What is forex trading and how does it work?

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Forex trading or foreign exchange trading, has become the biggest financial market in the world with over USD $3 trillion traded each day in the UK alone.To get more news about wikifx, you can visit wikifx.com official website.

Although forex trading can seem a little complicated at first, you might have already made your first trade without even realising it.
If you’ve ever travelled abroad and exchanged your home currency for local currency, that’s a foreign exchange.

Here, we explain what forex trading is and run through some of the advantages and risks to consider before getting started.

What is forex trading?
Forex trading is a way of investing which involves trading one currency for another.

The main aim of forex trading is to successfully predict if the value of one currency will increase or decrease compared to the other.

So, a trader might buy a currency today, thinking its value will go up tomorrow and plan to sell it for a profit then. This is known as going long.

Or, they may decide to sell a currency if they think its value will go down and buy it back later when it’s cheaper. This is known as going short.
Here, the base currency is GBP (pound sterling) and the quote currency is EUR (euros). This means that £1 is worth 1.17 euros if you wanted to buy.

Currencies are traded online through a forex broker. The forex market is open 24-hours a day from Sunday night to Friday evening.

When you buy a currency pair, the price you pay is called the ‘ask’ and when you sell, the price is called a ‘bid’. This price for the same currency pair will be slightly different depending on whether you are buying or selling.

These can be a little confusing to get your head around at first. But it helps to remember that prices are always listed from the forex broker’s perspective rather than your own.

In the eyes of a broker, potential buyers have to place a bid when you sell a currency. And you’ll have to pay the seller's asking price when you buy a currency.
What is spread in forex trading?
In forex trading, the difference between the buying price and selling price of a currency pair is called the spread.

It’s also known as the ‘buy-sell spread’ or ‘bid-ask spread’.

You can work out the spread of a currency pair by looking at a forex quote, which shows the bid and ask prices.

A high spread means that there’s a big difference between the bid and ask price. Whereas a low spread means that there is a small difference between the bid and ask price.
What is leverage in forex trading?
Leverage works a bit like a loan and lets you borrow money from a broker so that you can trade larger amounts of currency.

You have to put down a small deposit, called a margin, and the broker will top up your account with the money you need to make a trade.

Using leverage can help increase your profit if the investment is successful.

But it’s important to remember that trading larger amounts of currency can also increase the risk of you losing money if the currency goes down in value.

If you lose more money than your initial deposit, your account could go negative and your broker may ask you to repay it. Before using leverage you should fully understand the risks involved, and what you could end up losing. This is because compared to standard trading, the risks are magnified and you can stand to lose more than just your initial deposit, which could be money you can’t afford.