What Is FX Trading?

Last Updated July 23rd 2021
8 Min Read

FX, the Foreign Exchange Market or as most people know it, Forex, is the worldwide market for trading currencies. Since working with currency takes a large part of our everyday existence on a worldwide level, the Forex market is considered as the largest financial market in the world with a volume of over $5 trillion being traded each and every day.

So that is what FX trading is in a nutshell but are you aware of what FX trading consists of?

Well, that’s naturally the next question so we’re going to tell you exactly what the FX trading market is and help you understand the benefits as well as the risks involved if you decide to learn how to trade forex.

We will give you a more in-depth look at online forex trading and you might discover great potential opportunities so let’s get going!

If we have to quickly summarise what online forex trading is, we can say that in a nutshell, it’s making a prediction that the value of one currency is going to increase or decrease against another, if you’re right, you can make money.

Currencies are a commodity in their own right and as a product they have a certain value. A good FX trader is faced with the challenging task of determining how these values move up or down.

Learn about online forex trading

There are a couple of steps you should consider taking before you start diving into online forex trading.

First of all, you have to invest some time to learn about Forex trading and the financial markets. Without the knowledge and market-specific information and terminology you can’t move on to actual trading.

It’s of great importance to learn about fundamental and technical analysis, discussed in the following paragraph, as well as how to manage risks and control your emotions.

In addition, you need to dedicate some time to find a good forex broker with a trustworthy reputation that offers information and assistance to their customers but don’t worry we’ve got a few that we can suggest.

If you’re ready to start trading but need the necessary forex trading education to do so, keep in mind that we, at Trading Education, offer a free Forex trading course.

Take a look at all the perks on our official website

What is FX analysis based on?

what is fx analysis based on

Here, we would like to point out that there are two main methods of determining how the FX market aka the forex trading market is going to move and those methods are usually based on fundamental analysis and technical analysis.

Those two types of analysis are an integral part of every trading operation and forex traders should absolutely be aware of their meaning and how to apply them. What is the difference between those two?

Fundamental analysis basically explores the deeper reasons that caused the ups and downs of a currency.

This type of analysis examines the economic state of a country and its current well-being.

Fundamental forex traders will take into consideration various aspects that might affect the value of their currency, including inflation, gross domestic product, the interest rates of the central bank, trade balance and more.

Ultimately, by keeping an eye on these things, a forex trader can make a conclusion about how “healthy” the country’s economy is at this moment and whether to risk trading that country’s currency. This is an important aspect to know if you want to learn how to trade forex.

When it comes to technical analysis, traders are focused on discovering price patterns on various charts - the ups and downs of trends. Again this is also important to know if you want to learn how to trade forex.

Technical traders are concerned with price patterns, including flags and double bottoms. To sum it up, they are not quite worried about the background reasons explaining a certain movement of the trade but rather on the trends and patterns on the charts - they are their signals.

Forex traders are using this type of analysis to figure out which is the best pair to trade and towards which direction to trade it.

Example of FX trading

Forex trading gives you the opportunity to speculate on price movements on the global exchange market. The value of a currency rises and falls in relation which each other and you buy a currency pair when you predict that the base currency will strengthen against the counter currency.

When you place a position - either buy or sell, remember that the amount of money you can make is determined by the value of the currency pair, moving in your direction.

Let’s say that because of Brexit, you speculate that the pound will decrease against the US Dollar. If your prediction is correct and the value of the GBP starts to drop against the USD you could have a winning trade.

At that point, it’s advisable to close your position with the profit you made, remember until you close the position otherwise known as taking profit your trade will still be open and you could risk losing that profit. You can check your P/L on your open positions which stands for Profit or Loss as an indicator of how much money you are up or down on your trade.

What is FX trading good for?

As explained above, the value of currencies shifts. Most countries have a policy of controlled inflation and taxation that aim at moving money around and making people invest. By keeping your money static, you’re basically decreasing their value, as it naturally lowers with time.

In that sort of environment, you have to preserve your worth, not just the numbers in your bank account.

It’s highly probable that they will increase in time, however they may be static in value. For instance, back in 2000, you were able to spend a dollar or a pound and get a bunch of stuff at the local store. Now a dollar or a pound is worth a lot less and that’s due to inflation.

The changing value of currency also opens new opportunities for commerce, travel, and business. If, for example, the Turkish lira is currently a bit low, one can use that to buy commodities from the country for less than they would otherwise be worth.

There’s also the fact that your demands in life may increase in time. Living a decent life usually requires a lot of progress and development. Your family will certainly need more support than you did when you were younger. This is something that happens with everyone and FX trading can become one of the solutions to help you with the additional expenses that will inevitably come.

In addition,  FX trading will enable you to control the value of your money by moving it around. Instead of focusing on the amount of your finances, you can control their value. After all, that’s all that matters.

You have to start thinking in terms of values as well as sums. The number 1 financial regret people have is to focus too much on one or the other and miss out on some amazing opportunities.

Final Thoughts

To sum it up, the Foreign Exchange Market, also known as FX or Forex is the place where currencies are bоught and sold with the goal of making profit, coming from the difference in their value. The FX market is the largest financial market in the world (even larger than the stock market) and therefore many people are attracted to it - both experienced traders, as well as everyday people who want to earn extra money.

If you choose to go down that path, you have to be able to understand that when it comes to trading Forex, profits cannot be guaranteed and just like any type of trading there are plenty of risks. Nevertheless, the market is open to all individuals who understand trading and are willing to make extra money. One last important thing - Forex is certainly not for the inexperienced. We advise you to get a proper trading education, open a demo account and only after gaining that knowledge and confidence, dive into the FX world. Remember, great achievements always involve great risks.

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