It might surprise some readers to learn that the busiest financial trading market in the world is not a major stock exchange — or even stocks in general. Rather, it’s the forex trade, where currencies are leveraged against one another. While the forex market isn’t necessarily what people tend to grow up thinking about when they consider financial investment, the sheer size of it points to the idea that many ultimately consider it as a viable means of building wealth. And because this is such a popular idea, we’ve decided to go over some of the key questions to ask yourself before you give forex a try (as well as some of the answers!).
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What exactly is forex trading?
Forex is shorthand for foreign exchange. This market is essentially a worldwide trading network of currency exchanges. However, it’s not quite as simple as, say, buying dollars with euros and then selling the euros back later. Instead, currencies are traded as pairs. So, if you want to trade the euro/dollar pair, you would invest in the asset denoted EUR/USD almost as if it were a stock or commodity. The EUR/USD marks the value of euros in terms of dollars, and will thus rise or fall as the euro strengthens or weakens against the dollar.
What currencies make up the market?
In theory, just about any world currency can be traded in forex markets. However, a vast majority of the activity revolves around a select few currencies that essentially belong to the most powerful and influential economies. A medium post on major currency pairs lists the six that make up the bulk of forex transactions: EUR/USD, GBP/USD, USD/JPY, USD/CHF, AUD/USD, and USD/CAD. These six pairs, and to a lesser extent any other combination involving any one of these currencies, largely define the forex trade.
Is the market really 24/7?
One thing you’ll see on just about every list of “pros” or benefits of forex trading is the idea that the market never sleeps. While stock exchanges essentially follow business hours, the forex trade is perceived as being open at all hours. There’s some truth in this, but the answer to the question — and an important thing to understand if you’re considering trading — is that forex is not a 24/7 market. It is merely opened at all hours during work weeks, which does still allow for more flexibility in trading approaches.
Are there alternative trading methods?
We went over how forex trades are made above, but what about alternative methods? Such as futures trading as an alternative to buying and selling stock. And there are in fact a few different ways to get into the forex market, with the most significant “alternative” being contracts for difference. In a breakdown of how to trade forex CFDs on Plus500, it explains this method as one in which currency pairs are traded based on expectation, rather than bought or sold. A CFD represents whether the trader believes the EUR/USD value will go up or down over time and yields a return if the trader gets it right. It’s a popular model for those who would prefer to make predictions rather than possess assets.
Why don’t you hear more about forex?
This is a difficult question to answer with certainty. But it’s fair to wonder why, given the massive scale of the forex market, you don’t hear about it as much as you hear about the stock market. One possibility is that currency value fluctuations don’t tend to be as significant or interesting as changes in companies’ share prices — which means stocks are just more likely to garner news. Another possibility is that because the forex market is more of a trading environment — meaning there is a frequent day-to-day activity rather than just long-term holdings — it simply doesn’t come up as often in investment discussions.
Can forex trading make you rich?
We’ve asked ‘Can You Get Rich by Trading Forex?’ in the past, and the basic answer is – Yes! But as we explained previously, it takes a lot of effort, skill, persistence, and patience. This is frankly true of most forms of trading, but in forex, you’re very unlikely to “hit it big” in one fell swoop, simply because of the nature of the market. Thus, we do caution patience. Successful forex trading over a period of time can yield significant returns that significantly enhance your personal financial situation. But it won’t happen overnight, and it will be difficult.
The forex market can be a very interesting one to dive into, and one that’s unlike other markets in numerous ways. But there’s a lot to know about it before you get started, and even with a sound understanding of what you’re getting into, it’s a market that requires a careful approach over time if you’re to be successful.