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Forex: The Mutant Superhero of Trading

Foreign exchange is the buying or selling of one currency for another. You could even say currencies mutate!

By FlexInvestPublished 3 years ago 4 min read

Forex… Sounds like the name of an X-Men superhero, right?

Sorry to disappoint, Forex is actually the market in which currencies are traded, and is short for foreign exchange.

In fact, most of us have probably dabbled in forex trading, right after stepping off the plane and exchanged money for the local currency.

Let’s start with the basics

Currencies are extremely important around the world, and need to be exchanged so that we can carry out foreign trade and business.

For example, multinational companies and financial institutions, such as banks and hedge funds, need other currencies to operate in countries worldwide.

Forex is the largest financial market in the world, which isn’t surprising since there is a constant need to exchange currency.

According to the Bank for International Settlements (BIS), global market participants trade more than $5 trillion worth of currencies per day, that is roughly $213 million per hour! Now that is what we call a superpower!

Just so you know:

  • The NYSE’s daily trading volume averaged US$38.5 billion during the first five sessions of May 20173).
  • The Nasdaq’s daily trading volume averaged close to US$85 billion during the first four sessions of that same month).

Read also: Should you be afraid of the stock market?

How to profit from currency exchanges?

There are constant fluctuations between each country’s currency value, due to things like interest rates, trade flows, tourism, economic strength and geopolitical risk.

So, there’s an opportunity to bet against these changing values by buying or selling one currency for another, in the hope that the currency you buy will gain strength, or that the currency you sell will weaken.

The superpowers of Forex trading

It’s accessible

You can start trading currencies with small amounts. You can also access your trading account from almost anywhere. All you need is WiFi. Plus, the forex market is open 24 hours, 5 days a week.

Minimal to no commissions

No clearing fees. No exchange fees. No government fees, and if you’re lucky no brokerage fees. Oh and no middlemen. So how are brokers making money?

Well, most of them are compensated through something called the ‘bid/ask spread’, which is the amount by which the ask price exceeds the offer (bid) price for an asset on the market. This spread is usually less than 0.1% under normal market conditions.

No market manipulation concerns

It’s almost impossible for individual or small groups of investors to influence the price of a currency.

Not even central banks can move the market for any length of time without the full coordination and cooperation of other central banks.

Think about it like this: the trading volumes are simply so big that there are no trading entities big enough to manipulate the prices in their favor.

High liquidity

Since people are constantly exchanging currencies to travel and trade, you will usually find someone on the market willing to accept the other side of your trade. You will never be stuck.

Practice first

Most online forex brokers offer ‘demo’ accounts to practice trading and build your skills, along with real-time forex news and charting services. You can trade with ‘play money’ before opening a live trading account and risking real money.

High leverage

This allows traders to trade high volumes of currencies with the potential to make significant profits from the smallest moves on the market.

Leverage, however, is a double-sword; as your potential gain can be many times bigger than your deposit, but so can your potential loss. Usually you have to put in a margin which is up to 500 times smaller than the actual size of your transaction.

This is commonly known as leverage, and this is the main reason why Forex is so accessible to retail traders. If a broker offers you, let’s say 50:1 leverage, you can initiate trades up to 50 times larger than the balance in your account.

The takeaway

By trading forex, investors can access a market that is far larger in scope than that of the stock market. Because of its size, the foreign exchange market offers greater liquidity, which means that investors can enjoy lower transaction costs and more easily enter and exit trades.

They can also trade almost whenever they want, without having to worry about opening and closing trading hours. Its trading hours, along with its great leverage option, attract investors who are seeking for an alternative to trading stocks and indexes.

However, keep in mind that forex trading is a short-term investment. Investors rely on volatility in order to profit from quick price swings in the market. That’s why we always recommend ‘investing’ not ‘trading’.

And remember to choose how you want to invest depending on your goals and risk tolerances, not on what’s popular at the moment.

More from FlexInvest

  • How does the stock market work?
  • Why you should open an investing account… ASAP!
  • Are you using compound interest to your advantage?
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