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Global currencies are traded on a foreign exchange market. None of this is done via a centralized market. Instead, it is done by a network of traders over computer networks. It operates 24 hours a day and is one of the busiest markets, with prices that change constantly. Forex trading is when you buy and sell these different currencies, in an attempt to make money from the rises and dips in their value. Below, we give our essential guide on forex trading.

Forex Pairings

When you forex trade, you don't just look at one currency. You look at the relationship between a pair. For example, you may think that the yen will increase in value against the dollar, so choose to buy the Japanese yen. If this increases in value against the dollar, you can sell it and keep the profit you make.

What is a Lot?

A lot in Forex is a unit of measurement that shows trade size. A change in the value of currency between one unit and another is known as pips. These are very small measures, down to every fourth decimal. That means that when trading, doing it in large units is not possible so people trade in batches.

The price of these lots is set by a regulator or an exchange. Everyone who is trading then has an idea of how much they are trading when they open positions. You will find lots divided into four subdivisions known as standard, mini, micro and nano.

Calculating the size of a lot in forex is complicated, so many people choose to use a lot size calculator. The bigger the position trade size, the greater the level of risk involved. A lot size calculator is a way to manage risk, by balancing the standard amount in the foreign exchange market based on the account risk level, leverage and volatility.

Benefits of Forex Trading

Forex trading has several benefits compared to other types of trading. Some of the most important ones are listed below.

Liquidity

As the forex market is the most traded in the world, it provides a high level of liquidity. This means you can buy and sell with ease, and in a short amount of time. As it is 24 hours a day, you are also not bound by time constraints regarding how and when you can buy and sell.

Low Capital Required

Forex is great for beginners as it requires a lower level of capital to get started. By using leverage, this initial investment can multiply rapidly. As it is traded in a similar way to stocks, it is easy to get to grips with.

Less Chance of Manipulation

As it is traded by people over a network, there is less chance for manipulation. It can't succumb to bad practices like insider trading or be manipulated by financial institutions.

Hedging

Forex trading is also often viewed as a way to safeguard money and people use it for this purpose, also known as hedging. Many international businesses do this for stability. They will use forex to hedge against any fluctuations in the country they are now operating in.

Disadvantages of Forex

Forex trading is not for everyone and does have its disadvantages. Below, we discuss what you should be aware of before you begin your forex journey.

Leverage

While leverage can increase funds rapidly, it can also lead to increased volatility. Traders can control large positions without actually having much money in place. You will find that certain brokers even have levels higher than 50:1. This means it must be used carefully.

No Dividends

Unlike stocks, forex does not provide a regular income. Here you will get dividends, which you don't get with forex. Many traders prefer to invest in other methods to get more on their return.

Level of Knowledge

To be successful at forex trading, you need to know how economies work. Ideally, you will have in-depth knowledge of the countries with the currency you are trading in. You will also need to know how they are connected. All of this is specialist knowledge which takes time and patience to learn.

How to Trade Forex

If you want to be a successful forex trader, then you need to do your homework. Read up on forex and how it works in depth. You may then want to start trying some of your skills on a demo account before you begin investing. Find the right brokerage for your needs, then dive into the economies of the currencies you plan on trading with.

Choose a trading strategy. There are lots of these and some may be more beneficial to you than others. They can include swing trading, intraday trading and many others. Once again, try a few demo accounts to get used to how they work.

Finally, be methodical about trading. Don't get carried away chasing loss or gain. Make sure you are on top of your numbers, closing out trades at the end of the day. All investment comes with some risk, but with the right approach, you should find forex trading lucrative.

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