Spot forex differs from futures and ETFs by being traded over-the-counter (OTC), meaning direct dealing between two parties.
Traders make profits by betting that one currency’s value will increase or decrease relative to another. Learn the essentials of forex trading – terminology, strategies and risk management are covered here.
Global Scale of Market Transactions
Forex trading can be highly speculative, as traders attempt to profit from fluctuations in currency values. If you predict that the euro will appreciate against the US dollar, for example, and enter a trade by buying euros and selling dollars accordingly – should your prediction prove accurate, you could make a substantial return.
Currencies can be affected by many different factors, from geopolitical developments and economic news to central bank announcements of increasing interest rates; such an announcement could cause its currency to appreciate against the US dollar.
Forex trading is conducted via brokers who act as middlemen between buyers and sellers. Brokers generally make a small profit off the spread between bid and ask prices which helps offset some of their expenses associated with providing liquidity in the market.
High Liquidity
Liquidity gives traders the ability to trade currency pairs at any time and in smaller increments, helping to reduce volatility and create easier profit opportunities.
Liquidity levels vary among forex pairs, with major currency pairs typically boasting high liquidity due to their popularity among traders.
Certain times of day tend to produce higher liquidity, including during the London/New York overlap and early Asian session. However, liquidity can rapidly dry up just before important economic or central bank announcements, potentially leading to price gaps or wider spreads for traders. Traders can monitor this by reviewing their broker’s level 2 data which displays volume alongside bid and ask prices.
Low Margin Requirements
Forex trading involves the use of leverage, which amplifies profits and losses. To safeguard traders against unnecessary losses, brokers have minimum margin requirements that must always be maintained.
Margin is the percentage of full trade size required as collateral to open and maintain leveraged positions on an account. Once closed, your collateral will be returned back to you.
When the forex market moves against your position, your broker will close all open trades automatically when margin levels reach a preset value (known as stop out level). This protects you from losses that could otherwise become excessive; so choosing a reliable and well-regulated broker is crucial – the best ones always prioritise safeguarding of funds over profiting themselves.
High Leverage
Foreign exchange traders can take advantage of leverage to increase potential profits; however, it’s important to keep in mind that leverage could also magnify losses should the market turn against you.
Leverage provides traders with a means of increasing trade sizes without increasing investment capital, which can be particularly helpful for novice traders with smaller starting balances.
Most forex brokers provide various levels of leverage. New traders should do their research on each broker they consider before selecting a level that suits their comfort zone in order to reduce unnecessary risks while increasing potential gains.
Trading 24 Hours a Day
Forex trading is a global market and operates 24 hours per day from Sunday to Friday. Each region has their own time zone; so when one market closes down another opens up.
traders can take advantage of this unique trait by identifying times when the markets are most liquid and active. They can do this by reviewing the daily forex market schedule or speaking to brokers that provide around-the-clock trading.
Traders should carefully research their chosen pair before trading with a reputable broker so as to avoid incurring large losses. This way, large losses can be avoided.