The foreign exchange market, known as Forex, is the worldwide market for trading, buying and selling the world’s many currencies. Simply explained, Forex trading is the buying of one currency and selling of another, allowing you to take advantage of fluctuations across a wide range of currencies. To someone not familiar with trading it can seem quite confusing, but as one of the most widely traded markets in the world, it’s worth understanding, so let’s look at it in detail.
Why trade forex?
Forex is the most popular and frequently used market in the world today, making it very attractive for anyone starting out in trading. As a rough estimate over $4 trillion dollars worth of trades take place daily in the forex market around the world – an astonishing amount! Due to the high volume of traders and high quantities of currency being thrown back and forth this gives the forex market an essentially high liquidity, meaning it’s extremely easy for anyone to gain access to it and start trading. Aside from this, many traders prefer to use the forex market as you’re able to start trading with a minimal investment, as well being free from both commission and tax systems. Be sensible and research whether any (well established) brokers are offering a free trial, so that you’re able to try your hand at it for it before investing any money into it. Regardless of your motivation to start trading, it’s crucial that you posses the right understanding in order to succeed and build on your income or savings. Starting out before you have a complete understanding could result in making a loss and diminishing your finances, rather than enriching them.
How does a forex trade work?
In forex, you speculate on whether the currency of one country will rise or fall against another – for example the USD and GBP. This way of trading is called ‘pairs’, with the first currency called the ‘base currency’ (sometimes called the ‘primary currency’) and the second the ‘counter currency’. Forex currencies are always traded in pairs as you’re selling one currency whilst simultaneously buying another. A forex price will then show you how much a unit of the first currency will buy of the second currency. So for example, if you see GPD/USD = 1.63472 then this means, in simple terms, that one pound is worth 1.63472 USD. To buy one unit you would need to use 1.63472 dollars and to buy 1.63472 dollars you would need to use one pound.
An example of forex
If you trade within the forex market then it’s essential that you’re keeping up with the news, headlines and reports all of the time, and it’s worth asking yourself if this is something you have a genuine interest in before starting out. For example, if a story leads you to believe that the GBP will increase next to the Australian dollar then that would be the time to go ahead and do a trade. Let’s say for example you decide to buy 10,000 pounds worth of sterling at 1.41702. It will cost you 14, 710 Australian dollars. A few weeks later you may find that the price stands at 1.5702 which means when you convert back you are making a profit of around $1000. You can do several trades at once and hold different currency pairs in your account so you can choose when and where to trade them with ease. Keeping yourself well informed on current affairs, finance news and politics – basically anything that could influence a currency – is crucial to succeeding in forex, so that you’re able to make an educated speculation as to whether a currency will rise or fall.
And finally – is forex right for you?
Hopefully by now you have a better understanding of what forex is and how it works, allowing you to make an informed decision as to whether it’s something you want to try. Perhaps for someone who doesn’t have an invested interest in finance and current affairs, forex might not be right for you. It is however more than possible to succeed in forex, even with no prior experience in trading, as long as you have an understanding of how it works and the knowledge to make an informed speculation. One of the risks of trading in forex is that you can stand to lose more than your initial deposit, and so it’s absolutely crucial that you trade only using your risk capital – in other words, never trade more than you can afford to lose.
Done well, it can be hugely profitable, but as with any investment it’s imperative that you seek independent advice and have an in depth understanding before starting out to minimise your chances of making a loss.
Picture by Pinksoo