Forex trading has continued in an upward curve despite the fluctuations the market experiences itself. More investors worldwide are taking the option to invest in money itself – an option which only Forex trading offers.
Upon its introduction, investment in foreign exchange and currencies was greeted with stiff agreements, as many investors and financial experts doubted its sustainability. However, an overview of forex trading today shows that it has been accepted across the world as one of the highest profit-generating investments available.
Today, forex is as important as stock and bond market information. International media houses make it a duty to provide current forex news sometimes multiple times daily, during their expose on the global financial landscape.
Significantly, the information is not aimed at guiding tourists on the current exchange rates; rather, it is targeted at forex investors and enthusiasts who are constantly monitoring market fluctuations.
Although forex trading offers perhaps the highest Return on Investment (ROI) compared to other investment options, it poses significant risks and requires a good knowledge of the market and its activities to guarantee success.
Experts advise that investors who intend to engage in forex trade, do so through the help of professionals who have the technological know-how of the foreign exchange market. Also, the investors themselves can undergo training to enable them to gain relevant knowledge of the foreign exchange market and forex trading in general.
A Brief History of Forex Trading
It is safe to say that forex has been around for centuries – Forex is as old as trade itself. However, powered by the internet and modern technology, forex trade and the forex market as we know it to be today is relatively new.
The rise of forex trade gained precedence in 1971 after the Bretton Woods institutions began to experience a collapse. After this period, more currencies were allowed to float freely globally against each other.
Overview of Forex Trading
In this article, we will highlight all you need to know about forex trading and guide you on the pros and con that regulates the industry. Whether you are already an investor or you are new to the concept of forex trading, there is always something to learn.
Before we go on to the modalities and technicalities of forex trading, let us start from the basics.
What Is Forex Trading?
The word forex is coined from two words – ‘Foreign’ and ‘Exchange’. The international currency market is synonymous with its fluctuations, and as the value of the currencies goes up and down, it offers traders the avenue to make a profit – as a result of the fluctuations.
Unlike other markets, the forex market runs 24 hours a day and 7 days a week – this makes it a liquid, autonomous and self-sustainable market.
Forex trading simply involves the practice of selling one currency to buy another one. By so doing, you pitch the two currencies against each other, and hence, you make a profit when the currency you bought moves up against the currency you sold or traded.
Many investors prefer to trade on the United States of America Dollar, Great Britain Pounds, European Euro, Japanese Yen, and other leading currencies.
How Big is Forex Trading?
The foreign exchange market is undoubtedly the biggest market on the globe today. Not restricted by time zones, demography, and boundaries, forex trading has grown in leaps and bounds – exceeding the expectations of stakeholders and enthusiasts.
Today, the forex market is the largest financial market on the globe and boasts of the most engagement and activities on a daily basis. Emerging investors are amazed at the size of the forex market and are blown away by its international acceptability.
According to reports, the average traded volume traded on a daily basis in the forex market amounts to $6.6 trillion. The Triennial Central Bank Survey of FX and OTC derivatives markets released in 2019/2020 confirm these figures – which further increase investor confidence.
Interestingly, the New York Stock Exchange, which is believed to be the strictest stock exchange market in the world, endorses forex trading and trades over $1.1 trillion on average daily.
When considering the size of the forex market, no other market in the world can match it considering its market perception, acceptance, and volume of trading on a daily basis.
How Does Forex Trading Work?
Forex trading is not different from other forms of trading of securities like stocks and bonds, basically, it involves the buying and selling of currencies.
The trading is often done in pairs because you have to trade one currency to buy another – both at its current value, with the hope of making a profit when the currency you have bought, appreciates against the currency you traded.
For example, if you make a trade of the EURO against the United States Dollar or Japanese Yen against the Great British Pound, you will earn a significant profit when the United States Dollar appreciates against the Euro or the Great Britain Pounds appreciates and the Japanese Yen falls.
Let us take an example, if the official exchange rate between the European Euro and the United States Dollar is 1.50, when you buy 1,000 Euros, you will have to pay 1, 500 USD. When the value of the currency moves from 2.00 USD to 1 Euro, you can sell your Euros and make an instant profit of 500 USD.
The fascinating thing about the market is that this fluctuation can happen within a matter of seconds – and you will earn a robust Return on Investment (ROI).
What is Leverage in Forex Trading?
If you have watched a lot of forex news or being around people who engage in forex trading, you must have heard the word ‘leverage’ on many occasions.
Leverage is a common term in the forex trading market. It gives traders the opportunity to purchase a multiple of their initial or original investment. What does this mean? Let us go deeper into the overview of forex trading to give you a better understanding.
Let us make a simple example, a forex trader or investor can employ a leverage of 30:1. What this means is that the trader can buy $30,000 of his/her desired foreign currencies for just $1,000. In such a case, the brokerage firm will be responsible for lending the trader or investor the remaining funds to cover for the deficit.
Interestingly, some firms can offer as much a leverage of as much as 500:1 – now, that’s true leverage, you will agree.
What is the Effect of Leverage in Forex Trading?
Leverage is not peculiar to forex alone, and as such, it encompasses both gains and losses in relation to ROI. For example, when a trader or investor buys 30,000 USD in a particular currency and that currency moves up by 10 percent, the trader will have a 3,000 USD profit.
In a case where you used a leverage of 30:1 and invested on 1,000 USD, you will amass a percentage gain of 300 percent. Isn’t that wonderful?
Yes, of course, there is a catch – and the catch is that leverage works both ways. When a trader or an investor makes the same investment using a 30:1 leverage as explained above, if the 30, 000 USD moves down 10 percent to 28,000 USD, the trader will lose his entire investment, and also become indebted to the brokerage firm for the leverage.