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Forex trading is the buying and selling of foreign currencies with the aim of generating a profit. The value of currencies, especially floating currencies, fluctuate to varying degrees.
This constant volatility of exchange rates opens the door for speculators to invest in a certain currency against another.
The Forex market is the world’s biggest and most liquid market, with over $5 billion turnover every single day, with the market being open 24 hours a day, 5 days a week.
It goes without saying that forex trading is a very attractive market for not only banks and hedge funds, but even for the small individual trader, due to the low barriers for entry.
One literally only needs a computer with an internet connection, and some money deposited with a forex broker.
As a simple example, if you were very confident that the Euro (EUR) was going to gain strength against the US Dollar (USD) in the mid to long term, then you may decide to buy (or go long on) EUR/USD.
If the EUR/USD was trading at 1.1500 at the time of purchase, a €10000 investment would have cost you $11500.
As time goes by, if the EUR/USD gets stronger, e.g. its exchange rate moves to 1.2000 over the course of a few months, and you decided to close your trade there and then, you would have netted $12000, i.e. a profit of $500.
No One-Size-Fits-All Approach to Forex Trading
Whilst forex trading is easy to delve into, it’s notoriously difficult to master, especially for those without a financial background.
A lot of time and effort is needed to practice trading on demo and eventually on real accounts.
No doubt it takes dedication, discipline and patience, along with developing an edge to beat the market.
That edge is gained by studying at least one of two fields, known as technical analysis and fundamental analysis.
The former involves looking at currency charts, seeking out certain patterns using tools and software known as price action and indicators to help determine which way a particular forex pair may meander.
By extension, the latter involves focusing on the latest news reports and geopolitical situation of the countries involved.