Forex Trading
Foreign currency trading – better known as FOREX trading – is one of the largest and most popular markets in the world. In this guide we shall look at what FOREX trading is and how you can get involved.
The FOREX market is used to trade currencies from around the world. It lets banks and businesses easily buy and sell currencies. Essential the FOREX market is in place to facilitate international trade and investments. For example, if an American business wants to import Australian goods they can pay in Australian dollars despite the income of the company being in U.S. dollars.
What makes the FOREX market different to other markets include: 24 hour trading due to the global nature of the market; the extreme liquidity of the market; the use of leverage; the huge range of factors that can affect the exchange rates; and its trading volumes.
All countries in the world are part of the FOREX market and each one can be recognized by a three-letter code. For example, the U.S. Dollar is abbreviated to USD and the Euro is written as EUR.
It is important to understand the term ‘liquidity’ to know how FOREX trading works. Liquidity is essentially the ability to convert an asset into cash without much effect on the price. It is because of liquidity that there are always buyers and sellers to trade with on the FOREX market.
It is a reality in business that people want to buy low and sell high – in turn producing a profit. This equates into FOREX trading in that the trader tries to determine the tendency of the currency they are looking for – in other words whether to buy or sell.
The first step for anyone wanting to invest in foreign currency is to research the currencies you are interested in trading. You will want to research what factors will affect those different currencies such as the Gross Domestic Product, inflation and growth rates, budget and trade deficits, central-bank interest rates and more. It is also important to have a general overview of that country’s economy to have a good understanding of when and why the currency exchange rate may fluctuate.
The next step varies depending on your preference. The simplest way to begin FOREX trading is to simply purchase your chosen foreign currency in cash at the bank and then hold it until you think it is a good time to sell it back (hopefully) for a profit.
However, for those serious about FOREX trading you will want to establish a trading plan for investing in foreign currency. Many people choose to purchase an ETF that trades in the same way as stocks on the stock exchange such as the NYSE. It then follows the progress of your chosen currency.
Also similar to traditional stock trading, to properly participate in FOREX trading you must first open up a FOREX account. By doing this you will gain access to a trading platform. On this platform you can simply choose the two currencies you wish to trade between. The majority of trades are done between the U.S. Dollar, Japanese Yen, Euro, British Pound, Swiss Franc, Canadian Dollar and the Australian Dollar – however all currencies are available to trade.
If for example you think that the Japanese Yen is going to rise against the U.S. Dollar you would purchase Yen using your U.S. dollars and then when it rises (if your prediction is correct) then you can either wait and see if it will go higher or take your profits by selling your Euros back for U.S. Dollars.
These are basics of FOREX trading. It is important to remember that it is a very volatile market and currency exchange rates can fluctuate every minute so it is essential that you keep a watchful eye on the markets on a regular basis to ensure that you haven’t missed out on making a lot of profit. And remember – never trade more than you can afford to lose.