What is meant by forex trading

Financial lexicon
Forex trading (FX)

Definition: Forex Trading

Forex (short form: FX) is actually a Abbreviation for FOReign EXchange. This means theTrading in foreign currencies, i.e. foreign exchange trading.

Forex trading is in our age of globalization and the internet by far the largest financial market in the world. Foreign exchange trading is far greater than the total trading volume of the Tokyo, London, Frankfurt and New York stock exchanges.

Forex Currency Pairs: Majors and Minors

A large number of currency pairs are exchanged or traded with one another in forex trading: A distinction is made between the large majors and the less voluminous minors.

Examples of major currency pairs

EURO - US dollar (EURUSD)

British Pounds - US Dollars (GBPUSD)

US Dollars - Japanese Yen (USDJPY)

US Dollars - Swiss Francs (USDCHF)

These currency pairs mentioned above alone account for roughly over 75% of total trade.

Who is acting? Hedger and Speculator

The Hedger: What are his duties?

For example, the hedger works in the finance department of a large German company that also sells its products abroad. For example, if this company closes a lucrative deal in America and sells its goods there, payment in US dollars will most likely be agreed. The euro-US dollar exchange rate is of course subject to fluctuations. The company's profit therefore also depends on the exchange rate. The hedger's job is now To hedge profits from the basic transaction on the foreign exchange market against currency fluctuations. This is possible, for example, by hedging the corresponding sales proceeds in US dollars against exchange rate losses through "short" positions in the USD.

Neutralization of price fluctuations through hedge protection

Should the US dollar fall and the manufacturer thus make less profit from its actual business, the "loss" will be offset by the profits from the foreign exchange business (there was "hedged" on falling prices). In the opposite case (the dollar rises), the manufacturer has losses from his hedge, but these are neutralized by the additional profits from the basic business.

The speculator: what is his approach to forex trading?

The speculator buys / sells currencies as an investment object and hopes for enormous returns through exchange rate fluctuations. He relies on both rising and falling prices. Of course, he must have drawn the right conclusions and developed a feel for Forex trading and its fluctuations in order to be able to position himself correctly.

Why is the Forex market like this interesting for speculators?

There are several reasons for this. some of them are:

  • Very high market liquidity (Trades in the millions / billions within a few minutes)
  • No official regulation whatsoever (Chances of unimaginable returns in the shortest possible time)
  • Technically, you only need a computer, an internet connection and a broker account.

Forex Trading: What are the Risks and Rules?

Trading in lots

It is possible to move large sums with little money. Example: You buy 100 shares with a value of € 80 per share. It takes € 8,000 to complete the trade.

On the foreign exchange market, however, you buy so-called lots, where the value of one lot corresponds to 100,000 units of the corresponding base currency. For example, one lot when trading EURUSD is equal to € 100,000.

Trading with margin

Since the currency fluctuations are so minimal, you would have to raise a corresponding amount of capital to generate a relevant profit. It is for this reason that leverage exists. For this reason, bankers offer so-called margin (trading). For example, you only deposit 1% of the capital to be moved. This makes it possible to trade € 100,000 with a stake of € 1,000.

This is what is known as margin trading. The speculator only stores a percentage of the trade as money in the account.

If the exchange rate tends in the “right” direction, you get a profit of 100,000 lot. A doubling of the account in one day is quite possible. The risk is often kept secret: if the exchange rate turns in the "wrong" direction, you can quickly get out of the market and make big losses.

Forex: Should I Invest?

Does it make sense to invest money as a forex trader and if so, how?

Yes if you canabides by the rules of the game and ready to learn. Forex trading is a business of probabilities and risk management (exchange rate developments can never be predicted with a guarantee). However, it has been shown that there are prerequisites in markets with relatively high odds and there are prerequisites in markets with rather low odds.

Successful trading on the foreign exchange market: This is how it works!

  1. Recognize probabilities
  2. Assess probabilities
  3. act according to the probabilities

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