FOREX Trading Explained

Every day, over USD 6 trillion is traded in the Forex (Foreign Exchange) market, making it the largest and most liquid financial market in the world.

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How Does Forex Work?

Forex operates on a decentralised market where currencies are traded in pairs, such as GBP/USD or EUR/JPY. This means that when you buy one currency, you are simultaneously selling another.

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The most popular currencies to trade include:

• USD (US Dollar)
• EUR (Euro)
• GBP (British Pound)
• JPY (Japanese Yen)
• AUD (Australian Dollar)

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Traders in the Forex market will often buy one currency whilst selling another, hoping its value will increase compared to the other in the pair, allowing them to sell it at a profit.

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Conversely, they can also sell a currency expecting its value to drop, allowing them to buy it back at a lower price.

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However, Forex trading can be highly risky due to unpredictable market fluctuations, economic events, and leverage, which can amplify both gains and losses.

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Benefits of Forex Trading

Forex offers several key benefits:

• 24/7 Trading: The market is open 24 hours a day, five days a week, allowing traders from different time zones to participate at any time.
• High Liquidity: Due to its significant size, the Forex market is highly liquid, meaning trades can be executed quickly at any time without much impact on prices.
• Leverage: Many brokers offer high leverage, enabling traders to control large sums of money with relatively small investments, potentially amplifying returns.
• Low Transaction Costs: Forex typically has low spreads (the difference between buy and sell prices), making it a cost-effective way to trade.

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Risks of Forex Trading

Whilst Forex has its perks, as with everything there are risks:

• High Volatility: Currency values can fluctuate rapidly due to economic data, political events, or market sentiment. This volatility can lead to substantial losses as well as gains.
• Leverage Risks: While leverage can amplify profits, it also increases the potential for significant losses, sometimes beyond your initial investment.
• Market Manipulation: As a decentralised market, Forex can be susceptible to manipulation, especially by large institutions or banks, impacting the value of currencies unpredictably.

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Why Is Forex Important?

Forex trading plays a crucial role in international trade and investments.

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It facilitates the conversion of one currency to another, allowing businesses to conduct cross-border transactions, tourists to exchange money, and investors to diversify their portfolios.

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It also can present an opportunity for traders to make significant profit (or losses!) as they seek to grow their wealth.

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Please note that all content within this article has been prepared for information purposes only. This article does not constitute financial, legal or tax advice.