Forex: Dangerous Business or Harmless Trading?
The foreign exchange market is a great place for traders looking to make some really good profit. However, brokers like Traders with Edge advise you need to know what you’re doing and have experience too because trading in the foreign exchange market can be pretty risky and give you sub-par returns if you don’t.
What is the Forex?
Forex refers to the foreign exchange market and can be used interchangeably with currency or FX markets. Millions of dollars are traded on the Forex every day.
On the foreign exchange market, traders (traders) can buy and sell foreign exchange. The principle is similar to currency exchange on vacation. If a vacationer travels to the United States from Germany and exchanges 100 euros for dollars before departure, the amount of dollars received is calculated using the exchange rate. If the vacationer returns to Germany, he can exchange his dollars back into euros. If the exchange rate is higher, he benefits from the exchange. If the price is lower, he loses money when he exchanges again.
Can anyone trade in Forex?
Anyone can trade. The forex is neither tied to a fixed place nor to very fixed times. Except on weekends, traders can buy or sell currencies almost 24 hours a day. This distinguishes forex trading from stock trading, which is linked to the respective stock exchanges and the opening hours of the stock exchanges.
In principle, anyone can start trading forex from anywhere in the world, provided they have an internet connection. However, trading in foreign exchange involves very high risks. The FX market is, therefore, less suitable for laypeople.
The Forex Currencies
The exchange rate describes how much of one currency is needed to buy another currency. Synonyms for exchange rate are foreign exchange rate or FX rate. In Forex, two different forms of exchange rates are typically used. The “spot rate” is the current exchange rate at a given point in time. The forward exchange rate is the current rate used for a future foreign exchange transaction.
Exchange rates change when demand for a particular currency rises or falls. For example, demand can increase because a country exports a lot of products. These are paid in the local currency.
For example, a trader buys $1.30 for $1.00. If the euro rises, he can get more dollars when buying dollars again, but he can only exchange the US dollars he has already bought back into euros at a loss.
Profit on Forex Trading
The return on forex trading consists of the difference with which a currency is bought and later sold again. In principle, the calculation of the return on a forex trade is not as easy as on a conventional investment, for example, a fixed deposit. The fees for forex brokers, through which access to the foreign exchange market is possible, must also be deducted from the return. It should be noted, however, that this income is taxable.
Those who invest a lot of money can make big profits, but forex trading is not intended as a substitute for an income from a regular job. However, private traders can use Forex trading to supplement their income.
If you want to responsibly enter the forex trade, you should stick to fixed principles. This includes that a trader only invests as much as he could bear as an actual loss. In addition, the guiding principle “buy low, sell high” has also proven its worth. For example, when the dollar is very low relative to the euro, traders should buy dollars. Due to the generally increasing demand for cheap currency, the rate is expected to rise again. The trader can then sell his currency and make big profits.