How Forex Works

Before you foray into the world of forex trading, it is imperative that you know the meaning and the working of forex. Out of all the trading forms, forex trading is considered the most risky as the forex market is the most volatile market and involves a daily turnover of more than 4 trillion USD. This shows the enormity of the market. Beginners should therefore, be careful when venturing into forex trading, learn forex secrets and arm themselves with the required strategies to increase their chances of success and survival in forex trading. Here we discuss how forex works and what all details a new trader should be aware of:

Working of the forex market

The basis of currency trading is the exchange rate. As the currencies are traded in pairs, the former of the two represents the higher value currency, depicting the amount of the second currency needed to purchase one unit of the first currency. Various factors like inflation, political and economic changes, industrial production and interest rates are some factors, which cause a fluctuation in the exchange rate. The change in the exchange rate determines whether to buy or sell a particular currency.

Example of a forex trade

The USD/SGD represents the amount of Singapore Dollars that can buy one US Dollar. If the trader anticipates that the US dollar would rise in value against the Singapore Dollar, he would buy more US Dollars with the Singapore Dollars. When the price of the USD does rise, he sells them to make a profit. This way he can earn money trading other currencies as well.

Differences between currency and equity trading

  • There are no commissions separately as they are included in the bid/ask spreads
  • Round the clock trading
  • Traders have the advantage of leverage provided by the brokers but this may increase the potential profits or losses
  • Little capital is required to trade forex as compared to equity trading
  • Why Currency Trading Is Not For Everyone

Looking at the features of forex trading, a trader might assume this a completely risk-free zone. However, forex trading is not for everyone, as there is high-level risk associated to it, if trading on margins. A trader interested in forex trading must consider his objectives of investment, the capacity to take risks and experience level. Forex trading without ample experience can result in losses in the initial trades and therefore, a trader should never invest borrowed money, or money, which he cannot afford to lose.


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