The foreign exchange market (forex) is one of the most fluid and confusing markets around. It practically comes with its own language that prospective traders will need to learn if they are to become successful. However, if you can get to know the market then it can be a very lucrative one.
There is a reason the market is so popular, after all. Forex trading is one of the most common forms of investment and speculation in the world, and the daily turnover is in the trillions of dollars. Part of the reason for this is that determined traders can get started with the market fairly easily.
If you want to start trading in forex, or just following other traders that do, you will need to know a few basics. Here are the facts that will allow you to begin your profitable career in forex trading:
What is forex trading?
Put simply, forex trading involves buying one currency and selling another, with the intention of making a profit due to fluctuating exchange rates. So for example, you could use US dollars (USD) to purchase euros (EUR). The aim with this investment would be to sell those euros once the exchange rate changed so that they were worth more against USD.
All trades are done in this way, in the form of a 'currency pair'. Each pair consists of a 'base currency', which is the type you are buying or selling, and a 'counter currency', which is the type you are comparing it to. The example above would be written 'EUR/USD', with the base currency (euros) on the left.
The way the trades are measured is in 'pips', which stands for "percentage in points". This is a measure of how a currency's value has changed, from the fourth decimal point. So if the price of our EUR/USD pair moved from 1.4422 to 1.4430, we would say it has increased by eight pips.
How can I start?
The first step with forex trading is to purchase a currency pair. To do this, you will need to work out which currencies are set to appreciate or depreciate in value. For example, let's say your money is in pounds (GBP), and you're comparing the currency with euros, giving us the currency pair of GBP/EUR.
If you think the euro is set to get stronger against the pound, then you will want to sell your pounds in exchange for euros. Then, once the value has risen, you can close the trade and sell the euros for pounds in order to make a profit.
On the other hand, if you think the value of the euro is set to weaken then you would sell euros and buy pounds. The point is the same: purchase currencies, allow them to rise in value, then sell them to make a profit.
What makes a good investment?
It should be clear at this point that in order to succeed at forex trading, you need to be able to work out which currencies are set to rise in value, and which will fall. Predicting this is not easy, but it is certainly doable. However, there are a number of factors that you will need to take into account.
The politics of a nation might alter the value of its currency, for example, as well as its internal economics. So if inflation begins to rise in a country, its currency will begin to be worth less. However, there are other considerations. Everything from monetary policy to a natural disaster can affect a currency.
It is always a good idea to observe the markets and see if you can identify trends and patterns in the currencies. Once you have worked out why they rise and fall in value, then you can start making lucrative investments in the forex market.