The forex market (also known as the foreign exchange) is the market where currencies from around the world are bought and sold in attempt to make a profit from fluctuating exchange rates.
Currencies are always bought and sold in pairings (the first currency is known as the ‘base’ and the second is known as the ‘quote’), such as GBP/USD, EUR/GBP and AUD/EUR, with each pairing having its own behaviour and level of volatility. As a result, it is common for traders to invest in multiple currency pairings at a time, depending on which they believe may be the most promising/profitable.
The exchange rates between currencies are constantly changing; meaning forex trading is incredibly fast paced, with market opportunities arising on a regular basis.
What is Trading Forex to a Beginner?
In the forex market, there are essentially two positions which traders can take to speculate on currency pairings. These are:
* Going long: the same as ‘buying’ a currency if the investor believes that it will appreciate (increase in value) against the currency it is paired with
* Going short: The same as ‘selling’ a currency if the investor believes it will depreciate (decrease in value) against the currency it is paired with
As with any market, no trade is ever guaranteed to make a profit, which is why researching different currencies to gauge what is trading well (or may be profitable in the future) is recommended.
What is Forex Leverage and Volatility?
Leverage refers to the ability to control more units of currency with less capital. In essence, it means that an investor can magnify their profits if their investment is successful, but also magnify their losses if the pairing moves against their position. As such, leverage should always be used with caution, and with full knowledge of the potential risks involved.
Volatility refers to the size of the fluctuations in value which a pairing is experiencing, as well as how frequently its value is changing. If, for example, the euro was swinging between a value of 1.1 and 1.2 dollars in the space of a day, then it would be experiencing extremely high volatility. If it remained at a value of 1.18 dollars for a week, then its volatility would be considered extremely low.
As with leverage, highly volatile pairings tend to carry more risk, but they can also lead to larger profits with successful investments, so may be worth considering for more experienced investors.