If you have ever traveled from one country to another and exchanged money, you have carried out a forex exchange transaction. When you change money, you’ll realize that in some cases you gain more money than you started off with, while in other cases it could be the opposite. It is rare that you get exactly the value expected when you are trading. Forex is the shortened term for Foreign Exchange Market. Therefore, when trading in Forex you are trading in currencies. This is a highly volatile market with record-breaking highs and lows. Thus, it is recommended that traders should use risk capital when they choose to trade in Forex so that any money invested is money that they can afford to lose.
Forex trading has continued to grow, particularly with traders online. In fact, it is currently the largest financial market on earth with an average daily trading volume in excess of $3.2 trillion. In fact, combining every equity and futures market in the world will only result in 25% of the total value of the forex market. This means that the costs of carrying out a transaction are lower and that there is also a host of benefits that you can look forward to.
How Does Forex Trading Work?
When trading in Forex, one is making the decision to purchase one currency while selling off another currency at the same time. This is what is known as trading a currency pair. When looking at the currencies, you will notice that each one is represented by three letters, such as USD for United States Dollars, GBP for British Pounds Sterling and EUR for the Euro. The first two letters in the currency paid are an indication of the country that the currency comes from, and the third will often identify the currency.
Currency pairs are written as follows USD/EUR = 1.1245. On the left of the slash is the currency which is referred to as the base currency, while on the right that currency is known as the quote currency. The result indicates that if you have one USD, then it is equal to 1.1245 EUR. With this information, one has to decide when to buy and when to sell.
The trader will buy a position when the value of the base currency is likely to increase. The decision to sell comes about when the base currency is expected to decrease.
Another term worth knowing is the spread, which is an indication of the difference between the buy and sell prices that you will find on a forex pair. This is worth knowing when you want to trade long or short. For trading long, you trade using the buy price which is normally higher than the market price. When trading short, you trade with the sell price which is normally below the market price.
The increase or decrease in the price of a forex paid is measured in a unit that is known as pips. A single pip is a one-digit movement of the fourth decimal place on a currency pair. The more money that is put on the line, the higher the benefits one will experience when trading pips.
Why People Are Trading in Forex
Forex trading has grown considerably because of a host of advantages that traders can benefit from. These include the following: –
- Commissions are not charged by trading firms as investors are only able to pay the bid/ask spreads.
- It is possible to trade 24 hours a day, meaning that you do not need to manage yourself according to when markets open and close. The market is open five days each week for trading.
- You can choose from a few currencies which reduces confusion. With stock trading, you often have to pick a winning stock and sometimes there are more than 5000 to choose from.
- Trading on leverage makes it possible for one to magnify wins, although the same could be said for any losses incurred.
- You can start small as an investor, putting in just what you can afford and build up your trading balance from profits that you make.
How to Attain Success when Forex Trading
Due to all the benefits that one can receive with forex trading, you will often find that people jump into this type of trading, expecting to make a large profit in a minimal amount of time. However, just with any investment method, it pays to research as well as to be patient. This type of trading needs you to come up with a trading plan, and then to follow through on this plan no matter what is happening within the market. You should also ensure that you avoid making highly emotive decisions, which people tend to do at the first indication that things are not going their way. Keep in mind that a key feature of the forex market is its volatility, so expect to see a lot of movements up and down.
To attain success, you need to spend some time practicing on a demo and starting small so that you have an idea of how you can profit when you are using real money. Remember, when things go wrong you should figure out how you can move on to the next trade, and not get trapped in the management of just one trade. Achieving success means that one should be as honest with themselves as possible.
Making money is at the heart of forex trading, and all one really needs to do is fully understand the currencies being traded in. The price of one currency will determine the price of another and keep this in mind helps to avoid confusion. There are currencies that make up major pairs and these are the most well-known global currencies. Then there are those that make up minor currency pairs that are known as exotics. These are traded less, and they have larger trading spreads.