What is Forex Trading?
Forex, also referred to as ‘Foreign Exchange’, is the buying and selling of one currency in exchange for another currency. The forex market is known for its decentralised and over-the-counter (OTC) method.
Different Forms of Trading Forex
Being one of the largest markets in the world, there is over $5 trillion being traded on a daily basis. Unlike other markets, it is open 24 hours a day for 5 days a week. This is possible due to the fact that the foreign exchange market has no central market place, and therefore, it is run by a global network of banks and other organisations.
It is important to note the different ways of trading in the forex market. These include spot, forward and future trading.
Spot Forex Trading
Firstly, the most common, which is the spot forex market is the physical exchange of a currency pair that takes place at the exact time that the trade is settled.
Forward Forex Trading
The second being the forward forex market which involves a contract traded over-the-counter which agrees to buying or selling a set amount of a currency pair at a certain price which is to be completed at a set date in the future.
Future Forex Trading
Lastly, is the futures forex market, which is the trade of a contract on an exchange to either buy or sell a specified amount of a currency pair at a set price in the future.
Why Trade Forex?
There are many reasons why people choose to trade in the forex market. Some of the market’s benefits include no commissions, which means that there are no clearing, exchange, government or brokerage fees involved. Instead, forex brokers make profit through the spread, which is the difference between the bid and ask price of a currency pair. There are no fixed lot sizes, allowing traders to trade smaller lot or position sizes means that they are able to open trades as little as 1,000 units. As well as no fixed lot sizes, forex trading allows for low transaction costs. The retail cost in the forex market is usually less than 0.1% under normal market conditions and the spread could be as low as 0.07% for larger transactions.
The advantage of a 24-hour market means you can trade anytime during the day or part-time if you wish to maintain a full-time job as well, allowing for more flexibility. Since forex is the largest market in the world, it subsequently offers the most liquidity. This makes it highly possible for a trader to enter or exit positions in whichever major currency quite easily and for a small spread in most market conditions. High liquidity also means there is no room for substantial manipulation or ability to control the market by other entities. With forex trading, it is possible for a small deposit to control a much larger total contract value. Giving a trader the capability to make good profit, leverage also keeps risk capital to a minimum. Leverage can also allow a trader to open a position on the currency pair by paying a small amount of the full value at the position up-front.
The ability to hedge with forex trading means that traders can reduce the risk of unwanted moves by opening numerous strategic positions. Hedging is a helpful way of moderating losses or restraining them to a known amount. Forex trading also provides low barriers to entry, with some forex brokers offering trading accounts which offer a minimum account deposit of $50, making forex trading much more accessible. Overall, forex is a great place to begin trading, with access to a large market and great flexibility, low-barrier entries and the potential to significantly increase gains.
