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Forex Trading: Opportunities in the Largest Financial Market in the World

Currency exchange rates are subject to daily fluctuations. So much is known everywhere. Only insiders know that investors can benefit from these price fluctuations to a greater extent. The magic word is "Forex".

Forex is the abbreviation for the Foreign exchange market. In this section of the financial market, the biggest turnover takes place by far. Market participants are banks, companies, specialized brokers, and private traders. Due to the high level of liquidity - around five to six trillion dollars per trading day - and strong fluctuations, very good trading is possible here, but strict loss protection is essential. Since the 2000s, foreign exchange trading has been decentralized, directly between market participants, while specialized forex exchanges still existed in the 20th century.

Worldwide trade around the clock

Foreign exchange is not traded centrally on a stock exchange, but directly between market participants; these include international companies, commercial banks, central banks, investment companies, brokers, or hedge funds. They all trade by phone and via a global data network around the world, usually only on weekdays. Until a few years ago, trading in dollars, yen, Swiss francs or pounds was reserved for an exclusive group of bankers. The Internet, in particular, has opened up foreign exchange trading to a wide range of investors.

Choosing a serious broker

Forex trading is a transparent and fair, but also speculative market. There are high opportunities for returns - with correspondingly high risks. Therefore: Forex trading is something for risk-taking investors! Knowledge of the financial markets and their mechanisms and, above all, knowledge of economic relationships are essential.

Investors interested in online currency trading should first explore the aggregative list of foreign exchange companies. It will help them to choose a reliable and reputable forex broker. These are subject to the legal supervisory and monitoring obligations, offer a professional online trading platform and comprehensive service with a personal contact, have transparent fee structures, and have a good reputation on the market. The quality of a broker can be tested with many providers with the help of a demo account. In this way, investors can first get to know foreign exchange trading under real market conditions and "practice" without using real money.

Move more than you have

In foreign exchange trading, prices are quoted with four decimal places. If there were only two, something would move less frequently. The third and fourth decimal places are much more volatile. However, this also means that the price differences from which investors can benefit are usually very small. If they only traded in small or medium amounts, the achievable profits would be minimal. Therefore, you work with the so-called margin in forex trading. It describes the amount that has to be deposited as security for a transaction and covers the maximum expected risk.

Depending on the broker, the margin is between one and four percent of the amount traded. This creates a leverage that allows the investor to move a significantly larger amount on the market when he deposited. With a margin of one percent, for example, he can carry out transactions of up to 100,000 euros for a security deposit of 1,000 euros.

Benefit from positive and negative developments

Forex trading is a barter like any other. In a transaction, the investor exchanges one currency for another. So it's always about a currency pair, such as euros and US dollars. The investor can buy either the euro or the dollar. If he buys the euro, the EUR/USD exchange rate must rise for him to win; if he buys the dollar, it is the other way round. So investors can benefit from both positive and negative market developments. The costs are manageable. As a rule, only the bid-ask spread is applied to a transaction. Since the foreign exchange market is a very liquid market, it is small. The spread is given in "pips" - usually the fourth decimal place (2 pips = 0.0002).

What is the attraction of forex trading for traders?

Derivative trading on currency pairs, in particular, enables the stakes to be doubled and tripled in just a few hours or even minutes. Traders can win with rising and falling prices of their underlying, there are call and put options. The rapid price movements, which of course can also be found in some indices, gold, and oil (and even some stocks), make day trading attractive. It is worth observing the prices of two to maybe five or six underlyings and getting in again and again on favorable occasions, setting a stop-loss, and then pulling it in seconds and minutes. However, if a currency pair actually comes to a standstill, the trader can look for another one. This gives the infinite variety in forex trading.