Forex

Forex

The Foreign Exchange market, known to many simply as the Forex market, is the largest financial market in the world. As the name suggests, it is the exchange of currencies. With a daily trading volume of over $4 trillion, only a small percentage of this amount comes from actual trade – most of this colossal turnover comes from traders speculating price fluctuations for profit. Since currencies are traded in pairs, profit is made from the fluctuations in the exchange rate between these two currencies. A currency can be affected negatively by its country’s poor economy, causing it to drop in relation to other currencies. This will usually prompt traders to sell the currency in question, since it is steadily losing value, in order to buy a ‘stronger’ currency. On the other hand, a growing economy will usually mean a strong, rising currency. This will usually prompt forex traders to buy said currency, hoping to profit as it continues to grow in value.

This massive market is an OTC (Over the Counter) market, meaning the vast majority of all transactions happen via phone or online. In fact, the reason this market has grown so much over the past years is that it allows essentially anyone to speculate for profit based on simply reading the newspaper. See a currency that’s doing well? Buy it in a matter of a few clicks, sell it back later for profit. Unexpected news that you believe may cause the market to move against you? Time to sell and avoid potential losses. This is basically how traders make their money – they analyze the markets and news, use trading tools and signals, set stop losses and even program robots and algorithms in order to achieve the best possible accuracy rates – the more successful your trades, the more money you’re making!

Due to the fluctuations in exchange rates being so small, leverage is used in forex trading to allow traders to make significant profits. Leverage allows a small amount to act like a larger one, for example, a 1:500 leverage means every one dollar acts like 500. You could invest $2000, have it act like a million, and reap much higher profits. This should be used wisely, however, as while this means that your potential profit increases exponentially, so does your risk of suffering substantial losses. In forex, practicing effective risk management is one of the key ingredients to success – in fact, it alone can be the difference between losing money and generating a steady source of income.