A Brief Explanation of Forex Trading

Almost everyone has heard of it, but not too many people know exactly what Forex trading is. Also known as foreign exchange, currency trading or simply as FX, Forex is a decentralized market where currencies are traded on a global scale.

With an average daily trade volume of $5 trillion, Forex is the biggest marketplace in the world and more liquid than any other markets. To give you an idea of its size, you could add up all the world’s stocks into one and it still wouldn’t even compare to the gargantuan size of the Forex market. Let’s take a better look at what Forex is and how the marketplace works.

Foreign Exchange – It’s All About the Transaction

Although a lot of people are not quite familiar with Forex trades, if you’ve ever made a trip overseas or converted your money into a foreign currency, then you’ve made a forex transaction. Any time that you make these sorts of exchanges between two currencies, it is the forex exchange rate that determines what each currency is worth. And, since the rates are based on the supply and demand of each currency, the forex exchange rate is constantly fluctuating.

As an example of this, on a Monday morning, $1 USD might be worth 1.20 euros, however, by Tuesday, $1 USD might be worth 1.22 euros. This difference may not seem like much, but when you think of it on a much bigger scale, these pennies add up fast.

A Fast-Paced Market with Ample Opportunities

Forex is very similar to the stock exchange in the sense that you trade based on your predictions about a currency’s value and where you think it’s going. The major difference is that with Forex trading, you’re able to trade up just as easily as you can trade down. This means that if you believe a currency’s value is about to increase, you can buy and if you think it’s about to drop, you can sell.

Also, with such a massive marketplace, it’s much easier to find buyers and sellers than it is in other types of markets.

Most Forex traders constantly follow international news coverage. You may, for example, hear something such as China devaluing their currency in hopes of drawing in more foreign business. If you truly believe that this trend will continue, you might want to consider making a forex trade and selling Chinese currency against the Euro or US dollar.

Trading on the Edge of a Penny

Many will people ask themselves, “If forex prices are quoted in the hundredths of a cent, how is it possible to make any significant return?”. The short and sweet an is simply by leveraging it.

For you to leverage your trade, you simply need to ensure that you’ve set aside enough to cover the price margin of the size of your trade. That means that if you’re trading a 50:1 leverage, you can trade $2,000 USD and only need to set aside $40 USD. Whereas if you were trading a 200:1 leverage, you only need to set aside $10 USD. This sort of leveraging gives you more exposure in the marketplace and helps to keep the capital investment cost down.

Still, leverage doesn’t only increase potential profits, it can also have the opposite effect and increase your losses, which can sometimes exceed the funds that you’ve deposited into your account. Therefore, when starting out in foreign exchange, it’s always recommended to start small and stick to lower leverage ratios. Then, once you feel more comfortable in the market, you can begin making larger trades.