Forex is the financial market dedicated to currencies from all over the world. It allows you to invest in the values of these currencies and more particularly in the exchange rates between them. This relationship is represented by currency pairs, the international market where transactions are carried out over the counter. This market attracts more and more traders.
Many traders and individual investors turn to the largest market in the world, on which they can trade 24/7: Forex . Named for “Foreign exchange”, it refers to what is also called the foreign exchange market or currency market.
It is an unregulated marketplace, where transactions take place over-the-counter, to exchange global currency pairs at a pre-agreed price . Strategies focus on currency price movements.
If you too want to seize this opportunity to diversify your portfolio, follow this guide to learn the basics necessary for Forex trading such as how FX works, important concepts as well as market risks.
What is Forex Trading?
Currencies are monetary units that serve as a reference for all financial transactions and flows in a country. Each country or currency area has its own currency and these are quoted on the foreign exchange market in the form of pairs. Some currencies are more represented than others on the Forex, such as the USD dollar.
In this market, you can take a position on changes in currency prices and seek to benefit from upward or downward fluctuations. The Forex trader is particularly interested in the value of one currency in relation to another and mainly uses derivative products to gain exposure to the market.
The currency market is relatively simple to understand, which attracts many traders. On the other hand, one of the main reasons for this interest is that it is not necessary to commit a large part of your capital to this type of investment.
On many trading platforms, it is easy to access Forex through derivatives, as transaction costs are low. Trading tools such as leverage can also make your trades easier.
The foreign exchange market is considered very liquid , every day billions of dollars pass through the Forex. The main players are banks, institutions and large companies but more and more individual investors are investing in the market.
The foreign exchange market offers a multitude of opportunities for traders and investors of all levels, with different strategies and investment horizons.
How to invest or trade Forex?
The value of a currency is always evaluated in relation to another currency . They are therefore associated in pairs .
As a trader, you can invest directly in a currency pair, or you can trade a currency ETF , which allows you to invest in a currency or a set of currencies. ETFs tend to replicate the price movements of currencies, while you may not have access to that currency directly on the market.
For example, explore the UUP ETF , Invesco DB US Dollar Index Bullish Fund, which seeks to track the performance of the USD against six major international currencies.
Technical analysis is the most effective method to predict the movement of currencies relative to each other and to anticipate increases or decreases based on the prices. It can be combined with fundamental analysis; based on factors influencing the price of currencies.
Currencies can also be used as an instrument for a hedging strategy, called ” hedging “, especially in relation to other investments made. There are different hedging strategies on Forex, mainly taking advantage of the correlation between different assets.
Some currencies are also considered safe haven currencies . That is, during periods of instability, such as inflation, these currencies tend to remain constant or increase in value. They therefore allow capital to be protected, either by holding them or by trading them in times of crisis.