The investment world is full of opportunities, and the stock and bond markets get most of the attention. But another market that significantly overshadows them when it comes to volume is the foreign exchange market, which trades trillions of dollars worldwide every day.
Forex trading, the common name for the foreign exchange market, entails trading currencies instead of securities (think the U.S. dollar, European euro or Japanese yen).
Although many entities trading foreign currencies via the forex market are banks, governments and high-volume brokers, there’s space at the table for individual investors as well. But, as with most investing opportunities, there’s also risk. Read on to find out more about the pros and cons of forex trading.
Foreign exchange trading, or forex trading, is the buying and selling of foreign currencies to make a profit.
Trading forex requires the trader to anticipate the strength of foreign currencies when pitted against one another, using preset currency pairs like the euro and the U.S. dollar. The goal is to buy currencies at lower prices and sell them at higher prices to earn a profit.
The forex exchange operates 24 hours per day, five and a half days per week. The trading day starts in Australia, then moves to Europe and ends in North America, with markets overlapping during the day.
The market is highly volatile and can be affected by everything from consumer confidence to inflation to geopolitical events.
Investors are not limited to trading in their own country’s currency, which provides plentiful options for trades.
While many of the movers and shakers buy millions of dollars worth of trades, it’s possible and even easy to get started with as little as $5, depending on the platform you choose. By using leverage, even small amounts of money can have a big impact (though, again, with risk).
The forex market almost never sleeps; it’s open 24 hours, five and a half days a week around the world. Because most traders use leverage, there’s also the potential for big gains — and big losses.
Since the forex market is known to be volatile, many trading platforms offer free training and a practice account. With a practice account, potential traders can make trades, explore leverage and learn while investing imaginary money until they are confident enough to invest their cash.
Compared to the stock market, there are even more factors that affect the forex market, like political movements, tourism, interest rates and more. Anticipating what will move the price is extremely difficult, making this a risky market to enter.
The forex market is particularly susceptible to fraud schemes. Most recently, the Commodity Futures Trading Commission (CFTC) warned of romance scams involving dating apps. Since all trading is done digitally, it’s easy to get duped into transferring funds to an unscrupulous trader using a fraudulent platform.
Trading on forex is very different from buying shares on the stock market. Although practice accounts are available, there’s still the potential for loss on any given day.
While trading forex does have some similarities to the stock market, it also has some stipulations that complicate trading. For example, rather than just buying one currency and waiting for it to appreciate, forex traders have to choose currency pairs.
The most common currency pairs that include the U.S. dollar are EUR/USD (euro), USD/JPY (Japanese yen), GBP/USD (Great Britain Pound Sterling), USD/CHF (Swiss francs), AUD/USD (Australian dollar), USD/CAD (Canadian dollar), and NZD/USD (New Zealand dollar). However, there are at least 30 currency pairs traded every day.
Forex trading is speculative by nature. Once an investor has chosen a currency pair, they speculate on how much of one currency they can purchase using the other currency in the pair.
For example, if someone buys EUR/USD, they speculate that they may be able to buy more euros now at a lower price using USD than they could in the future. If the price of euros increases, the investor can make a profit. If the price goes down, the investor may lose money.
The forex market is different from the stock market in that it has no central, physical address like Wall Street. Instead, the forex market is a complex network of computers and brokers all over the globe. Within that network are three types of markets where foreign currency is traded daily.
Although large entities complete most forex trading, starting as an individual investor is fairly straightforward. Many broker sites allow investors to create a profile and fund an account, just like they would for fund or stock trading.
For those who want to try forex trading but want guidance, some sites offer advice and training. Some even provide the opportunity to practice trading without investing any money.
Forex trading is highly liquid and volatile, so investors should thoroughly research what they buy and the risks of trading before investing. Consider what affects the market and how long you want to keep your capital invested. Remember that on a 24-hour exchange, change can happen any time of day or night.
There are as many forex brokers as there are stock trading apps. However, since forex is traded worldwide, you must verify that the brokerage you’re considering allows U.S. investors. Many do not.
Do research to determine which forex trading platforms make sense for you. If you’re primarily interested in foreign exchange trading, Forex.com could be an option. Other popular online stock trading platforms, like TD Ameritrade and IG, also offer forex trading.
Forex trading comes with its own terminology. Here are a few key terms to know.
What is the difference between a forex broker and a forex platform?
How do you avoid forex trading scams?
Like any other investment method, forex trading can be susceptible to scams. According to the CFTC, the best way to stay safe is to execute trades with firms registered with federal or state authorities. You can check the registration of a person or firm by visiting cftc.gov/check.
Is forex trading profitable?
Smart investors can profit from forex trading, but since it is a very volatile market, the potential for losses is also very high.
How risky is investing in forex trading?
How much money do I need to start trading?
How can I open a forex trading account?
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