how forex trading works
Source: istock

How Does Forex Trading Work and Is It Profitable?

Ambrish Shah - Author

Sep. 10 2020, Updated 2:22 p.m. ET

Forex trading means converting one currency to another. Forex trading is also known as FX trading or foreign exchange trading. The foreign exchange market, where institutions and investors trade currencies, is the largest financial market in the world. In April 2019, foreign exchange trading reached about $6.6 trillion each day, according to the 2019 Triennial Central Bank Survey.

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In the foreign exchange market, traders can take a position in any major currency versus other major currency. For example, you can bet on the U.S. dollar versus the euro. The most popular currencies that are available to traders are the euro (EUR), the U.S. dollar (USD), the pound sterling (GBP), the Swiss franc (CHF), and the Japanese yen (JPY). The forex currency pairs with the highest trading volume are EUR/USD, USD/JPY, GBP/USD, and USD/CHF.

Is forex trading profitable and is it legit?

Forex trading has grown significantly over the past decade. The forex market is where different currencies are traded. Unlike stocks or commodities, foreign exchange trading is conducted directly between two parties electronically over-the-counter.

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The foreign exchange market is open 24 hours a day. Currencies trade globally in New York, Tokyo, London, and Sydney. There are three different types of foreign exchange markets — the spot market, the forwards market, and the futures market. The spot market is where the currencies are traded for immediate delivery.

forex exchange
Source: istock
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Unlike the spot market, the futures market and the forwards market don’t trade actual currencies. In the forwards market, forwards contracts are bought and sold over-the-counter between two parties. The two parties decide the terms of the deal between themselves. In the futures market, a contract is bought or sold based on a standard price and date in the future. Unlike a forwards contract, a futures contract is legally binding.

Trading in the forex market is profitable if it's done with discipline. The success depends on your level of understanding, trading strategy, and the risks you are willing to take. Usually, profits and losses are unlimited in the foreign exchange market. Foreign exchange trading is performed on huge leverage provided by brokers, which can magnify gains and losses. Forex traders face challenges like platform malfunctions, counterparty risks, and sudden bursts of volatility.

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Foreign exchange trading is safe if traders select a broker correctly. Traders need to consider the country affiliation and where the broker firm is located. The broker should be registered with the SEC. Although forex trading is legal, there are scams in the industry.

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Which forex trading platform is the best?

CMC Markets is the best overall forex broker, according to Investopedia. CMC Markets was founded in 1989. The company is listed on the London stock exchange under the symbol "CMCX." CMC Markets offers an extensive set of offerings and is regulated by the Financial Conduct Authority in the U.K. CMC Markets puts an emphasis on education and customer service. The company offers industry-leading research reports.

CMC Markets doesn’t have a minimum account deposit requirement for customers willing to open an active account. Customers with higher account balances are eligible for premium services like a personal account manager, higher trading leverage, perks, and priority access to new products. CMC Markets charges an inactivity fee of 10 pounds per month for no trading activity in the last 12 months. The company's fees are charged based on the spread, which is competitive within the forex industry.

The other best forex brokers are London Capital Group, Saxo Capital Markets, and XTB Online Trading.

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How Forex Trading Works
Source: Pixabay

Do forex trading robots work?

Yes, forex robots do work. A trading robot is a computer program used to generate forex trading signals. Thousands of forex traders use robots every day to find real pips. Forex trading can improve significantly with the correct setup and professional forex robot. The top three forex robots right now are Odin Forex Robot, Vader Forex Robot, and Ganon Forex Robot.


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