Forex trading can be an incredibly daunting topic for beginners. But in this post, we’ll explore the basics and help you get started.
Forex Trading Defined
Even if you’ve never tried trading or followed market activities, there’s a high chance that you’ve seen or heard of forex trading.
The term “forex” is a portmanteau of “foreign exchange”, and is often referred to as FX trading. It revolves around converting currencies, with the most popular including: CAD, USD, GBP, NZD, and JPY.
The forex market is one of the world’s most popular, and currencies are typically exchanged for various purposes (such as tourism, commerce, etc.). Research shows that FX markets generated an incredible $6.6 trillion in trades per day (as of April 2019). In the digital age, traders, dealers, and banks can complete money exchanges faster and more easily than ever.
Some currencies experience rapid price fluctuations, caused by such factors as tourism, interest rates, regional risks, and more. The high level of volatility involved in forex trading creates regular opportunities to profit if values shift in your favour.
This is one of the main reasons that forex trading appeals to traders the world over, though high volatility can also create risks. However, for many forex traders, the potential for profit far outweighs any element of danger that may be involved.
Staying up-to-date on market activities can empower you to make the right choices over time, as can working with forex brokers. Good brokers will work hard to make forex trading simpler, more profitable, and more convenient for their clients.
How Does Forex Trading Work?
As the forex market trades 24 hours, five days each week, traders can make investments round the clock. That’s because the forex network consists of banks all over the world, operating in varied time zones (Tokyo, New York, Sydney, and London).
Currencies are traded against one another in pairs, such as USD/GBP. Studying current exchange rates shows the amount you have to pay in one currency to buy a target amount of another. For example, you can check the current USD/GBP exchange rate to determine how many US dollars you would have to invest to buy, say, £20,000.
Types of Forex Trades
Traders can make forex trades in a number of ways:
Spread betting: speculate on a currency pair’s future price movement — you’ll achieve a profit or a loss depending on whether the market moves in your favour before you close your position, and on the amount of money you invest
CFD trading: When trading with forex CFD (Contract for Difference), you agree to exchange the price difference of a currency pair that occurs between you opening and closing your position — if the movement is in your favour, you’ll profit
Newcomers can struggle with forex trading, and you can make costly mistakes if you dive in without learning the basics first. That’s why it’s so important to do your research and consider working with a forex broker, who will help you make a successful start.