Forex Trading: How Does Forex Trading Really Work?

Whether you are a seasoned investor or you are completely new to the Forex market, or looking for a refresher here is a forex trading: a beginner’s guide that will help you understand the sometimes bogus forex terms.

Let’s start with the simple basic question that beginners are likely to ask:

Forex Trading: How Does Forex Trading Really Work?

What is Forex?

Forex, sometimes abbreviated to FX, is short for foreign exchange. It is the global, decentralized trading market of the world’s currencies. Traders, investors, banks as well as exchanges, buy, sell, and speculate on these currencies, which in turn determines the foreign exchange rate.

How Does Forex Trading Work?

When you come across the term forex trading, it simply means to buy and sell currencies, with the aim of making a profit. Forex trading involves two currencies at a time, which are the base currency and the quote currency. The difference in price comes in where you will make your profit or loss.

How Risky is Forex Trading?

Just like every kind of trading, there are risks and forex is not an exception. But be it as it may, forex trading can also yield profits, which is why so many people are into the business. However, to be on the safe side, when you want to start trading, you should start on a demo account if you are new to forex trading. As you proceed and are sure you are ready for a live account, you should weigh the pros and the cons, before you get started.

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Pros and Cons of Trading Forex

As earlier stated, forex comes with its own fair share of risks and benefits, that you must analyze before you plunge into it. Here let’s take a look at some of them:

Pros

  • Forex markets offer the most liquidity because they are the largest when it comes to daily trading volume in the world. With this, it is easier to enter and exit a position in any major currencies, within a fraction of a second for a small spread in most market conditions.
  • Forex market is traded 24-hours a day and five a week, which starts each day in Australia and ends in New York. Its major centers are Sydney, Hong Kong, Singapore, Tokyo, Frankfurt, Paris, London, and New York.

Cons

  • To successfully trade currencies, it requires an understanding of economic fundamentals and indicators. Thus a currency trader must have a big-picture understanding of the. Economics of the various countries as well as their inter-connectedness in order to fully grasp the fundamentals that drive currency values.
  • Banks, brokers, and dealers in the. Forex market is known to allow a high amount of leverage, which implies that traders. Can control large positions with relatively little money of their own. Thus a trader has to understand the use of leverage. As well as the risks that leverage introduces in an account. This particularly important, because extreme amounts of leverage have. Led to many dealers becoming insolvent unexpectedly.
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What is a Position?

In forex trading, the term position means, that a currency is currently in progress. In trading, you can get long positions and short positions.

Long Position

A long position is when the trader has bought a. Currency with the expectation of it increasing. If the currency is sold back. Then the long position is considered closed.

Short Position

A short position unlike a long position is when the trader has sold a currency with the expectation that it will decrease. If the currency is bought back, the short position is considered closed.

How to Start Forex Trading

Also, if you are new to forex trading, it is advised that you use a broker who is regulated and has at least a five-year track record. If you want to start trading, you will be required to. Deposit funds to make the first trade, in what is called a margin account. If it is your first time, it is best to start with a demo. Account where you can make all the mistakes without risking. Any of your actual money, until you are well-grounded 

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