The forex market is a vast and lucrative space, and one that was worth an impressive $2.409 trillion at the beginning of 2021.
However, it’s also incredibly volatile, while the margin-based nature of currency trading also makes it possible to incur losses that may be disproportionate to your deposit value.
So, we’ve created an introductory guide to help anyone who wants to start trading forex, while highlighting the risks associated with this practice.
What is the Forex Market? Appraising its Core Principles
In simple terms, the forex market is an entity that enables participants to trade currency pairings as derivative assets. The majority of forex trading volumes take place in the retail market, which is open to casual and part-time traders as well as institutional investors.
Forex is traded on margin, which enables traders to secure leverage and increase their leverage in the market. So, while margin refers to the precise amount of money required to open a position, leverage is the multiple of exposure to account equity.
This is why you can lose or gain more than your initial deposit, as you’re able to open and maintain large positions with a small amount of capital.
The derivative nature of currency trading also allows you to speculate on the performance of selected currency pairings, without assuming ownership of the underlying financial instruments.
This is a huge boon for investors, while it empowers day traders to profit from the numerous forex price movements that occur during each 24 hour period.
The Pros, Cons and Risks Associated with Forex Trading
There are numerous reasons to trade currencies and open a forex bonus account, aside from the size and derivative nature of the market.
Currencies are also highly liquid, due to the ease with which they can be bought, sold and exchanged in real-time. The high daily trading volumes are indicative of high liquidity, providing traders with ample opportunity to profit and invest flexibly every day.
Forex is also a 24-hour marketplace, and one that’s split into three geographical sessions based on exchanges in New York, London and Tokyo. Interestingly, the various crossovers between these three markets create heightened trading volumes and increased volatility, which can be capitalised on by day traders across the globe.
But are there any risks or downsides associated with currency trading? The short answer is yes, especially when you consider that the forex market is complicated, not standardised and relatively unregulated by the interbank market.
We should keep in mind that the market’s key pricing mechanism is supply and demand, creating a scenario where increased trade flows and volumes can make it incredibly hard to forecast price shifts within short periods of time.