You surely have heard this term many times and know that top forex traders earn a lot of money. In general, FX is exchanging foreign currencies for profit, but there is much more to it. In this article, you'll find an answer to the question "What is Forex?", learn about its basic principles, and understand how you can become a trader yourself.
How Forex Trade Works
Forex exchange is a decentralized global market where people from all around the world can buy, sell, and perform other financial operations with foreign currencies against each other. The goal of the trader is to try to predict the movement of the asset's price and open a trading position in a way that they purchase currency for a low price and sell it for a high price.
Of course, it's a very basic principle as there are various types of trades for different strategies and preferences. The most common are:
Position trade: a long strategy that involves waiting for months to hold or take a position.
Swing trade: a bit faster variation of the previous one, utilizing price swings.
Day trade: involves opening and closing positions in a day. Mostly used by those who view FX as their primary occupation.
Margin Trading
To drastically increase their potential income, forex traders can resort to margin trading. In layman's terms, it is using the money borrowed from the brokerage firm to increase the size of the position and get more returns from investing in case of a successful trade. In this scenario, a margin is an amount of the trader's money required to set up an account and acts as a safety deposit. The amounts required vary depending on the broker and can often get as low as 1%. This means a trader can operate as much as $100,000 for depositing just $1,000.
Margin trading helps people increase their potential and control larger positions than they could have with their own capital. However, it is a huge risk as you are dealing with the money that doesn't belong to you and can exceed what you can repay by many times. In case the investor's losses are getting close to the initial deposit, a broker can initiate a margin call to ask them to deposit more of their money into the account or close the position to minimize losses. Leverage should be only done by skilled traders who fully understand the risks and know what they are doing.
Contracts for Difference
CFDs are another way of earning on exchange rate fluctuations. Here, instead of actually buying an asset, you make a bet on its movement. It is done by making a contract between an investor and an asset owner that states that a buyer must pay a seller a difference in the value of the asset between the time of start and finish of the contract.
These contracts allow investors to buy underlying assets at a lower price and are easy to execute. The downsides are lack of regulation, high maintenance, and a fact that traders bear the burden of paying the spread.
How to Become Forex Trader
Everyone can become a Forex trader. All you need to access online trading is a broker company that provides a connection with the interbank market. There are numerous broker companies you can find on the internet. They differ by commission rates and available trade types, yet all have tools for chart analysis and allow opening position in just a few clicks.
https://www.state-journal.com/sponsored/what-is-forex-a-platform-for-online-trading/article_61bf6450-e731-11ec-a79f-db3edd016daa.html
2022-06-08 06:30:00Z
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