In recent times, Forex has been popularized and pushed into the mainstream of the trading world. Most experienced traders have already grasped the basics, and less knowledgeable ones have at least heard of it. However, Forex has attracted a new wave of complete beginners with the promise of quick financial gains. Others consider the entire thing a scam and avoid it entirely.
As it usually is, the truth is somewhere between the two standpoints. Forex trading can be lucrative for skilled traders and has certain advantages and disadvantages compared to different asset categories. However, it isn’t the get-rich-quick formula that some present it as. On the other hand, it does have its dangers, with many scammers posing online as valid brokerages. That doesn’t mean that Forex itself is a trick, just that a few bad apples are abusing this trend.
With the mysticism and misinformation surrounding Forex, getting into it can be a daunting task. To alleviate that pressure, we’d like to present a short rundown of Forex and Forex trading in general.
What is Forex?
Forex stands for foreign exchange, which is the market where different currencies are bought and sold daily. Without a centralized location, the Forex market exists electronically as a network of brokers, institutions, banks, and individual traders. However, those individuals don’t usually trade on their own, but rather through a broker or bank. The market plays a vital role in the global economy, as international purchases often require currency exchange.
Say you’re in the US and need to order a product from the UK. Your dollars need to be converted to pounds before you can make a purchase, as the UK doesn’t accept dollars locally. Or otherwise, imagine you’re visiting another country; chances are that wherever you are, you’ll need to convert some money from your local currency to the one that the place you’re visiting uses. In either case, the funds convert at a specific rate, which are determined by the Forex market.
The market spans globally and is conducted electronically with OTC (over-the-counter) trades. The decentralized nature means that all transactions occur by going through computer networks between traders. That, plus the international nature of the market, means that it can stay open for longer, with a 24/5 worktime.
If you’ve ever encountered Forex trade lists, you’ll notice that currencies are listed in pairs, such as EUR/USD or USD/JPY. That’s because the list pits currencies against each other, with the price indicating how much of the second currency you need to buy the first.
Forex Trading Basics
Historically, the main actors in Forex trading were governments, hedge funds, and large companies. However, the availability of trading has increased massively, with anyone being able to access it via their computer or even phone. Today, numerous banks and brokerages offer Forex trading opportunities to any individual wishing to venture into trading. So on the surface, Forex trading seems quite simple, but what happens beneath the initial levels?
As we already mentioned, the Forex market functions on an OTC basis. However, there are three specific ways participants trade Forex. This includes through the forwards, futures, and perhaps most importantly, the spot market. The last one is crucial because it’s the largest one, and the other two also find their basis from it. Prior to recent times, the futures market was also vastly popular, but that dropped with the normalization of electronic trading.
So as the most significant one, let’s pay the most attention to the spot market. That’s where the price most accurately represents the current state of the currency you’re buying or selling. The cost of each asset depends on many different factors, all grouped under supply and demand. Each finalized trade represents a spot deal, where two parties agree to trade a specific amount of two distinct currencies. We should note that although many misconceive these trades as instant, they usually settle after two days.
Notably, Forex trading is done in lots, named micro, mini, and standard. The micro level starts at 1000 in current currency worth, with each next level being ten times larger.
Forex Pros and Cons Trading Forex, like any other asset class, has specific advantages and disadvantages. The most commonly cited plus is the massive trading volume, which leads to high liquidity and the 24/5 operation hours. However, accurate Forex trading requires a high level of knowledge of the fundamentals of economics and indicator reading. As such, it’s not inherently better or worse than other types of trading.