What is Forex?
Forex or FX means “Foreign Exchange” and is the trading of foreign currencies. The Forex market is one of the largest, most exciting, fast-paced markets in the world. It was true that until recently forex trading in the currency market has been largely dominated by huge financial institutions, corporations, central banks, hedge funds, and extremely wealthy people.
But as the internet emerged, it all changed. Now, even the average investors can buy and sell currencies. It can be done easily, with just a click of a mouse through online brokerage accounts.
What is Forex Trading?
One important thing that you should know about forex is that all currency trading is done in pairs. This market does not operate the same way the stock market works where you can buy or sell a single stock. You will have to one currency and then sell another one in the forex market. That’s why it’s called trading.
Forex trading is a 24-hour market that only closes from Friday evening to Sunday evening.
Another thing to know is that trading of currencies happen in different sized lots. The micro lot is 1,000 units of a currency. A mini lot is 10,000 units of your currency. A standard lot is 100,000 units of the currency. If your account is funded in U.S. dollars, a micro lot will be $1,000 of your base currency, which is the dollar.
What is the Forex Market?
The foreign exchange market is where you can trade currencies. Whether people realize it or not, currencies are important to mostly everyone around the world. This is due to the fact that currencies are needed to be traded in order to conduct foreign trade and business.
For instance, if you’re a resident of the U.S. and you want to buy a product from Italy, you or the U.S. importer will need to buy the product from Italy and pay them in euros. Same goes for travelling. A British tourist in Japan can’t use euros to pay the locals to avail of their services. The tourist will have to exchange his or her euros for the local currency, which is the Japanese Yen, at the current exchange rate.
The forex market can provide you with plenty of opportunity for investors. Nonetheless, you will first have to understand the basics behind currency movements in order to be successful.
Forex over Stocks: Why?
One huge reason as to why traders prefer forex to the stock market is the forex leverage.
Leverage in stock trading usually allows two to one. There are also other qualifying requirements before you can use it. Not all investors are approved for a margin account – something you need to partake of the leverage in stock market.
Forex trading on the other hand is very different. If you have a forex trading account, you can immediately qualify to trade with leverage. There are no qualifying requirements. In the U.S. you are limited to 50:1 leveraging but there are other countries that offer as much as 200:1.
Forex Trading also offers 24/5, meaning you can access the market longer compared to the stock market’s 8/5 operating hours.
Eight major currency pairs make up for the majority of the marjet volume in forex trading. These pairs are EUR/USD, USD/JPY, GBP/USD, AUD/USD, USD/CAD, USD/CHF, EUR/JPY, and EUR/GBP. While there are at most 2,000 stocks available in the S&P 500 stock market.
Read more about: Stocks investing for beginners tips before you start.
Nevertheless, small forex market movements can lead to large gains – or losses. The same cannot be said with stocks, such movements can be relatively less impactful.
Pros and Cons of Forex Trading
Leverage – as was discussed previously, leverage has been one of the greatest sway for traders. Access to leverage holds the key to the difference between small gains in trading and sizable ones. Availability of resources for leverage in the forex market is greater compared to most other markets.
Flexibility – due to the market being open 24/5, it offers you more opportunities to explore the market on your terms. As such, if you’re one of those traders working regular jobs, you usually won’t have enough time to focus on trading during the day. You can then limit your activities to evenings or weekends. You can also use your mobile phone to monitor the trades at other times. This can provide you with a firm base where you can build your account and trading skills.
Online Services and Tools – as aforementioned, you can use your own gadgets to understand, monitor, and analyze the market. Online services and tools helped on making forex trading easier even for beginners. You can start trading within a few clicks, as long as there’s internet, you can begin trading from the comfort of your own home.
Low Costs – this is due to brokers multiplying as time passes. Brokers charge lower fees and offer tighter spreads, which means that most of your profits stay with you. But before you confront making any final decisions, you should first analyze which broker fits you best. You must first make sure that they’re regulated and offers ideal account options. Also check the tightness of their spreads. Go for it if they offer demo accounts. This can help ensure that you’re comfortable with the platform and that you understand it before staking your own money.
Liquidity – forex market offers one of the most – if not the – most liquid market when it comes to trading. This market is the largest globally in volume meaning that there is normally ample liquidity for trading. This is true especially with the major currencies. High liquidity can eliminate the possibility of price manipulation and price anomalies. The removal of such can enable tighter spreads that lead to better pricing. Unless a major event happens, you can expect similar patterns throughout the continuous trading.
Volatility – you should remember this, all markets can display volatility one way or another, and the forex market is no exception. Add the fact that the major currencies frequently display high price swings. If you’re hoping for short-terms profits, you might end up getting exposed to unexpected extreme volatility at times. Such event can render your strategies unprofitable.
Bad Brokers – you should do thorough research before choosing your broker. If you happen to choose an unregulated broker, it’s a bad decision from the start and one filled with dangers. You can have legal accountability if you’d use a regulated broker. In the event that something does end up going wrong, regulation can back you up. Though it won’t provide necessary help if the market end up going against one of your trades.
High Leverage – yes, leverage is both an advantage and a disadvantage. Having high leverage can benefit you, but it can also greatly magnify your loss. Forex trading can easily become a loss-making nightmare. You need to have an effective capital allocation scheme and a strong grip on your emotions aside from having robust knowledge of leverage.
Lighter Regulatory Protection – trades made in the forex market done over-the-counter. This means that trades are not done in a centralized exchange. Regulatory oversight can then be sometimes limited. Due to this limit, you, as an investor, might end up needing to do a “due diligence” investigation regarding your broker’s reputation and trading practices before you make any decision of signing up for an account.
World Events – Forex is influenced by world events. If you were expecting to be focusing on a specific company and monitoring how its performance is affecting your stock, you can still do that, but you shouldn’t devote all your attention to that activity. With forex, you need to pay attention to the nation. You must know that everything – from a natural disaster to an election – can affect the value of its currency. In order to trade smart, you must keep up with the world events. This can be advantageous to those people that enjoy keeping pace with what’s happening on the world.
It’s okay if choosing where you would like to invest takes time. You have to research a lot of things: the kind of investment, your chosen broker, the risks and benefits of that investment.
It’s better to go to a field as a beginner with knowledge than become someone that takes on very risky actions which turn trading and investing into gambling. Learn as much as possible from the people around you, but make sure that you’ve proven their statements true for yourself before putting all your confidence in their word.
It might take some time before you become the rich person you aspire to be. But that’s one thing that makes trading exciting. You work hard for it. Therefore, once you harvest what you’ve sown, it’ll be that much sweeter, seeing all your hard work finally pay off.
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