What is Forex?
Forex also known as foreign exchange market, is a decentralized global market for the trading of currencies at current or determined prices. The forex trading market has a very large number of trades across the world, with a daily volume of more than US$5 trillion, and it is open to both major institutions and individual investors.
Major participants in forex trading are financial institutions. The forex market accommodates different types of players, from those who trade for foreign currency to buy goods and services, traders who invest for a profit and individuals who wish to hedge risks.
Advantages of Trading Forex
You have a lot of reasons to trade in forex compared to other financial markets instruments. Forex investing accommodates traders with as little as a dollar to engage in trades using multiple foreign currency pairs. The returns / profits are extremely high, and a trader can double or triple initial investment just by clicking and following the market trends. The market offers trading 24/7 which enables part-time traders access during odd hours, noon, morning, or anytime and anyplace on any given day. Compared to any other market like equities or commodities, the forex trading market is the most liquid market with the highest number of trades per day worldwide.
Making Forex Trades
You can trade a currency based on your individual perception of what its value is now and what it will be in future. If you believe a currency’s value will increase, you take a long position on the currency, that is you buy and hold the currency wishing to sell it in future when the currency value has increased. If you think its value will decrease you engage into a short position on the currency, that is sell the currency at current price anticipating that its price will decrease in future, so you can buy it back at a cheaper price. If your sentiments were correct you make a profit on your position. Profit made is the spread, calculated as the difference between the buy and sell price. If your predictions were wrong you make a loss on your position.
Let’s say you believe the US dollar will increase in value against the euro. Your pair is USD/EUR. Since you think the US dollar will increase, you buy USD/EUR, buy the US dollar. If you believe the US dollar will decrease against the euro, you sell USD/EUR, sell the US dollar.