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The recent HBO TV series Industry took a unique peak at the hustle and bustle of global banking, including the pressurized and highly lucrative forex market.
Life as a forex trader is certainly more accessible than ever before, with more than $6.6 trillion traded globally on a daily basis and the number of part-time traders continuing to increase year-on-year.
We’ll explore the history of the market below and provide an overview of retail trading while appraising its basic strategies and pros and cons.
A Brief History of Forex
While the notion of exchanging goods and services has been prevalent throughout history, the forex market that we see today is a relatively modern invention.
The first regulated marketplace saw international currencies pegged to the price of gold before the so-called ‘Gold Standard’ was abandoned after World War II.
This was replaced by the Bretton Woods System, which was the world’s first fully negotiated monetary order and one that pegged participating currencies to the value of the US dollar (while the greenback itself remained tied to the price of gold).
The abolition of this system in 1971 meant that currencies were subsequently subject to a free-floating exchange rate in most instances, which laid the foundations for the digitization of the FX marketplace and its huge financial potential.
What are the Main Forex Markets
There are three main niches within the wider forex market, each of which offers different features and trading parameters to investors. These include:
- Spot Market: Here, international currency pairs are bought and sold based on their real-time trading price.
- Forward Market: This sees currency contracts traded at a predetermined price (and within an agreed timeframe) in an over-the-counter (OTC) environment.
- Futures Market: In this space, similar contracts are traded on a standardized size and date, based on the wider public commodities marketplace.
The Basic Forex Trading Strategies
The forex market offers investors the benefit of buying (going long) or selling (going short) the value of underlying assets, enabling them to profit without assuming ownership of such instruments.
This also introduces a number of different strategies, including scalping and day trading strategies. These require you to open short-term positions (which in the case of the former can be held for a few minutes) that actively leverage small price shifts in the market and build incremental profits each day.
Conversely, position or swing trading describes longer-term strategies that are held for days, weeks, and even months, enabling to you to tap into more substantial trends and gauge political activity to identify exit points.
What are the Pros and Cons of Forex Trading?
In addition to its speculative nature, forex trading is also highly liquidity. This refers to the ease with which assets can be bought and sold in a particular marketplace, with major pairs like the EUR/USD benefitting from constantly high levels of demand.
The market’s innate volatility can also be leveraged by investors with a short-term outlook, although this also creates significant uncertainty and is one of the primary reasons why as many as 70% of all FX traders regularly lose money.
The same can be said for the leveraged nature of the FX market. After all, this enables you to open positions with a ratio of 200:1 in relation to your deposit, creating the potential for both sizeable gains and losses depending on how the market moves.