TRADING

How Forex Trading Works – Market Realist


Forex trading means converting one currency to another. Forex trading is also known as FX trading or foreign exchange trading. The foreign exchange market, where institutions and investors trade currencies, is the largest financial market in the world. In April 2019, foreign exchange trading reached about $6.6 trillion each day, according to the 2019 Triennial Central Bank Survey.

In the foreign exchange market, traders can take a position in any major currency versus other major currency. For example, you can bet on the U.S. dollar versus the euro. The most popular currencies that are available to traders are the euro (EUR), the U.S. dollar (USD), the pound sterling (GBP), the Swiss franc (CHF), and the Japanese yen (JPY). The forex currency pairs with the highest trading volume are EUR/USD, USD/JPY, GBP/USD, and USD/CHF.

Is forex trading profitable and is it legit?

Forex trading has grown significantly over the past decade. The forex market is where different currencies are traded. Unlike stocks or commodities, foreign exchange trading is conducted directly between two parties electronically over-the-counter.

The foreign exchange market is open 24 hours a day. Currencies trade globally in New York, Tokyo, London, and Sydney. There are three different types of foreign exchange markets — the spot market, the forwards market, and the futures market. The spot market is where the currencies are traded for immediate delivery.

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Source: istock

Unlike the spot market, the futures market and the forwards market don’t trade actual currencies. In the forwards market, forwards contracts are bought and sold over-the-counter between two parties. The two parties decide the terms of the deal between themselves. In the futures market, a contract is bought or sold based on a standard price and date in the future. Unlike a forwards contract, a futures contract is legally binding.

Trading in the forex market is profitable if it’s done with discipline. The success depends on your level of understanding, trading strategy, and the risks you are willing to take. Usually, profits and losses are unlimited in the foreign exchange market. Foreign exchange trading is performed on huge leverage provided by brokers, which can magnify gains and losses. Forex traders face challenges like platform malfunctions, counterparty risks, and sudden bursts of volatility.

Foreign exchange trading is safe if traders select a broker correctly. Traders need to consider the country affiliation and where the broker firm is located. The broker should be registered with the SEC. Although forex trading is legal, there are scams in the industry.

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