Forex trading is a trade of currencies. In FX, currencies are exchanged and traded in pairs. It has now become the largest trading market in the world with the most activated trade. Here we will explain how Forex trading works and what are its pros and cons of it in the international market. Forex trading / foreign exchange trading has become the most diverse and trending market in the world, trading over USD 3 trillion every day in the UK alone. Although the forex market seems like a complicated medium yet we might have made many trades without even realizing it. If you have traveled abroad, you must have exchanged your local currency for foreign currency before traveling for a convenient journey.
This article highlight what forex trading is and some advantages and risks involved in Forex trading that one should consider before jumping into the actual market for better trade.

What is Forex Trading?

Forex trading is a way of investing your money to make a profit. This trade involves trading one currency for another. The main aim of forex trading is to predict successfully if the value of one currency will decrease or increase as compared to the other currencies. So, a trader buys a currency today and plans to sell it the next day, thinking and expecting it to soar high to make a profit. This is also known as going long for investment.Or they may sell a currency thinking that its price will slow down or crash and buy it later when it gets cheaper. This is known as going short with your trading. The value of a currency is affected by many factors i.e.

• Interest rates
• Demand and supply
• Political events
• Inflation
• Natural disasters

In forex trading, each currency has its symbol to help you recognize it easily. For example, the pound sterling is GBP and for US dollar is USD.

How does Forex Trading Work?

In forex trading, currencies are always traded in pairs, called “currency pairs”. This means that whenever you buy one currency you simultaneously sell another one.
Each currency pair is made up of two parts:
Base Currency: the first currency is always listed as quote currency and always stands equal to 1.
Quote Currency: the second currency in this transaction is always listed in the quote.
Let us take a survey through currency pairs:
GBP/EUR= 1.17
Here the base currency is GBP (pound sterling) and the quote currency in this pair is EUR (euros).
Currencies are usually traded online through a forex broker. The forex market is open 24 hours a day and operational five days a week from Monday morning to Friday evening. Whenever you buy a currency pair, the price you pay for one currency is called the “ask” in forex trading, and when you sell, the price is called a ‘BID’. The price for the same currency will be a little different every time you sell or purchase. It can be a bit difficult to understand and can be complicated at first to get in the head. But it also helps us to understand and remember that prices are always listed in the forex market from an ab broker’s point of view rather than our perspective.

What is a spread in forex trading?

The difference between the buying price and selling price of a pair in forex trading is called the spread. This is also called the buy-sell-spread or bid-ask spread.
You can calculate the spread of a currency pair by looking at a forex quote, which explains the bid and asks the price. A high spread usually means that there is always a big difference between the bid and the asking price. On the other hand, a low spread means that there is a small difference between the ask and bid price.

What is leverage in forex trading?

Leverage works as a loan amount that a broker helps you to borrow money from him to trade in forex trading. This helps you to trade large amounts of currency.
First, your ah veto deposit a small amount that is called margin, and a broker will add the balance to your account to top it up to allow you to trade more smoothly.
If the investment is successful, the leverage amount can help you increase your profit. But important thing is that, if you trade a large amount the risk of losing also increases if the investment is not successful.
If you lose more than your initial deposit, your account could show a negative balance, and the broker will demand his money. Before using the leverage amount, you have to be aware of the disadvantages and risks involved in this method of trading.

What are the pros and cons of forex trading?

The pros and cons of the forex market should be considered before jumping into forex trading.

Pros of forex trading

1. Large and prevalent international market
   Forex trading is a huge market, internationally it means that there is a lot of scope for trading worldwide. Its features are attractive and promising.
2. Huge liquidity
   Large scall of trade makes it a wide and diverse market to trade. The large amount that has been traded worldwide is distinct feature of forex trading. It is easier to buy and sell instantly as there is a huge demand.
3. Low cost
   You do not need a huge amount to start trade in forex. There is always an option of leverage to boost your profit.
4. Trading time
   Forex trading happens 24 hours and five days a week, unlike other markets which does not have continuous trading hours.

Cons of forex trading.

1. High volatile trade
   The value of currencies fluctuates in the forex market, and this fluctuation is always unpredictable.
2. Risk of leverage:
   When you trade a large amount in forex by lending money from a broker, known as leverage, the risk of losing your capital becomes high.
3. Changes in the exchange rate
   The change in the exchange rate means that your profit will decrease if the currency goes down.
4. Selling limitation
   Some countries in the world have some limitations regarding forex trading. They have limited the trading amount like a limited amount of money that can be traded in one day at some price.