Trading on the foreign exchange markets, better known as Forex trading, is one of the most popular in the world and has probably benefited more than any other market from the trading allowed to smaller investors by the Internet. Forex trading basically means that foreign currency is bought and sold by a trader in the hope that a movement in the foreign exchange market will increase the value of a specific currency over another.
The advantage of 24 hour trading that has taken place since the Internet brought investing into the homes of everybody and everybody with an Internet connection has led to trades being made on currencies from around the World.
Currency Trading For Beginners
The foreign exchange market, known today as Forex, is where different currencies are bought and sold at the prevailing rates for each currency. It is the biggest financial market providing opportunities for trading.
One of the major reasons the Forex market has become so popular with traders from around the World is the fact it has become one of the least volatile available, with an average movement each day of less than 1 percent for most currencies. The lack of volatility means these markets can be used for both long and short term investments that had, in the past, made this market one of the most important for large investors, such as banks, hedge funds and mega rich individual investors.
In Forex trading, the investor purchases an amount of currency in the hope that they will later be able to sell it for a profit, which means the invested money can be moved between different currencies to build a profit over time. The market is also one of the simplest to gauge as the investments made on a large or small scale have little impact on a day to day basis. Even the largest investment made by banks and hedge funds can only move the value of a currency by a small amount, movements are instead largely based on the long term prediction of the state of the overall economy in a specific country.
The investments made in Forex trading can be done for any length of time, with some investors moving their funds around in just minutes to look for a major profit. Others gamble that a currency will rise over the future months and take a long term view of Forex trading.
Currency trading, also known as Forex trading, is the type of trade dealing with the exchange of a single currency into another depending on a certain rate. Those that participate in currency trading are larger financial institutions, like banks. Currency trading is very different from other markets since it isn’t controlled by a governing body and the trade is made between individuals based on credit agreements. This is a very competitive trade market, since the traders are dealing among one another. The nice thing about currency trading is it’s very simple to learn and can be done from the comfort of your home.
Understanding Forex Trading
Forex trading refers to the process of investing in foreign currencies. As a matter of fact, forex stands for foreign exchange. To understand how this works, it’s important to know that are trading occurs in pairs. For example, you as an investor believe that the value of the Chinese Yuan is on the rise, thanks to the growth of the Chinese economy. You decide to purchase as much yuan as you can, using your U.S. dollars. You hold the yuan for anywhere from a few hours to a few days, or until it has increased in value to a point where you make a profit and then you re-purchase U.S. Dollars with your now more valuable yuan. Profits and losses are calculated based on the exchange rate that exists between the currencies the investor chooses. In theory, if the investment is timed correctly, you should have been able to purchase more U.S. Dollars than you started with, thus providing you with a profit. Sounds easy, right?
The truth is forex trading is difficult because currencies are extremely volatile and are sensitive to even the slightest movement in the markets. This makes them unsuitable for most novice traders. As a matter of fact, studies have shown that even seasoned traders go into forex trading expecting to lose more often than they win. However, when a forex trade goes well, it can be extremely profitable, which makes this an extremely attractive form of trading for many investors. Having a forex trading strategy is essential to hedging losses.
Getting Started With Forex
Getting yourself started with currency trading is very simple. Similar to other businesses, you need to understand the term “Forex trading”. Learn about the various terminologies and what the risks are involved. You also need to learn under which conditions will the value of the currency change, therefore you can determine the best time to buy or sell a specific currency.
Choosing A Broker
- Another important thing that you need to do is choose a broker.
- Your broker will be your intermediate between you and the currency market.
- Brokers are very helpful for those that are just starting with currency trading, as they will help you make the best decisions.
- Make sure that the broker you choose has been in the market for at least 10 years. This will determine that they have a good knowledge of the market and will provide you the best customer service.
How are currencies traded?
- There are three ways to trade currencies; the spot market, the forward market, and the futures market.
- The forward and futures markets are used by companies to hedge against currency exchange risks.
- The spot market is where day-to-day currency exchange transactions occur.
- Currencies are bought and sold at the prevailing rates, which are affected by interest rates and economic factors.
What are the risks?
- The Forex market is very liquid and leveraged meaning large sums of money are transacted.
- Leverage amplifies the gains possible, but also increases the risk of losses.
- Without leverage the margins are so small compared to the equities market.
- In addition, the market reacts to speculator activity which moves very quickly.
How to start trading?
- You can open a Forex account in the same way you would an equities trading account.
- Although there are no commissions to trade currencies, there is a difference, known as the spread, between the sell and buy price which will effect how much you make.
- Use a reputable company and ask about any other costs.
- The most common form of trade is going “long” on one currency and “short” on another. This simply refers to the exchange of one currency for another in hope of a favorable rise between the pair.