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How Does Forex Trading work? Complete Guide

Trading Forex, or FX trading as it is also called, involves trading currencies. And like with all types of trading, the goal is to make money.

This article aims to provide an overview of the basics of Forex Currency Trading, how it works, and its characteristics and risks. As with any other type of trading, there are risks involved, and it is therefore important that you gain knowledge about how Forex trading works before entering forex trading to increase your success and minimize risks. Before you begin, it is always advisable to find good binary options brokers.

What is Forex Trading?

Forex trading is largely a synonym for currency trading and aims to exchange one currency for another – you buy one currency and sell the other. The value of the currency is often reported in the media as one going up and another going down, a fluctuation that shows the strength of the countries’ economies. In short, the euro rises and passes the US dollar, concluding that the economy is currently stronger in Europe than in the US -or vice versa.

Currency trading is always done in pairs that are either referred to as small or large. The major currency pairs include the British pound, US and Canadian dollars, and the euro.

The pairs are represented by printing the abbreviation for the two currencies and separating them with a slash – GDP / EUR. The pair here consists not only of two different currencies but of so-called base currency and counter currency.

In the example, GDP is the base currency, and EUR the counter currency. When trading currencies, you speculate on the value of the currency pairs in relation to each other. If the British pound increases in value against the euro, the value of the example pair GDP / EUR will also increase. If the euro strengthens against the pound instead, the pair’s value will decrease. As in all other types of trading, FX trade involves trading strategically. If an FX trader believes that the British pound will strengthen against the euro, he wants to buy the currency pair; if he thinks the opposite relationship will arise, it is time to sell.

There are only a couple of brokers on a market who try to help beginners. Usually, new people in trading watch some side content – famous bloggers from YouTube, or maybe read blogs from influencers. But Exness always tries to help every client, no matter if you are a newbie or experienced trader, you can send an e-mail to Exness support and your technical question will be resolved for sure. Furthermore, you can watch videos dedicated to trading from official Exness representatives on YouTube.

Currency pairs

The major currency pairs are the ones that are traded the most, and they also have reasonably greater volatility. Volatility is a term that describes how much a foreign exchange rate deviates from the average value – the larger the exchange rate changes, the higher the volatility, and vice versa.

This currency trading is conducted globally and the foreign exchange market is open almost around the clock. Nowadays, activity is very high, transactions worth billions are estimated to be carried out every day. In general, it is said that the market is open from Sunday evening to Friday evening, but in terms of the global foreign exchange market, there is usually always something that is open for trading.

Some of the largest currency pairs include:

  • AUD / USD
  • USD / JPY
  • EUR / USD
  • USD / CHF
  • USD / CAD
  • GBP / USD

Create a free Forex demo account

The best way to learn forex trading is to try out a demo account. Then you get the opportunity to trade with virtual money, and the currency broker can help you through the process with additional information, tools, and practical features. When you feel ready to trade for real, you can convert your account into a real forex trading account. Choose a serious forex broker. There are many out there, but a popular choice is https://tradersunion.com.

How does currency trading work?

All currency trading takes place through speculation in value increase and depreciation and this is where it all begins. A Forex trader first decides which currency pairs to speculate in. When this is done, it is decided how large the order should be – how much to invest? Then the trader has to make a choice, will the asset go up or down in value? If it goes up it indicates buy, if it goes down it indicates sell. Then it is a matter of deciding the course and carrying out the trade.

Through this Forex trading process, a position has now been created. However, the process described is simplified and before the size of the order is decided, there are a number of other factors that need to be taken into account. One of these is leverage.

The leverage can best be described as a tool that allows private individuals to invest less capital but still have a chance at a larger profit, but it also involves greater risk.

Characteristics

There are several advantageous features that characterize forex trading with Forex, including the leverage effect which means that the user can invest relatively little capital to get a relatively high return. Trading is also open around the clock and usually goes fast because the foreign exchange market has such high liquidity – that is, there are always plenty of both buyers and sellers.

Other properties are that the trade can be carried out completely digitally through various so-called Forex trading platforms. Several of these platforms offer training through programs such as “simulated Forex trading” which allows those who are new to learn how to trade, how the platform works, and what Forex trading strategies are available.

There is also specific software that can perform complex calculations and help the user navigate the ever-changing foreign exchange market. By using a Forex trading platform, trading is made possible and also facilitated by software developed for currency trading. In other words, there are good conditions for educating yourself before you start trading.

Risks

The risks of Forex trading are in many cases the same as the potentially beneficial properties. The leverage effect can give large gains on relatively low investment, but it also means that the relationship can be reversed – that the losses are significantly greater than the effort. This, in combination with the large volatility that prevails for several large currencies and which means that the market can fluctuate rapidly, means that risk management is an important part of currency trading. A good Forex broker offers risk management tools such as price alerts and stop-losses.

It also applies to the user to have control over their maintenance margin, which must not be less than the specified amount. If this happens, the entire position can be liquidated with immediate effect, resulting in lost profits.

With large variations in the market, which are admittedly not entirely common but still occur, it may in exceptional cases be the case that stop-losses do not have time to be triggered before the loss is already a fact. This causes the trader to lose relatively much money.

FX Trading online

Forex Trading online has many advantages, which contributes to why it is the largest financial market even today. One of the biggest advantages is, as mentioned, that currency trading is open 24 hours a day from Sunday to Friday, so you can trade currency basically whenever you want, wherever you want. It is also easy and smooth to keep track of the latest market news and exchange rates, precisely because you mainly look at the major currency pairs we have listed above. Remember to use a well-known and reputable Forex broker when trading currencies.

What is leverage?

Simply explained, the leverage effect is a definitional relationship that increases your chances of greater returns but also increases the risks. In other words, the leverage effect can be described as a multiplier effect on both gains and losses.

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