To excel in any field, you must first learn the ropes before taking the plunge. As with any venture, Forex trading also requires a trader to have a fairly concrete idea about the dynamics of the market, but most importantly, they should also possess the psychological prowess to put their strategies into good use. Read our Forex 101 guide to obtain a fairly decent idea on how to start out in the world of Forex trading.
Forex is an abbreviation of 'Foreign Exchange', also known as FX, which acts as a backbone for all global cross-border transactions. Forex trading arises from the need to exchange the currency of one country to another, primarily for trade. For instance, two of the most popular currencies in the world, the Euro and the US Dollar, are frequently exchanged as reparation for goods sold and services rendered between the United States and the European Union. It is currently estimated that the Forex market is responsible for around $5-$6 trillion worth of transactions each day.
Forex trading is all about trading one currency for the other and is usually denoted by their currency abbreviations. When one currency is pegged against another currency, it is known as a currency pair. The currency pairing for the Euro and the US Dollar is denoted as the EUR/USD, where EUR is the base pair, and the USD is the quote currency. The value of EUR/USD denotes how much USD is required to buy 1 EUR, or in other terms, how much USD can be bought by selling 1 EUR. Essentially, traders are free to buy or sell any currency pair in the world, which is a novelty feature of the concept of Forex trading.
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Forex trading is used for a wide variety of reasons, speculation and hedging being just a few of them. In the grand scheme of global Forex transactions, FX trading is used by both institutional traders and retail investors for overseas payments, speculation, hedging against currency risks, and in some cases, as an investment by taking advantage of the differential interbank currency interest rates. Therefore, in pure trading terms, it can be used as any single investment opportunity, or be used as a part of an investment portfolio. If you are a newbie trader, you fall into the speculator's category, where your primary aim is to profit from the currency rate variations.
Smaller retail traders, such as day traders or small-term traders, rarely invest the sums that are typically invested by institutional investors. Currency pairs fluctuate as a result of economic policies, market demand/supply, investment from institutional traders, and other internal/external factors. Nevertheless, most online Forex brokers offer a platform that allows traders to start Forex trading with just a minimum initial deposit of $100, or sometimes even less. Therefore, retail traders can access the Forex market, but they won't contribute to the price discovery of the currency pairs with their positions. However, it is possible to profit from the market movements, which can be quite substantial. Of course, if the trader is wrong, the losses can also be magnified, which is why proper risk management principles are vital.
Forex 101 is all about learning the basics of Forex trading and using it to get familiar with the concept of Forex trading. You can use our trading tips and Forex education articles to stay on top of the market. However, to truly make a difference in your trading performance, start trading with a demo account, and then replicate your strategies on a live funded account. The key to the game is to understand the market dynamics and modifying your approach to earn the maximum return on your investment.