What is Forex Trading

What is forex trading

Forex, or foreign exchange, can be explained as a network of buyers and sellers, who transfer currency between each other at an agreed price. It is the means by which individuals, companies and central banks convert one currency into another – if you have ever travelled abroad, then it is likely you have made a forex transaction.

While a lot of foreign exchange is done for practical purposes, the vast majority of currency conversion is undertaken with the aim of earning a profit. The amount of currency converted every day can make price movements of some currencies extremely volatile. It is this volatility that can make forex so attractive to traders: bringing about a greater chance of high profits, while also increasing the risk.

How does forex trading work?

There are a variety of different ways that you can trade forex, but they all work the same way: by simultaneously buying one currency while selling another. Traditionally, a lot of forex transactions have been made via a forex broker, but with the rise of online trading you can take advantage of forex price movements using derivatives like CFD trading.

CFDs are leveraged products, which enable you to open a position for a just a fraction of the full value of the trade. Unlike non-leveraged products, you don’t take ownership of the asset, but take a position on whether you think the market will rise or fall in value.

Although leveraged products can magnify your profits, they can also magnify losses if the market moves against you.

Why trade forex?

When traders choose which market to trade, they are looking for optimal trading conditions and the best chance of taking a profit. There are many reasons why millions of traders across the world think that the forex market fits these criteria, but we are going to focus on the top nine benefits of forex trading:

Ability to go long or go short

While you can go short on other markets by using derivative products, such as CFDs, short selling is an inherent part of trading forex. This is because you are always selling one currency (the quote currency) to buy another (the base currency). The price of a forex pair is how much one unit of the base currency is worth in the quote currency.

For example, in the forex pair GBP/EUR, GBP is the base currency and EUR is the quote currency. If GBP/EUR is trading at 1.12156, then one pound is worth 1.12156 euros. If you think that the pound is going to increase against the euro, you would buy the pair (going long). If you think that the pound will decrease in value against the euro, you would sell the pair (going short). Your profit or loss will depend on the extent to which you get your prediction right, meaning it is possible to profit whichever way the market moves.

Forex market hours

The foreign exchange market is open 24 hours a day, five days a week – forex can be traded from 9pm Sunday to 10pm Friday (GMT). These long hours are because forex transactions are completed between parties directly, over the counter (OTC), rather than through a central exchange. And because forex is a truly global market, you can always take advantage of different active session’s forex trading hours.

It is important to remember that the forex market’s opening hours will vary in March, April, October and November, as countries shift to daylight savings on different days.

High liquidity in forex

The FX market is the most liquid market in the world, meaning there are a large number of buyers and sellers looking to make a trade at any given time. Each day, over $5 trillion dollars of currency is converted by individuals, companies and banks – and the vast majority of this activity is intended to generate a profit.

The high liquidity in forex means that transactions can be completed quickly and easily, so the transaction costs – or spreads – are often very low. This creates opportunities for traders to speculate on price movements of just a few pips.

Why trade forex instead of stocks?

Your decision about whether to trade forex or stocks on leverage should be based on which asset you are interested in trading – currencies or shares. However, there are a few reasons why some traders prefer to trade forex than stocks:

Market opening hours: the stock market is limited to an exchange’s opening hours, whereas the forex market is open 24-hours a day. However, it is worth noting that certain stock indices are available for weekend trading
Higher liquidity: the forex market sees an average daily turnover of $5 trillion, whereas the stock market sees comparatively fewer traders per day
Greater volatility: the stock market tends to have more stable prices that change over a longer period of time. Although this is a great thing for some trading styles, the volatility of the forex market can create an exciting range of opportunities for shorter-term traders
When you are deciding whether forex or the stock market is better for you, you should consider your attitude to risk and your financial goals.