Forex is the name given to the currency market, specifically to the conversion from one to another. It is currently one of the busiest markets in the world, to the point that an average of $5 trillion is traded every day.
How friendly is it, can it be accessed and worked on easily, and what do you need? Continue reading the article to clear up any doubts you may have, so that you can join this revolutionary system.
The word Forex is an abbreviation of Foreign Exchange, although it can also be known as FX, Currency Market, or simply mercado de divisas in Spanish.
If you have traveled to another country and had to make a currency exchange, you have made a forex transaction. The exchange rate between them will determine what you will receive in local currency, based on demand and supply.
Although a lot of trading is done for practical reasons such as having to buy something in a currency you don’t own, the truth is that most exchanges are related to investors looking to make a profit.
This type of exchange fluctuates constantly. In other words, due to the amount of currencies that are traded daily, the prices of some of them can increase very drastically.
This serves to give them more opportunities to increase their profits, but it also increases the dangers.
How the Forex Market Works
Forex trading does not take place in traditional markets, but directly through an over-the-counter (OTC) market.
This foreign exchange market is managed through a network of global banks, established in four different time zones: New York, London, Tokyo and Sydney. Because there is no physical space through which transactions must be carried out, they can be processed 24 hours a day.
There are three types of forex markets, which are detailed below:
1) Forex forward market: A contract is set up to buy or offer a fixed amount of currency at a certain price. The expiration occurs on a fixed future date.
2) Forex spot market: is the physical exchange of currencies that occurs at the time when the operation is settled, or after a small time frame
3) Forex futures market: A contract is established to acquire or offer a quantity of currency at a determined cost, at an agreed upon future date. It is similar to a forward, but with the difference that this contract is legally binding.
It is worth noting that most forex investors are not interested in receiving the currencies physically. Their goal is that, thanks to their predictions of exchange rates, they can make profits on market movements. Of course, to get to this point you need to have a certain degree of experience.
There are several ways to work with forex, but they all have the same premise: buying one currency and selling another at the same time. In the beginning the transactions were made through a traditional broker, but now there are a variety of online providers.
Thanks to these online trades, investors can make greater profits from changes in currency prices.
Many traders use leveraged products, such as CFDs, barrier, turbo and vanilla, which allow them to open a position by paying only a small fraction of the value of the position without having the underlying asset. In other words, you will have your move when you think the market is going to go up or down.
However, as mentioned above, while leveraged products can increase profits, they can also cause you to lose if the market moves against you. This is a very delicate bet, so it is not recommended for all traders. Even if you have a lot of experience you can still suffer setbacks.
Security and legality
When a person first hears about forex they immediately think it’s a scam. Is it? Not at all. The forex market is completely legitimate and the largest in the world.
However, there have been cases of trading schemes and forex brokers being scams. To avoid falling for them, it is important to do business with someone who is regulated.
Is it safe? Yes, but, as with any trade, it is not risk-free. You can lose money if you don’t have discipline and take the necessary preventive measures. It must be made clear that trading with unregulated brokers is not a safe option.
Another very common concern is that forex trading is illegal. No, in fact, it is legal in almost every country, with certain regulations in each.
In the United States, for example, CFD trading is illegal, and not available to Americans. But Forex trading itself is, if allowed.
Unlike Forex, which only includes currencies, contracts for difference (CFDs) cover other types of assets, such as stocks and commodities, in addition to currencies.
The foreign exchange market is not tax free. The way in which taxes are set is different in each country. Most of the time they are related to capital gains.
It requires patience
Forex trading is simple, but requires patience, dedication and effort. To be successful you need to have a trading style that suits your personality, and develop your own approach to trading.
Most Forex traders fail because they innocently make the mistake of thinking that success can be achieved overnight, causing them to mismanage risk.