The foreign exchange market, known as Forex or FX, is one on the largest global financial markets, where the trading of currencies takes place. Currently worth around $2 quadrillion, with an average of $5 trillion worth of currency traded every day, it’s a considerably liquid market. The volatility of the forex market is attractive to the majority of investors, as it can bring the opportunity for high profits, although it does come with a level of risk. With this in my mind, we’ll guide you through how to trade successfully and benefit from online forex trading.
What is forex trading?
To benefit fully from its advantages, you must understand what forex trading is and how it works. In simple terms, it’s the buying of one currency and selling in another, based on an exchange rate. The currencies are traded via a global network, mainly online, of banks, financial institutions and brokers; unlike stocks and commodities, where this is a central, physical exchange. The forex market is open 24 hours a day, 5 days a week (Monday to Friday), and price movement between the currency pairs is constant, effected by several factors.
Forex prices are based on a currency pair; the base currency and the quote currency. A trader buys in one currency, and if this strengthens against the other in the pair, this gains a profit. If the currency bought falls against the pair, then it would incur a loss.
Portfolio diversity
Traders can benefit from the diversity forex trading can bring to their portfolio, and can base their investments on speculating the market, or use forex trading as a way to hedge against future exchange rate fluctuations. Most big companies trading will have a FX hedging policy to make sure it’s as safe as possible.
On a contract for difference (CFD) trading platform, investors can speculate on the price movement of the forex market, with no intention to have physical possession of the currencies in question. You can open a position on both a rising and falling market, which can result in a profit, if you expect the value of the currencies traded to gain or drop. If you own the underlying currency as well, then trading in a CFD can potentially offset any losses, if you speculate a downward trend for that currency pair.
To gain from forex trading, experienced traders will be aware of the movement in other markets, as this can be reflected in the forex market, as well as monitoring the impact of key global events and economic growth, such as changes in interest rates, bank policies or politics. Knowing various indicators and trading techniques to analyse the market data is also beneficial. It’s worth noting that observing the fluctuations in other currency pairs can influence the strategy of the currency currently being traded, or the need to change to another pairing.
Trading with leverage
One main advantage that investors can benefit from when online forex trading, is the opportunity to use leverage. As currency is usually trading in large numbers, leverage enables the investor to participate in a larger portion of the market, without the initial amount of capital normally required. It is a rather efficient use of the money you wish to invest, if the market moves in your favour, as leverage means you only use a fraction of the amount of capital needed, but you are exposed to the market at the same value of the full amount. This could result in the profit gained being magnified, but also that the losses incurred are proportional to the full value of the trade.
Online demo accounts
You can take full advantage of the option of a demo account when trading forex online. Mirroring the movements of the real-time market, a demo account is the perfect way for beginners to get to grips with forex trading, to fully understand the volatility of the market, and to practice any strategies or techniques they wish to implement. This way, traders can benefit from making tried-and-tested decisions when moving onto trading with real capital, with the intention of gaining bigger profits.
On certain online trading platforms, the demo account also comes with access to further information, articles and educational material that can be utilised to improve and learn how to benefit from online forex trading.
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