On average, $5.1 trillion dollars is traded every day in the Forex market.
That’s over four times the global GDP.
But to most people, foreign exchange is something you do when you travel to another country. You exchange your money for the local currency.
But what exactly is Forex? And how does forex trading work?
Read on to find out what it is and why you should get involved.
How Does Forex Trading Work?
Simply put, forex trading is foreign currency trading.
Forex (FX) is the financial market in which currencies are traded. It is the most liquid market in the world.
It includes all of the world’s currencies, each trading on their own currency exchange rate.
When you trade, you are speculating on the fluctuating values of currencies between two countries.
This is why trades are always expressed in pairs, such as EUR/USD (the Euro and the US Dollar). In this example, the rate represents the number of U.S. Dollars one could buy with one Euro.
Let’s say you think the value of the Euro will increase relative to the U.S. Dollar. In that case, you will make a trade for Euros with U.S. Dollars.
You will sell the Euros for a profit only if the exchange rate goes up.
As with any investment market, from options trading to real estate, forex trading involves the risk of losing your money.
There are strategies and habits to practice to limit your losses which we’ll discuss in a moment.
Why Trading Foreign Currency Has Become Popular
Here are a few of the advantages to forex trading, which are likely responsible for its rise in popularity:
- 24/7 trading is available.
- No charge commissions are widely available.
- You can make leveraged trades which can significantly boost your gains and losses.
- Forex is easily accessible. You can get started without a lot of money.
- You can keep it simple, focusing on a few currencies instead of combing through thousands of stocks.
Many people enjoy forex trading because it’s both fun and profitable.
Should You Become a Foreign Currency Trader?
As mentioned, forex trading comes with a high level of risk.
Your decision to enter the forex market should depend on your level of comfort with risk.
Successful forex traders also develop strong habits which help them to limit losses.
For example, it’s essential to start keeping a daily log of your trades. Examining your wins and losses and deriving lessons from each can speed up your learning curve.
Most successful foreign currency traders have a deep understanding of the inner workings of the forex market. In other words, they are insiders who understand the market better than the average trader.
Your goal, then, is to learn as much about forex trading as possible and last long enough to become an insider yourself.
From the beginning, practice limiting your losses. Keep your trades low while you are learning and only risk what you can afford to lose.
Develop Strong Money Management Skills
Most successful forex traders complete successful trades less than half the time. But their overall trading is profitable due to their solid money management skills. They quickly cut their losses while letting their profits run.
Keep track of forex signals to help you make educated decisions. RedHotFX is a great resource if you don’t have time to follow all the currency news,
Forex Trading Wrap-Up
When you’re asking “How does forex trading work?” it’s important to set an achievable goal.
Begin by practicing on a forex trading demo, and do small trades when you start trading with real money.
Keep your wits about you and accept your losses as learning opportunities.
Implement a set of basic trading rules for yourself. Then consistently update those rules based on the trading lessons you learn each day.
If you found this article helpful, be sure to check out our other money-related content.