Forex trading or FX trading is one way you can improve your financial situation but as with any form of trading, you have to know how to operate the system in order to maximize profits and minimize losses. With Forex trading, where you buy and sell two currencies at the same time, you are trading in a highly liquid market that you can access at any time, where the potential for gain is great. But you need to know what you are doing. Here’s how Forex trading stands out and why it can make a big difference to your finances.
Basic Trading with Forex
The general premise of Forex trading is the buying and selling of two currencies at the same time. You start with a pair of currencies. The GBP/USD is a popular currency pair. When the first currency is GBP this is the base currency, and then the second currency, USD, is the counter currency. You speculate on whether the base currency will rise in value or fall in value against the counter currency. If you believe that GBP will rise in relation to USD, you buy the pair of currencies (go long). If you think that GBP will fall against the dollar you will sell the currencies (go short). If you are correct in either case you make a profit. If not, you make a loss.
Trading on Margin and Leverage
Forex trading is a system that is based on the trade on margin. Therefore, one key way in which Forex trading affects your finances is that you do not have to put down the full amount you want to trade. A typical margin would be classed as 500:1 leverage, and, in this case, the value of the complete position works out at 500 times the total deposit you use to open the trade. Using this system it is possible to make a lot more than you deposited, but also to lose a lot more, too.
Understanding Leverage and Margined Trading
Using a margin to enter a trade is a more efficient use of the money you have. You don’t have to put down the complete value of the trade, and therefore, you open up the opportunity for bigger profits using a smaller deposit. Of course, you also open up to larger losses as you could lose more than the deposit you paid. It is important to understand the fast-moving nature of the markets and how to increase your chances of overall trading success.
Move Quickly to Maximise Profits
Because Forex is not linked to a central exchange and trading takes place around the clock from Sunday night to Friday night, you will almost always be able to respond to movements in the market in real time, says CMC Markets. You don’t have to wait for markets to open in order to take a position, which can benefit your finances if you are keen on a fast-moving trading platform and want to be able to maximise your exposure to profit whenever you want to trade.