The process of exchanging national currencies against one another takes place globally on the foreign exchange (forex) market. With around $6.6 trillion transactions taking place on the market on a daily basis, it is one of the most active trades worldwide.
Despite its popularity, forex trading is not without its risks, since the market is highly volatile and susceptible to exterior influences, such as economic and political changes in society. In addition to understanding currency markets, it's important for traders to understand the regulation and safety provided by different brokers for Forex trading before getting started. As with any other type of investment, researching different options for forex trading will help create a foundation for navigating the market more successfully in the future
Successful trade on the forex market, requires patience, extensive research, and the ability to act responsively, according to market fluctuations. If you’re interested in opening a position in the market, then this article will act as your guide to forex trading, taking you through its history and some key points, that could help you to minimize the risk of making losses.
The history of the forex market
The forex market is open for trade 24 hours per day, five and half days per week. But the act of trading currency is not a modern concept. The first recorded exchange of currency is believed to date back to 259BC in Egypt, where silver and gold acted as the universal currency and its value was determined by their weight.
2500 years ago, silver and gold still functioned as universal currency but allowed commodities to be bought and sold. The Greeks and Egyptians traded with these precious metals in the form of coins, and their value was then determined by both their size and weight.
Though foreign exchange trading is identifiable in the depths of history, the market went through its most transformative stages in the 20th Century. In 1944 the Bretton Woods Accord was signed, which permitted currencies to change within a specific pre-determined range. Following this, a ‘free floating’ system was introduced in 1971, which allowed countries to decide their own exchange rates, and the market that we are familiar with today was born.
How do you trade on the Forex Market?
Forex is traded in currency pairs, meaning that the value of a currency is determined by comparing it against another. This means that you can directly compare and speculate upon the performance of two countries’ currencies and take a suitable position based upon your findings.
In a pairing, there is a base currency and a counter currency. If you were comparing British sterling against the US dollar (GBP/USD), sterling would act as the "base currency" in this instance, meaning that if the pound was worth 1.0999, you would need that quantity in dollars in order to purchase one pound.
By comparing the base currency and the counter currency, you can assess whether they will rise or fall against one another and act accordingly. If you suspect that the base currency will rise against the counter currency, you would take a bullish position and buy. Alternatively, if you believe that the base currency will fall against the counter currency, you would assume a bearish position and sell your assets.
What is leverage and how can it be used?
Leverage is a tool that allows traders to acquire greater exposure in the forex market with reduced expenditure. This is possible because, once you have paid the initial margin requirement, the remaining total trade value can be borrowed from a forex broker. Though greater exposure can pose a greater risk of making losses, it allows you to trade on the most popular currencies, and have the opportunity to acquire larger profits than your capital alone would afford.
Forex trading using CFDs
Trading on the forex market using a contract for difference (CFD) allows you to open a position without owning the underlying asset. A CFD is a contract between an investor and an investment broker that states that the two parties will exchange the difference between the opening and closing trade prices, once the contract has come to an end.
One benefit of CFD trading is that it can give you greater leverage when trading. This is because the current margin requirement to open a position is usually only 5%, therefore, since you will require less capital to open a position, it is possible for you to increase your potential profit margin.
