Forex which means foreign exchange, refers to buying and selling foreign currencies. It involves simultaneously selling one currency while buying another. This is done Over The Counter (OTC) i.e. through various computer networks all over the world. Forces of supply and demand are the major forces moving the forex market. These currencies are traded worldwide in the major financial centers in London, New York, Singapore, Zurich, Frankfurt, Hong Kong, Sidney and Paris.
It is easy to see why it is such a perfect place to make money as well as conduct easy financial transactions; it works 24 hours with no physical restrictions or demand for large capitals as a factor for trading. Forex presents you with the ability to trade in the most powerful currencies in the world from the comfort of your bed.
It is pretty easy but can also be difficult, especially if you do not understand the market or know how to go about trading. There are a few things you need to know about forex trading.
1. Currencies are signified in symbols or abbreviations. Example USD means United States Dollar, AUD signifies the Australian Dollar, GBP means Great Britain Pound etc.
2. In the Forex trading market, currencies are traded in pairs, like EURO/USD. These currencies paired together are traded together; the value of one currency is given to the other because you are trading it for the other. The currency you are trading usually listed first in the pair; in this case, the EURO is called the base currency and the currency you are buying, usually listed second; in this case, the USD, and is called the quote currency. When trading, the base currency is worth 1. Now, how much you will receive in the quote currency for 1 of the bases will be shown alongside. Example: 1 EURO/USD 1.5406 means you need 1.3406 USD to get 1 EURO.
3. In every pair, there is the Ask and Bid The ‘Ask’ price is the buying price of the quote currency the Bid price is the selling price of the base currency. The difference between the two of them is called the ‘spread.’
4. Aside from the forex of demand and supply, other things affect the forex market; politics, news, the country’s economy, present-day happenings.
5. You can decide to go ‘long’ or ‘short’ but what does that mean? If you trying to predict that the USD is going to increase in value, you buy it. That is called going ‘long’ but if you feel it is going to lose its value; depreciate, you sell it. Selling currency is called going ‘short’.
6. We have something called a pip. What is that? It’s a short form for Percentage In Point, it is the difference in the exchange between the currencies in a pair. For example, if USD/AUD moves from 1.2345 to 1.2357, the pip is 2. It is usually the difference in the 4th number after the decimal, except for pairs involving the Japanese Yen.
Now, knowing these terminologies are not enough. You need to know the types of Forex markets that exist. There are three:
- Spot Forex Market: in this market, trading is done on the spot, for the current market price.
- Forward forex Market: Here, a contract is set to buy or sell a specific currency at a future date.
- Future forex market: This has the same futuristic character as the forward market but, it is more legally binding, and trading is done differently.
This is a lot of information and can be quite overwhelming. You may be wondering how to start ACTUAL trading. Starting forex trade, it is important to follow these guidelines:
Get an Account and a Broker
Forex trading is done via an account. This is like your forex bank account; transactions you want to carry out would be done from here, currencies you buy land here and the ones you sell, go out through your account. These accounts are usually opened with a Forex broker. Getting a broker is not difficult but you have to be careful; there are many fraudulent brokers out there. So, you must be careful in your search for one. Look into their reputation. To be on the safer side, choose a broker that is popular and spoken well of by customers. Also, make sure their commission rates match your budget; nothing too expensive that you cannot afford.
Manage your emotions
DO NOT trade with your emotions. People do not invest a huge chunk of their money by reasoning with their hearts or feelings alone. When deciding to go long or short, be reasonable about it. Do not let a huge win provoke you to make outrageous buys or, a huge loss drives you to revenge by selling at the worst possible time.
Learn About the Market
These are the basics. You can start trading with this little knowledge but, as time goes on, you WILL need to know more. From learning about the currencies in the market to knowing the right time to buy a currency and sell one, there is a lot to learn about forex trading. I would not lie and tell you this article has exhausted all the information you need. You need to learn more. If you have the time, you can even take one of the many crash courses online. Study the trends, follow sites that are focused on dishing out information on forex trading. For example, there are many currency pairs you can trade in, but you have to know which ones will suit you best. This is like an investment and if you do not study about it, you could make the wrong choices. Study about the markets, the big players in it, what causes the various currencies involved to rise and fall. Study to be able to predict better so your future trades would not end up in losses.
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