What is Forex?
Foreign Exchange (FOREX) refers to the foreign exchange market. It is the over-the-counter market in which the foreign currencies of the world are traded. It is considered the largest and most liquid market in the world.
To make this simple, imagine you are getting ready for a trip to New York and you exchange 500 Euros into Dollars. A week later, your trip is unfortunately cancelled and you decide to change your Dollars back into Euros. Surprisingly, you end up with 505 Euros: a profit of 5 Euros!
This is known as a profitable foreign exchange trade. You initially purchased Dollars at a certain rate of exchange and during the week that followed, the value of the Dollar went up against the value of the Euro.
Without even meaning to do so, you managed to make a small profit as you bought your Dollars at a low rate and sold them back at a higher rate – the aim of any successful trade.
Why trade forex?
When traders choose which market to trade, they are looking for optimal trading conditions and the best chance of taking a profit. There are many reasons why millions of traders across the world think that the forex market fits these criteria, but we are going to focus on the top nine benefits of forex trading:
1. Ability to go long or go short
While you can go short on other markets by using derivative products, such as CFDs, short selling is an inherent part of trading forex. This is because you are always selling one currency (the quote currency) to buy another (the base currency). The price of a forex pair is how much one unit of the base currency is worth in the quote currency.
For example, in the forex pair GBP/EUR, GBP is the base currency and EUR is the quote currency. If GBP/EUR is trading at 1.12156, then one pound is worth 1.12156 euros. If you think that the pound is going to increase against the euro, you would buy the pair (going long). If you think that the pound will decrease in value against the euro, you would sell the pair (going short). Your profit or loss will depend on the extent to which you get your prediction right, meaning it is possible to profit whichever way the market moves.
2. Forex market hours
The foreign exchange market is open 24 hours a day, five days a week – forex can be traded from 9pm Sunday to 10pm Friday (GMT). These long hours are because forex transactions are completed between parties directly, over the counter (OTC), rather than through a central exchange. And because forex is a truly global market, you can always take advantage of different active session’s forex trading hours.
It is important to remember that the forex market’s opening hours will vary in March, April, October and November, as countries shift to daylight savings on different days.
3. High liquidity in forex
The Trade4xpro is the most liquid market in the world, meaning there are a large number of buyers and sellers looking to make a trade at any given time. Each day, over $5 trillion dollars of currency is converted by individuals, companies and banks – and the vast majority of this activity is intended to generate a profit.
The high liquidity in forex means that transactions can be completed quickly and easily, so the transaction costs – or spreads – are often very low. This creates opportunities for traders to speculate on price movements of just a few pips.
4. Forex volatility
The high volume of currency trades each day translates to billions of dollars every minute, which makes the price movements of some currencies extremely volatile. You can potentially reap large profits by speculating on price movements in either direction. However, volatility is a double-edged sword – the market can quickly turn against you, so it’s important to limit your exposure with risk-management tools.
5. Leverage can make your money go further
Trade4xpro offers a way to trade foreign exchange pairs using CFDs. CFDs are leveraged, which can make your money go further. Leverage in forex enables you to open a position on the currency market by paying just a small proportion of the full value of the position up front.
The profit or loss you make will reflect the full value of the position at the point it is closed, so trading on margin offers an opportunity to make large profits from a relatively small investment. However, it can also amplify any losses, meaning losses could exceed your initial deposit. For this reason, it’s important to consider the total value of the leveraged forex position before trading CFDs.
To help you manage your risk, Trade4xpro offers a range of risk-management tools including stop losses, guaranteed stops, price alerts and running balances.
6. Trade a wide range of currency pairs
Forex trading gives you the opportunity to trade a wide variety of currency pairs, speculating on global events and the relative strength of major and minor economies.
With Trade4xpro, for example, you can choose from over 90 currency pairs, including:
- Major currency pairs, eg GBP/USD, EUR/USD, and USD/JPY
- Minor pairs, eg USD/ZAR, SGB/JPY, CAD/CHF
- Emerging currency pairs, eg USD/CNH, EUR/RUB and AUD/CNH
- Exotic pairs, eg EUR/CZK, TRY/JPY, USD/MXN
These pairs are all available to trade from the same account via a single login.
7. Hedge with forex
Hedging is a technique that can be used to reduce the risk of unwanted moves in the forex market, by opening multiple strategic positions. Although volatility is part of what makes forex so exciting, hedging can be a good way of mitigating loss or limiting it to a known amount.
There are a variety of strategies you can use to hedge forex, but one of the most common is hedging with multiple currency pairs. By choosing forex pairs that are positively correlated, such as GBP/USD and EUR/USD, but taking positions in opposite directions, you can limit your downside risk. For example, a loss on a short EUR/USD position could be mitigated by a long position on GBP/USD.
Alternatively, you could use forex to hedge against loss in other markets, such as commodities. For example, because the USD/CAD generally has an inverse relationship with crude oil, it is commonly used as a hedge against falling oil prices.