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Forex Articles

What is Forex Trading and How Does the Forex Market Work?

What is forex trading?
The word Forex is usually abbreviated to FX. It is combination of the words foreign and exchange. Of course, the word foreign refers to foreign currency so it follows that Forex trading simply means trading in foreign currencies. In this article, the writer will discuss forex trading, how it works and why it is a lucrative and exciting business.

Understanding the Forex Market
The forex market is a global marketplace where currency traders can exchange national currencies. Unlike the global stock where people have to go through stockbrokers to transact business, forex traders can buy and sell currencies directly. The forex market is the most highly capitalized and the most liquid market on planet earth. It is open 24 hours a day for five and half days in the week. The fact that the market operates at all hours of the day means that traders can work round the clock in different time zones.

Forex Trading and the Internet
Before the advent of the internet and smart devices, forex trading was relatively challenging. In the pre-internet era, the bulk of forex trading was carried out by commercial banks and other financial corporations on behalf of their clients. These days, forex traders have no reason to run a brick-and-mortar operation. Forex traders can simply operate online from any location at any time of the day or night. The only requirements are a computer and an internet connection. Some traders don’t even need computers smart devices like an iPad, a smart phone or a tablet will do.

Capital Requirements and Trading Specifics
The beauty of the forex world is that you don’t need a large sum of money to start this business. You can start with a relatively small amount of money and grow your business as you make successful trades. You can also start with a huge capital outlay if you have the funds. It all depends on your access to capital and your investment style. All you have to do is learn the business, carry out a bit of demo trading for a while and then you set up your account with a reputable platform online. Once you have taken these steps, you are in business already.

Making Money from Forex Trading
The first question people ask before entering the currency business is: What is forex trading? The next question is: Can you make money in the forex business? We have answered the first question already so, we move to the next question. Can you make good money in the forex business? The answer is a resounding yes! There is serious money in this business but making money consistently depends on a number of factors. These factors include the capital at your disposal, your investment style, timing and trading strategy.

Understanding Currency Pairs
As a forex trader, you are not in business to buy foreign currencies without a plan. a forex trader is an investor and this is why you have to trade currency pairs. One of the most popular currency pairs for forex traders is the USD/GBP. This means you are pairing the US dollar against the British pound. Other popular currency pairs are AU/USD and the USD/EURO. These pairs are the Australian dollar and the US dollar and the US dollar and the European currency respectively. When you trade currency pairs, you simply place a buy or sell instruction at certain prices for the currencies you are targeting. For instance, you are convinced that the USD will fall against the GBP. You simply place a bid on the transaction with instructions to buy or sell at certain prices. If the market goes your way, you make money from that particular transaction.

Forex Trading Terminology
Apart from the simple currency pair terminology, the forex world has an array of terms and expressions peculiar to the currency world. Some of these terms include to go long, go short, swing, scalp, and so on. As a forex trader, you need to master these terms, understand them and use them to your advantage. In addition, you need to master effective forex trading strategies because these will help you carry out successful traders in the currency market.

Understanding Forex Trading Strategies
Some of the most popular strategies for forex traders include price action, trend trading, scalping, position trading and swing trading. As a forex trader, you don’t have to stick to only one strategy all the time. You are allowed to change strategies as the market changes. You can also try out a combination of strategies if this is what it would take to give you an edge in the currency market.

Finally, it is important to be innovative and flexible as a forex trader. Keep your eyes wide open, do your research and try to learn new things as you trade. Again, you should not ever trade with real money unless you have perfected your strategy using a period of demo trading to try out a particular strategy.

Final Word
Forex trading is a gold mine but you have to understand how the market works before you start making money. Do your research, learn on the job and you will make good money in the forex trading business.