Forex (or foreign exchange) trading is the trading of currencies against each other. Like other trading, the aim of forex trading is to make a profit by selling for more than you buy a currency for. Like any form of trading, it comes with a degree of risk, although forex has unique risks compared to other forms of trading.
One of the attractions of forex trading is the use of leverage. This allows you to trade with borrowed money so that with a small investment, you can trade large amounts. The benefit is that trades can potentially generate much larger profits, but on the flip side, it also increases the risk of every trade. It is important to be aware of this to take steps to protect yourself. Having numerous leveraged trades, even low risk trades, open at once, can result in significant losses if you make a loss on many of them. In addition, traders can incur significant losses very quickly when trading with leverage so it is extra important to have suitable stops in place. In addition, if you are a new trader, it is worthwhile to start out with small leverage and work your way up as you become more confident.
Factors Impacting on the Forex Market
There are many factors that impact trading in any market, but because forex involves currencies from around the world, news from anywhere in the world can impact the forex market. This news can result in fast price movements or the change in trend direction. Whether you trade in the long term or short term it is important to keep an eye on global news.
Interest rates have an impact on the exchange rates of a country. If the interest rate goes up, the currency gets stronger because other countries will look to invest in that country’s assets. The opposite it also true – if interest rates fall, the currency of the country will weaken as investors pull out. The changes in currency values that the interest rates result in can make forex prices change significantly.
There is a transaction risk that can result in exorbitant transaction costs simply due to the time differences between the beginning of the transaction and its end. Forex is a 24-hour market and currencies can be traded at different prices during trading hours. The bigger the time difference between entering a trade and settling the trade, the higher the transactional risk, as the time difference allows the exchange rate to fluctuate.
Before you begin trading in forex it is important to not only understand how the trading works, but also understand the risks associated with it. Only by understanding the risks can you begin to take steps to minimize the risk that faces you. The unique risks that are associated with forex trading may result in higher losses than you initially anticipated, but these can be mitigated if you know what steps to take and what to look out for.