Here’s something we’ve observed: currency trading has somehow earned its spot in what can be considered as a safe topic for small talks these days—just right alongside the weather, where you come from, and what industry you work in.
If that tells us one thing, it’s that a lot of people find forex trading appealing, or at least they know enough about it to form their opinion on the matter.
Gone are the days when big banks, multinational corporations, and hedge funds had full authority over the subject matter. Now, the foreign exchange market or the forex market, is a free-for-all space for anyone who has the mettle and capital to make a lucrative career out of it.
But as widely talked-about and fascinating as it may be, is forex trading really for everyone? More importantly, do the benefits outweigh its risks?
Here, we talk about what forex trading is, the risk it entails, and the one thing that you can do to mitigate such risk.
What is Forex?
Before we dive into the intricate and vast world of forex, let’s define it first.
Forex is short for foreign exchange. It’s the most popular form of trading in currencies, but it also includes commodities and any other financial instruments that are tied to a country’s currency or assets. For example, you can trade oil futures through forex because they follow the same market rules as currencies.
The space in which forex operates in is called the forex market. It is where currencies and their derivatives are traded. Basically, it makes purchasing and selling goods and services possible locally and across borders. Say, you want to purchase something in Vienna but you live in the United States. In order to complete this transaction, you need to be able to pay in euros. What you do then is to have your U.S. dollars exchanged into euros. The forex market works like this, but only on a much bigger scale.
So much bigger, in fact, that the forex market is considered as the largest financial market in the world—with a daily average turnover of over $533 billion. This number, of course, covers a variety of foreign exchange transactions such as spot transactions, foreign exchange swaps, currency swaps, and forwards.
With that explained, let’s now zone in on how you can conduct forex trading.
In the simplest terms: forex trading is where you buy or sell currencies in the forex market. Here, you basically take advantage of price differences between two different currency pairs. So, if you think that a particular currency pair will rise in value relative to another currency pair, then this would be a good time for you to purchase it. If you think the opposite, then you might then consider selling it.
This means that forex trading involves a lot of what the community calls as speculations and hedging. And so, it doesn’t come as a surprise as to why some people refer to forex as “speculative currency trading” or “the lightning-fast trades of financial instruments that underpin global trade and commerce.”
The Risks in Forex Trading
If you're new to trading, the forex market could be your stepping stone to understanding its landscape better. Some of its benefits include:
・ A lower barrier to entry
Compared with stocks and futures, forex trading allows you to begin with a relatively small amount of money in your bank account compared to the other markets.
・ A 24/h market
The forex market operates around the clock. For beginners, this operates on two levels: you can trade anytime and anywhere without worrying too much about time zones; plus, you get to compare prices between different exchanges for maximum effectiveness.
・ High liquidity
The forex market has the highest trading volume globally. In other words, you won’t have that much of a problem when it comes to finding someone who will take your trade or making sure that there are enough buyers and sellers for you to transact with at any given time during the day.
And so, as long as there are no restrictions and withholding taxes for international money transfers and transactions—which is actually the case in most parts of the world—you can easily take advantage of forex trading despite its risks.
Now let's move on to one very real and very frightening possibility that could outweigh all of these benefits: you could lose your hard-earned money.
This can happen if you don’t have a good grasp of forex trading strategies. It can be a frustrating, and cutthroat, and fickle market. Even the most seasoned traders still lose their footing and make hasty decisions that cost them big bucks in the long run (and we're not even talking about commissions and fees).
In other words, forex trading is not for the faint of heart, and it’s definitely not for those who are looking to make a quick buck. You need to be ready with your research or forex strategies before jumping into this market because like other financial markets, there's no guarantee that you'll come out on top after each trade.
What can you do to minimize the risk of forex trading?
There's no doubt about it—trading is hard. You need to be able to understand its mechanism and strategies to be able to make it work in your favor. It takes time, effort, and confidence to be able to get your trading career off the ground. And even then, you have to be able to manage your expectations and emotions to implement good risk management strategies.
But the good news is that you don't have to go through all of this alone. Professional strategy analysts could pave the way to your full earning potential.