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The currency market, aka the foreign exchange market, aka Forex, aka the FX market, is the largest financial market in the world, with an average daily trading volume of over 5 trillion dollars.
The currency market allows people from all over the world to buy, sell and exchange currencies of different countries, and potentially benefit from the high fluctuations in currency exchange rates.
The basic idea is pretty straightforward: if you believe that the value of a particular currency is going to rise in relation to another currency, you can buy that currency and then sell it later for a potential profit.
Technical analysts are particularly drawn to trading in the foreign exchange market due to the currency exchange rates’ high volatility, which may lead to higher profits.
Currency prices can be influenced by a wide range of factors, including political events, economic data releases, and central bank policies, among other things.
This is generally a more short-term approach, taking advantage of daily volatility and price changes.
Investors also use currencies to hedge their FX exposure, i.e., if an investor’s portfolio is dominated by GBP and they invest in a company dominated by USD, they may choose to short the USD to neutralise the currency effect.
It is also worth noting that some investors consider certain currencies as safe-haven investments.
The US dollar, the Japanese yen and the Swiss franc have long been considered less risky currencies in comparison to those of emerging markets, for example.
Therefore, in times of panic or risk — it is not unusual to see those currencies prosper.
Either way, it is, of course, important to do your research and understand the basics, as currency trading is highly speculative and carries a significant amount of risk.
That is why eToro runs free courses on technical analysis and regularly discusses the fundamental drivers on our webinars and podcasts.
So, feel free to explore the eToro Academy!
To summarise, investing in the currency market can offer the potential for profits, but it’s also important to be aware of the risks involved and to approach it with caution.
Does currency trading have a place in your portfolio? That is for you to decide.
Until then — see you in the next video.