3 What is Forex Trading and How Does it Work
Foreign exchange (forex) trading has become one of the most popular forms of passive income for thousands worldwide. If you’re a beginner in this field, you probably would like to take a closer look at the market – how does forex trading work and what pros and cons it has.
Let’s figure out all questions together.
What is Forex Trading?
Forex trading, also known as foreign exchange trading, is the act of buying and selling currencies in the eponymous market. The Forex market is a decentralized global marketplace where currencies are exchanged between traders from all over the world. The market has evolved over the years, becoming more accessible to traders of all sizes. The days when it was only open to institutional firms or large banks acting on behalf of their clients are gone and now anyone can join in. This makes forex one of a kind – an open trading hub that is truly nonstop and continuous around the world.
How Does the Forex Market Function?
The goal of forex trading is to profit from fluctuations in exchange rates between currencies. Traders speculate on the future direction of a currency pair by buying or selling one currency in exchange for another. For example, a trader might buy the US dollar against the Euro if they believe that the dollar will appreciate in value relative to the euro. If their prediction is correct and the dollar does appreciate, they can sell the dollars back to the market at a higher price than they paid for them, making a profit.
As all transactions can be done right after choosing a broker and opening an account, you should think about it as well. Find info about cent account brokers as it is a great option for beginners.
Advantages and Disadvantages of Forex Trading
Let’s go through some pros and cons of trading forex:
Advantages
High liquidity
Forex is the world’s biggest and most liquid financial market, with daily trading volumes exceeding trillions of dollars.
24-hour market
It is open 24 hours a day, 5 days a week, allowing traders to access the market at any time from anywhere in the world.
Leverage
Forex brokers offer leverage, which means that traders can control large positions with a small amount of capital. See regulated broker Fortrade which has convenient leverage conditions.
Disadvantages
High risk
Forex trading involves high risk because of the volatility of the market or the unpredictability of events that can affect exchange rates.
Emotional trading
It can be emotionally challenging, as traders may experience fear, greed, and other emotions that can cloud their judgment and lead to poor trading decisions.
Complicated market
As the forex market is decentralized, it is susceptible to market manipulation by large financial institutions and central banks.
Which Charts are Used in Forex Trading?
There are 3 main types of charts:
- line charts
Line charts are a powerful tool to identify long-term trends in currency prices. By plotting the closing trading price over time, these charts produce trend lines that can be used as indicators of potential breakouts or changes in direction.
- bar charts
Bar charts provide more detailed pricing information than line charts. Each chart displays the opening and closing prices of one day’s trading session (OHLC) – represented by an open dash on the left side, with similar dashes on right indicating closure. Colors may also be used to indicate price movements. Green or white represents increases while red or black signifies drops in value.
- candlesticks
These diagrams make reading and understanding currency trends easier to comprehend. A red or black candle illustrates decreasing prices, while green or white candles represent increasing price points during a period of time.
What Are Basic Forex Trading Strategies?
There are 4 basic forex trading strategies:
- Day trading is a strategy where traders buy and sell assets within the same day, striving to make quick profits in as little time as possible.
- Scalp trading is a type of short-term strategy in which traders open and close positions within minutes, aiming to capitalize on small price movements for quick profits.
- Swing trading is a medium-term approach to investing where traders seek to capitalize on short-term price movements in the market by holding positions for several days or weeks.
- Position trading involves holding a currency for an extended period, ranging from months to even years.
Conclusion
With the basics discussed in the article, beginner traders can begin to trade currencies with more confidence. Don’t forget to practice knowledge on demo accounts, do your own research, and choose the strategy that fits you most.