What is forex trading?
Forex, often referred to as ‘foreign exchange’, is the buying and selling of different currencies to exploit fluctuations in the marketplaces (through arbitrage) or adjustments in market prices over time: a decentralised global market in which all the world’s currencies trade. It is the largest, most liquid market in the world with an average daily trading volume exceeding $5trln.
As with other forms of speculation, the aim is to buy low and sell high in order to make a profit.
The incredible thing about Forex is that the market literally never sleeps. Prices are constantly fluctuating as world events unfold and investors may wake up to find a natural disaster, or other event, has caused their holdings to rocket up or plunge down.
How is forex priced?
This can be a tricky one to pin down, since the price of any currency is always determined in another, and these ratios are constantly in flux.
The most traded pairs of currency in the world are called 'majors'. These are EUR/USD, USD/JPY, GBP/USD and USD/CHF. You can also trade in minor, less liquid, currencies referred to as 'exotics'. These include the Polish zloty (PLN), Norwegian krone (NOK) and the Mexican peso (MXN).
What are the advantages?
Markets open 24/5
You can trade almost 24 hours a day, Monday to Friday. Since the forex market is decentralised, it isn't tied to any specific geography so there is always a market open somewhere (though in order to make money, the market you're trading on needs to be active). The best time to trade is when the markets relating to the currency you are trading overlap
Volatility
If you want fast-paced trading with quick turnarounds, this may well be the place for you. Forex completes more trades daily than the New York Stock Exchange.
Low trading costs
Unlike stock brokers, forex brokers don't charge extra commissions or transaction fees as they're compensated through the bid/ask spread.
What are the risks?
World events
Where a company's performance affects the value of its stock, the value of forex is far more volatile. Anything from a political shift to a natural disaster can change the value of a nation's currency, which will have knock-on effects for other currencies in the market. Forex traders need to keep abreast with world events in order to trade smart.
Trading on margin
You can trade forex through a margin account. This allows you to borrow money from your broker to up your potential return on an investment. This is known as leverage. For example, if your broker offers you leverage against at 50:1, for every pound in your account you can make a trade for £50 of whatever currency pair you want. If you win, your returns will be significantly increased, but watch out – the same is true for your losses.
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