Forex Trading for Dummies – What is Forex Trading?

Forex trading for dummies – it is an undeniable fact that forex trading has become a very popular form of trading in the last couple of years. With several investors shifting from other forms of investments or trading such as stocks; to join the foreign exchange market - all for good reasons. That being said, the foreign exchange market is not easy to understand and gain from. Therefore, in today’s forex trading for dummies, you will get to understand more about the ins and outs of forex trading.

What is forex?

Forex is short for foreign exchange, which known as a decentralised global market specifically designed for the trading of the world’s currencies. The forex market is the world's largest and most liquid market with a daily trading volume of over $5 trillion on average. The forex market is resistant to manipulation, and therefore, currencies are seen as the purest trading form. Forex involved the purchasing and selling of currencies, and you may even have taken part in the foreign exchange market without knowing it. Perhaps you bought foreign currency when you went on holiday out of the country, or you imported furniture.

The foreign exchange market

The foreign exchange market is where all the currency trading takes place, and it is of two tiers; the interbank market and over-the-counter market. The interbank market is where the largest banks exchange currencies among each other; with very few members but very large trades. Hence it usually dictates values of all currencies. The over-the-counter marketplace is where individual forex traders and companies trade. However, a lot of companies are now offering online trading platforms, and as a new trader it may be difficult to choose a trading platform; and knowing more about what forex trading is will be helpful; hence forex trading for dummies.

How does forex trading work, for dummies?

Forex trading takes place between two parties at a time through a contract. Traders in the forex market will simply be looking forward to gaining from the volatility of world currency values. Therefore, a trader has to choose two currencies and then predict which one of the two currencies will rise in value in comparison to the other; the trader can then pair the two currencies in one single trade. After placing your trade with an investment amount of your choice; you then wait for the expiration time of the trade. If at that time, your predictions were accurate, then you will get your investment amount back as well as the profits from that trade. There are three kinds of trades that one can choose from, these include;

• The forward market, which involves two parties agreeing to exchange currencies at a future date at a particular price.
• The spot market, which is for the price of the currency at the time of the trade.
• Then there is a swap trade which is somewhat a combination of both. In this case, foreign exchange dealers will purchase a currency at the current price on the spot market, and then they sell it at the same amount in the forward market. With this comes future risk reduction because even if the currency falls, the dealer cannot lose an amount more than the forward price.

Forex Trading For Dummies - What are the advantages of forex trading?

Currencies are more important than people may realise, and trading forex has several benefits, not just for individuals and companies but for everyone worldwide. People may want to get involved in forex trading for the following reasons;

The volatility of foreign exchange

Billions of dollars are traded every minute, and because of this, most currencies have quite volatile price movements. Volatility can allow traders to profit immensely from price movement speculation in whichever direction. However, it is also very risky, and the market may suddenly turn against you. Therefore, you must beware of the risks involved. Check out our article on forex trading risks and how to manage them.

Leverage

Leverage allows traders to make large profits while limiting their risk exposure. Trading on the foreign exchange market with a small margin deposit one can still control a higher total contract value.

Liquidity

The FX market is known as the most liquid market in the world. Therefore transactions can be done easily and quickly; so, you can turn your trade into cash just by the click of your mouse.

Foreign exchange market hours

The forex market runs five days a week 24hours a day; which is quite advantageous to traders because they can take advantage of a variety of active forex trading sessions.

Conclusion – Forex Trading for Dummies

Forex trading is something that becomes more and more important each day, and as more people participate in the foreign exchange market, the larger it becomes. It is very important to have a good understanding of what forex trading is and how to benefits from it with minimal risk. Therefore, risk management tools must not be taken lightly. Forex trading is very exciting, but can you still make money from it? Find out how in our previous article.