New to Forex

New to Forex

The Forex market is the name commonly given to the foreign currency exchange market. Is it the largest financial market in the world, reaching daily turnovers of over $4 trillion! About $1.5 trillion come from spot forex – the buying and selling of contracts for currency lots online and/or through brokerages for profit. Up until recently, forex trading had been available only to large financial institutions, banks, hedge funds and very wealthy individuals or companies acting as the investor. It’s easy to see why - in order to generate significant profit on trades where the price would rise or fall merely a few pips, a trader would need to invest a very large sum of money, while exposing themselves to much higher risks. The advent of the Internet and features such as leverage, offered by most brokerages today, changed this. Today, almost anyone can enter the market with minimal amounts of capital and begin trading.

How does the FX market work?

Retail Forex trading has been steadily growing in popularity over the past few years. But what is it exactly that attracts so many traders to this enormous market? How does this market work, and how is it that thousands upon thousands of traders are making a living simply by trading currencies?

As with any market, the Forex market is dominated by the forces of supply and demand. In a market this large and liquid, it is practically impossible for any entity or corporation to corner or manipulate prices. Price movements occur from factors that directly affect the supply and demand of any given currency. A country whose economy is in decline will command much less demand for its currency compared to a country that is experiencing economic growth. The same is true with the supply/demand curve of any given country’s exports, as one would need to either purchase the country’s currency or pay conversion charges in order to be able to purchase their goods. Forex traders make their money on these changes in the price of a currency by either selling it or buying more. And while the strategies, tools and methods utilized by even the most successful of traders vary greatly, the goal of every trader is the same – to best capitalize on these constant price movements and maximize profitability.

Leverage

Leveraged accounts allow a small amount of money to act like a much larger amount, in order to take advantage of the market’s price fluctuation to the fullest. For example, a leverage of 1:200 will cause 100 dollars to act as $20,000. The profit a trader would make from a successful trade is calculated using the 20,000 dollars rather than the 100, meaning that if the trader manages to make 1% profit using this leverage, he would be making 200 dollars rather than $1, essentially doubling his initial investment. Using leverage, however, also tends to expose a trader to higher margins of risk – a high leverage will also substantially increase your losses in the case of unsuccessful trades. Using leverage wisely is the key to successful forex trading – due to the increased vulnerability of your capital, risk management must be taken even more seriously!