What About Forex Trading?
Forex (foreign exchange) trading is an exciting form of investing on the global market, consisting of buying and selling currencies on exchange markets worldwide. Trading forex offers various ways of diversifying your portfolio while helping to diversify risks involved – however it’s essential that investors understand these before beginning their venture.
Forex trading involves making predictions on the future direction of currency pairs, consisting of two separate currencies with one acting as its base and another serving as its counter. A speculator may make money by purchasing one they expect will increase in value before selling it off after its value has increased – this is known as taking a long position; traders may also opt to take short positions, selling one they expect will decrease and then purchasing it back at a lower price and closing out their short position at that time.
At times, various factors can impact the price of a currency pair, including interest rates, economic news and political events. Such fluctuations may lead to short-term price movements which you can profit from by trading using fundamental analysis techniques. For instance, an announcement from a central bank to increase their interest rate can cause the dollar to strengthen against other currencies, leading to increased demand for US goods and services and leading to increased exports.
Leverage is another key element in the forex market, enabling traders to use smaller sums of capital to manage larger investments with greater ease. Schwab provides leverage options ranging from 50:1 up to 500:1, but remember that using leverage may magnify both losses and profits.
Forex differs from stocks by being traded over-the-counter (OTC). This means that traders don’t trade directly against one another but rather through dealers, who act as sellers and buyers respectively for both of your orders; spreads and commissions may also provide additional income sources to dealers.
Due to its over-the-counter nature, forex trading is accessible both to individual retail traders as well as large institutions and corporations. Historically, most forex transactions were handled by major banks on behalf of their individual clientele. Individual retail speculative traders account for an increasingly significant share of the market today, although their participation is indirect through brokers and banks that are regulated by both the Commodity Futures Trading Commission and National Futures Association. FCMs and IBs (Forex Clearing Markets/International Brokers) provide liquidity for retail forex trading by acting as sellers to your buy orders and buyers of your sell orders. In return, these firms charge a fee known as “spread,” which varies depending on which broker provides it; typically this spread can either be variable or fixed; making forex trading an attractive prospect for retail traders.