What is Forex and How Does It Work?
Forex, also known as foreign exchange trading or currency trading, involves the conversion of one currency into another. It is one of the most actively traded markets in the world, with an average daily trading volume of $5 trillion. Take a closer look at everything you need to know about Forex, including its nature, how it is traded, and how leverage works in Forex.
Are you interested in trading Forex with ATM Capital?
What is Forex Trading?
Forex, or foreign exchange, can be defined as a network of buyers and sellers who exchange currencies at an agreed price. This is how individuals, businesses, and central banks convert one currency into another—if you have ever traveled abroad, you have likely conducted a Forex transaction.
While many foreign currency exchanges take place for practical reasons, the vast majority are conducted to generate profit. The high volume of currency exchanged daily can lead to significant price fluctuations. This volatility is what makes the Forex market attractive to traders—it offers great opportunities for profit but also carries increased risks.
Why Trade Forex?
When traders choose a market to trade, they look for the most suitable conditions and the best opportunities to make a profit. There are many reasons why millions of traders worldwide believe that the Forex market meets these criteria. However, we will focus on the nine most important benefits of Forex trading.
Ability to Buy and Sell
Just as you can sell in other markets using derivative products like contracts for difference (CFDs), short selling is an integral part of Forex trading. This is because you sell one currency (the quote currency) to buy another (the base currency). The price of a Forex pair is determined by how much one unit of the base currency is worth in the quote currency.
Forex Trading Hours
The foreign exchange (Forex) market remains open 24 hours a day, five days a week, operating from 9 PM on Sunday to 10 PM on Friday (London time). This is because Forex transactions occur directly between parties in the over-the-counter (OTC) market rather than through a central exchange.
It is important to remember that Forex market opening hours will change in March, April, October, and November, as countries transition to and from daylight saving time on different days.
Can Forex Be Traded Over the Weekend?
The Forex market closes on Friday evening at 10 PM (London time) and does not reopen until Sunday evening at 9 PM (London time). However, since the market is only closed to retail traders (while remaining open to central banks and related institutions), Forex trading actually takes place over the weekend. This means there can be a price difference between Friday’s closing and Sunday’s opening, known as the gap.
High Forex Liquidity
The Forex market is the most liquid market in the world, meaning that a large number of buyers and sellers are constantly looking to trade at any given time. More than $5 trillion USD worth of currency is exchanged daily by individuals, businesses, and banks—most of this activity aims to generate profits.
Forex Volatility
The massive volume of currency trading generates billions of dollars every minute, making price movements for some currencies highly volatile. You can earn substantial profits by speculating on price movements in both directions. However, price volatility is a double-edged sword—the market can quickly turn against you. Therefore, it is essential to limit your risk exposure using risk management tools.
Leverage Can Increase Your Capital
Forex trading with ATM Capital is conducted via Contracts for Difference (CFDs), which are leveraged products. This means they can amplify the size of your capital. Leverage allows you to open a position in the currency market by paying only a small portion of the total position value upfront.
Trade a Wide Range of Currency Pairs
Trading in the Forex market gives you the opportunity to trade a wide range of different currency pairs, speculate on global events, and assess the relative strength of major and minor economies.
Hedging with Forex
Hedging is a strategy that can be used to reduce the risks of unwanted movements in the Forex market by opening multiple strategic positions.
Why Trade Forex Instead of Stocks?
Your decision to trade Forex or leveraged stocks should be based on the type of assets you want to trade—currencies or stocks. However, there are some reasons why certain traders prefer Forex trading over stocks:
- Market Hours: The stock market is limited to exchange trading hours, whereas the Forex market is open 24 hours a day.
- Higher Liquidity: The Forex market sees a daily trading volume of $5 trillion.
- Greater Volatility: The stock market tends to have more stable prices, while Forex market volatility creates short-term trading opportunities.
When deciding whether Forex or stock trading is better for you, you should consider your risk tolerance as well as your financial goals.