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Understand the Forex Trading Market, Its Facts, and Pros & Cons

Understand the Forex Trading Market, Its Facts, and Pros & Cons

Don’t know much about the Forex Trading market and the strategies used in that?

The Foreign Exchange Trading Market or commonly known as the Forex or FX market. This marketplace is global and is open 24 hours a day on weekdays. And it is the best place to trade your assets. FX trading is conducted OTC (over-the-counter), which means there is no physical place to exchange assets.

Rather than using a central exchange, like the New York Stock Exchange, the FX market is operated and monitored by a worldwide network of banks and financial institutions.

Understand the Forex Terms

Every marketplace has its terminology, and before entering the trading market, these are the important words to know before engaging in FX trading.

  • Currency Pair: All trades require a currency pair. Additionally, to the common, there are also less common trades such as exotics, which are currencies of developing countries.
  • Pip: Pip is considered the shortest percentage in points, and a pip refers to the minimum possible price change within a currency pair. Therefore, FX prices are quoted out to at least four decimal places; a pip is equal to 0.0001.
  • Bid: The exchange rates are determined by the maximum price that buyers are willing to pay for a currency is called a bid.
  • Ask: The exchange rates are determined by the minimum price that sellers ask to sell the currency is known as ask.
  • Spread: It is the fees that apply on the transaction between bid-ask is called the bid-ask spread.
  • Lot: A lot is a unit measuring a unit of currency. Forex commonly deals with specific amounts called lots, or basically the number of currency units you sell or purchase. There are four lot sizes available to trade: Standard (100,000), Mini (10,000), Micro (1000), and Nano (100).
  • Leverage: Because of large lot sizes, some traders may not be ready to put so much amount to execute a trade. Leverage is the term for borrowing money, which allows traders to participate in the foreign exchange market without the money otherwise required.
  • Margin: Trading through leverage is not free; traders must deposit some money as a security amount known as a margin.

6 Facts about Forex Market

  1. The Forex Market is Enormous: Foreign exchange FX is the world’s most traded market, with over $7.5 trillion being traded regularly. To put it in view, the daily average volume for the S&P 500 is 2.27% of the FX traded volume means 553 billion US dollars.
  2. Perhaps you have Already Traded Forex: When you travel to another country, you have to exchange your currency for foreign currency to spend money there. Sometimes, you don’t even completely spend that currency, and you will convert it back to your own country’s currency. This procedure is known as FX.
  3. Currencies are Available in Pairs: You are always trading one currency with another, for instance, the US dollar against the euro (USD/EUR). It is known as an FX pair.
  4. Potential Opportunities: Forex is an unexpectedly liquid market, and it is rapidly changing all the time. It makes it especially attractive to traders looking for short-term gains.
  5. It is a Decentralized Exchange: As you know, stocks use exchanges such as New York Exchange. However, FX is traded by an OTC means there is no physical exchange; it is a decentralized global network of banks.
  6. The Forex Market Never Sleeps: This market is open 24 hours a day, five days a week, from Sunday 5 PM to Friday 5 PM. It is why the time zones of the four trading centers, London, Sydney, New York, and Tokyo, extend over with each other, so when one closes, another opens.

How does Forex Trading Works

FX traders trade a currency pair, the two different currencies quotation paired together. A currency pair significantly tells traders the current market price of one currency against another. A three-letter code denotes every currency pair. These two codes are usually two letters representing the region where the currency belongs and one letter representing the name of the currency itself. For instance, the currency code of the U.S. dollar is USD, and the currency code of the British pound is GBP.

In a currency pair, the first currency is the base, and the second is the quote. The quote shows how much of the second currency you can get with one unit of the first. For example, if the EUR/USD quote is 1.06, it means 1 euro is equal to $1.06.

Pros and Cons of Forex Trading

Pros Cons
It is one of the largest liquid markets. It leverages trading to increase the risk of loss.
On the FX market, more than 100 global currency pairings are listed. Unpredictable market behavior due to geopolitical reasons.
It operates 24 hours and five days a week. It charges trading commission and margin fees.
It required low initial capital. Open orders require 24-hour risk management.
In FX, high volatility creates profit-making opportunities. Currencies don’t generate flow or dividends.

FAQs

What is the benefit of the Forex?

This market has many benefits if you have strategies to survive in the market. It will help you to earn lots of profit when you can convert large amounts of foreign currency.

How is forex profit calculated?

The FX profit can be calculated by multiplying the size of the position (traded units) by pip movement or simply just multiplying the pip movement.

Can I day trade with $100?

Yes, you can start trading with $100; however, it also depends on the broker. Some brokers may ask for more than $100 for the deposit.

Wrapping Up

To conclude, Forex trading is a great market. It offers accessibility and profit potential but involves risks like leveraging and market unpredictability. But through the predetermined logic that EA possesses the risk in the trading can be reduced or at least can detect the risk before time. Now, this can help the trader to make a decision suitable for him and according to his risk tolerance.

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