Forex trading means the buying and selling of currency pairs. You are basically buying one currency while selling another and trying to close the position with a profit later.
There are a lot of Forex trading strategies, but most of them are short term in nature: most are closed within a few days or weeks at most, but daytrading (the opening and closing of positions within the same day) is also common.
Unlike stocks, which many investors hold for longer periods and expect a big payday when they finally sell, forex traders usually go for many “small wins” instead of a home run. Many traders use leverage to multiply their returns, but you shouldn’t overdo it. Using very high leverage is quite risky!
We recommend using a demo account if you’re about to explore how to start forex trading. Using a demo account can be the best way to learn forex trading.
What are the pros and cons of forex trading? First of all, forex trades are not meant to be long-term, buy-and-hold investments. Unlike investors in stocks or bonds you can’t rely on dividends or coupon payments - in fact, you are usually charged rollover fees if you hold your positions overnight.
Forex usually requires active trading and monitoring your positions. This can be stressful but also a source of fun. The forex market lends itself well to technical analysis and some traders are able to have consistent profits by sticking to their own system and rules, based mostly on technicals. Some traders use automated systems.
We should also mention that some participants in the forex market use the market to hedge their currency exposure, i.e. protect themselves against fluctuations in currency exchange rates.
See a practical breakdown on how to use this in our forex trading examples, see some of the top forex trading strategies or check our guide on how to start forex trading. You can also learn industry terms using our forex trading glossary.