What is forex and how does it work?

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What is forex and how does it work?

Before you start forex trading and enter the Forex market, it is important that you have gathered knowledge about the subject and analyzed the market. An overly frivolous attitude to this can lead to negative consequences as Forex trading actually involves a significant risk where a larger part of your capital can be lost if you are not prepared.

What is Forex Trading?

Forex trading is basically a synonym for foreign currency trading and aims to exchange one currency for another – you buy one and sell the other. The value of the currency is often reported in the media as one going up and another going down, a fluctuation that shows the strength of the countries’ economies. In short, the euro rises and passes the US dollar, concluding that the economy is currently stronger in Europe than in the US.

Forex currency trading is always done in pairs that are either referred to as small or large. The major currency pairs include the British pound, US and Canadian dollars, and the euro.

Currency pairs

The major currency pairs are the ones that are traded the most, and they also have reasonably greater volatility. Volatility is a term that describes how much a foreign exchange rate deviates from the average value – the larger the exchange rate changes, the higher the volatility, and vice versa.

This currency trading is conducted globally and the foreign exchange market is open almost around the clock. Nowadays, activity is super huge, transactions worth billions are estimated to be carried out every day. It is generally said that the market is open from Sunday evening to Friday evening, but in terms of the global foreign exchange market, there is usually always something that is open for trading.

Large currency pairs examples

  • AUD / USD
  • USD / JPY
  • EUR / USD
  • USD / CHF
  • USD / CAD
  • GBP / USD

Small currency pairs examples

  • EUR / SEK
  • GBP / SEK
  • USD / SEK
  • SEK / JPY

How does currency trading work?

All currency trading takes place through speculation in value increase and depreciation and this is where it all begins.

  • A Forex trader first decides which currency pairs to speculate in. When this is done, how large the order should be or how much to bet?
  • Then the trader has to make a choice, will the asset go up or down in value? If it goes up it indicates buy, if it goes down it indicates sell.
  • Then it is a matter of deciding the course and carrying out the trade.

Leverage

Through this Forex trading process, a position has now been created. However, the process described is simplified and before the size of the order is decided, there are a number of other factors that need to be taken into account. One of these is the leverage or leverage effect as it is also referred to as. The leverage can best be described as a tool that allows private individuals to invest less capital but still have a chance at a larger profit, but it also involves greater risk.