Complete guide of What is Forex Trading and how does it work.
What is Forex Trading and how does it work?
1.What is Forex or FX?
Foreign Exchange Market, commonly referred to as Forex or FX, is an international market where one country’s currency is traded for another country’s currency. Simply put, Forex trading is the exchange of currencies, buying and selling one currency for another.
The Forex market is the largest and most liquid market in the world, with an average daily trading volume of $7.5 trillion as of 2022.
2.Who are the participants in the Foreign Exchange Market?
Historically, the foreign exchange market was mainly participated by governments, large corporations, and hedge funds. However, the market participants are now more diverse than in the past.
Today, the forex market is much simpler and more accessible than before. Unlike in the past, trading is now easy and fast with just one click of the mouse. This has opened up a market where individuals can open accounts and trade.
Therefore, there are various market participants in the forex market today, including banks, securities firms, institutional investors, and individual investors.
3.The Purpose of Forex Market Participants
Generally, most Forex transactions are for practical purposes, such as exchanging money for personal and commercial purposes. For example, exchanging money for travel expenses for a vacation abroad, or exchanging currency to pay for a business to purchase or sell goods in another country.
In addition to the practical purpose, forex trading is also used to gain profits from the constant fluctuations in the value of currencies. Forex trading can also be used to hedge funds previously invested in other currencies.
In addition, potential losses can be reduced by opening one or more forex trades that offset or completely eliminate risk. Forex trading allows investors to invest in the price movements of a particular currency in another currency.
4.Comparison of the Forex Market with Other Markets
There are several key differences between the Forex market and other investment markets.
First, investors participating in the Forex market are not subject to the same strict standards or regulations as the stock, futures, and options markets.
Second, since trading is not conducted on traditional exchanges, fees are lower compared to other investment markets.
Third, there are no restrictions on trading hours. The market is open 24 hours a day, so you can trade at any time.
Finally, liquidity is very high, so you can trade freely at any time you want.
5.Pros and Cons of the Foreign Exchange Market
5-1. Pros
One of the biggest advantages of the foreign exchange market is its high liquidity. Based on this high liquidity, traders can enter and trade positions without being greatly affected by price fluctuations.
In addition, the foreign exchange market operates globally and operates 24 hours a day on weekdays. Therefore, market participants can start trading at the time when the trading pair is actively moving.
The second advantage of the forex market is the low trading fees. Unlike the stock market, which usually charges high fees, forex brokers usually make money from the difference between the buy and sell prices of currency pairs. This allows frequent traders to trade at a cost-effective rate. In addition, leverage trading is also possible, allowing traders to operate large positions with small amounts of money.
In addition, the forex market offers a variety of currency pairs, which helps investors diversify their portfolios. Depending on the economic conditions of each country, investors can trade appropriate currency pairs to generate profits or hedge against upcoming risks.
Finally, the market is highly transparent, which means that market participants have a lot of resources to refer to when making investment decisions. The lack of information accessibility minimizes the skill gap between novice and experienced traders.
5-2. Disadvantages
The biggest risk in the foreign exchange market is trading with high leverage. Using high leverage can increase profits, but it can also increase losses.
If you can take a position in line with the direction the market moves, trading with high leverage will greatly help maximize profits.
However, if you use high leverage while entering a position against the market with wrong judgment, it can lead to disastrous results. Therefore, it is important to use an appropriate level of leverage.
Another disadvantage is the complexity of the forex market itself. There are so many currency pairs to trade, and it takes a lot of time and effort to understand the various economic situations of each country and how they affect the exchange rate.
This may be a little different from the knowledge required in the stock market. In the stock market, you need to know the value analysis and issues of individual companies, but in the forex market, you need to have a holistic understanding of the global economic situation.
