Forex (FX) trading is arguably one of the most popular forms of trading amongst investors, with a daily average trading volume of around $5 trillion.
In its simplest form, forex trading is the trading of one currency against another, known as currency pairs. This form of trading supports the conversion of any national currency into another, which means that as a result it is one of the most active trading marketing in the world. This is just one of the many reasons for its popularity.
This guide aims to provide you with more information on forex trading and the elements which make it one of the top markets for investment.
Market Liquidity
As one of the largest financial markets, forex trading has the potential for high gains and fast returns. This is because the huge volume of currency being traded at any time provides many opportunities for liquidity. This does however add to its volatility and increases the risk involved. However, with the right strategy in place, traders can benefit from this, with the potential to make a significant profit from their capital.
The fact that the forex market is available online for 24 hours a day, five days per week means it’s easily accessible. Additionally, the number of currency forex investors and brokers, buying and selling every day affect the market movement. Unlike other financial markets, such as stocks and commodities, there is no central exchange, so all trades take place through a global network. This ease of access means that individual investors can easily react to market movement, and influences from political or economic factors, entering or exiting the market accordingly.
The returns are therefore particularly rapid for the forex market, and allow it to work well for a short-term strategy. This differs to other financial markets, where you may have to wait for organic asset value growth.
Leveraged Trading
Online forex trading lends itself well to leverage trading, as it is usually traded with a large position size and a huge amount of currency. Leverage enables you to open a position on a larger portion of the forex market, without the full amount of investment usually needed.
Trading currency this way is an effective use of money, as it is possible to see an incredible difference in the gains from trade, if the market moves in your favour. This is because a smaller amount of money than traditionally needed is used, yet you are still exposed to the market at the same value as the full amount.
It’s important to always take the time to fully understand leverage trading, how it works and how you can benefit from it, as it has the potential to magnify the profit as well as the losses. This is because the investment is always based on the proportion to the full value of the trade taking place. You can learn more about leverage in trading from Skilling, which is an online trading broker, as well as other resources which provide helpful advice and information, and are readily available online.
Short selling strategy
If the short selling strategy suits your style, then this works particularly well for forex trading, and is simpler to implement than a lot of the other markets. This is due to the fact that currencies are bought and sold in pairs. If you speculate that there is a decline in value of a currency, you need only sell the one currency and buy back in the other it is paired with – easily taking a short position on the market.
Trading in currencies also benefits from technical analysis, where a trader can use charts and indicators to predict the price movement, based on the market’s previous trends. This can influence the point at which you open and close your position on the forex market.
Having done extensive research and with a clear strategy and techniques in mind, the forex market can be a profitable investment for many traders. It’s volatility, and potential for high returns, continues to make it an attractive opportunity for investors.
