The forex trade is an over-the-counter, global, decentralized exchange for the trade of currencies. This exchange determines international exchange rates for each currency involved in the trade. It includes all aspects of trading, buying and selling currencies at either decided or current prices. Each currency traded on the forex market has a unique data compared to that of the other currencies being traded. However, the most common currency being traded on the forex market is the US Dollar. All other currencies are traded for their respective countries’ currencies based on speculations on future predictions of their market value.
There are three types of forex trade: Spot transactions; Forex arbitrage transactions and longer-term investments like forward contracts. These three are the basic types of free trade. Spot transactions are where one currency is bought at its base rate and sold back to the seller at a higher rate. With the help of leverage, this can be done to more than four times the base rate.
Forex arbitrage transactions take the situation where two different currencies are traded. In this type of free trade, the investor will be buying one currency and then selling another at the same time. While buying the currency with the lower price, they will sell the currency with the higher price for an equal profit. This can be done continuously to maximize profits. Although this type of transaction is less profitable, it can also be done easily and quickly with the use of automated software programs that have the ability to read and execute data from various market sources at the same time.
Short-term investments are done through spot transactions. These are usually three to four trades made daily in the forex market. These trades are made according to the current prices of the different currencies, which may vary depending on the political and economic news that occurs around the world. A short-term investment will enable traders to make instant transactions without holding or waiting on the exchange for the stocks and currencies to change. This makes the transactions faster and easier.
Short-term trades are usually made using leverage wherein a small amount is traded as compared to the total amount traded. This allows traders to control the risk level better. In liquid markets, the risk of holding the currency is relatively lower because it is immediately accessible. However, in a volatile market, holding the currency for a long time may expose you to losses if the market suddenly fluctuates. Due to this reason, short-term trades are usually done in volatile markets to minimize risks of losses.
There are also some advantages of leverage in trade forex. When trading with leverage, you are able to manipulate the currency price even when the market is closed. You are still able to reap its benefits once the market opens again. In addition, the larger your leverage, the higher the profit you can earn.