If you’re new to the global currency market, you may have heard the terms ‘forex trading’ and ‘fx trading’ used interchangeably.
This is often a source of confusion amongst novices, who may mistakenly believe that these terms represent different types of trading in the marketplace.
In fact, both of these entities refer to the same thing, with each term used to describe the basic exchange of assets on the foreign exchange. We’ll elaborate on this in a little further, while explaining the concept of FX trading in far greater detail.
Getting Started – What Exactly is Forex Trading?
In simple terms, ‘forex’ or ‘fx’ trading allows for the exchange of different international currencies within a decentralised global market, with both retail and institutional investors driving this entity.
From a broader perspective, fx trading involves the simultaneous buying and selling of the world’s 170 currencies, with the US dollar (USD) thought to be on one side of at least 88% of all trades.
Incredibly, an estimated $6.6 trillion is traded each day within the global forex marketplace, making it the single most liquid and largest financial entity in the world.
Clearly, the size of the market has grown in line with technological advancement, with the cumulative daily trading volume estimated to be far lower at $5.1 trillion back in 2014. As innovation has taken hold, however, fx trading has become more accessible to part-time investors, driving higher volumes and demand in regions such as Asia and the Middle East.
Interestingly, currencies are traded (or exchanged) in pairs as derivative assets, which enables investors to speculate on profit movements and profit without assuming ownership of the underlying financial instrument.
This is also underpinned by the incredible liquidity of international currencies, with major entities such as the USD, Euro (EUR), Japanese yen (JPY) and the British pound (GBP) incredibly easy to buy and sell in real-time.
Understanding the Role of Leverage and Margin in FX Trading
In fx trading, two of the most important considerations are ‘margin’ and ‘liquidity’, which are different entities but closely correlated with one another.
Put simply, leverage refers to the process of taking on debt at a predetermined rate, with this usually expressed as a ratio. For example, brokers can often access leverage of 50:1 when opening a new fx position, enabling them to control large amounts of capital with a relatively small deposit.
Conversely, margin describes the debt or capital borrowed from a brokerage site to trade individual currency pairs, with this used to create corporeal leverage and actually execute orders.
Of course, this allows you to potentially secure inflated returns that are disproportionate to your initial investment. However, it can also cause you to incur disproportionate losses, which is why you should always focus on understanding the role played by leverage and maintaining a balance between your position size and capital holdings.