Forex is basically currency trading, which is buying and selling currencies on the foreign exchange market headed to the goal of making a profit. This type of trading is often called ‘speculative forex trading’. Yet, different things also apply to currency trading. Learning how to save money and time on currency transfers and foreign payments have to be researched and studied well before embarking on this type of speculation or trading.
An exchange rate for a currency applies to a currency that can be swapped with another. It always comes in pairs like the USD/EUR. Economic events such as geopolitical factors, inflation, and industrial production can create rising or falling exchange rates. It will also be influential in your decision on whether to buy or sell a pair of currency.
Here is an example of a Forex trade:
The USD/EUR represents the number of Euros you can buy for one US Dollar. Believing that the US Dollar will rise in value against the Euros will make you buy US Dollars with Euros. Once the exchange rate increases, you will sell the US Dollars back and make a tidy profit. Just bear in mind that while forex trading can earn you profit, it also involves high-risk losses.
Today, the biggest market in the world is Forex, with a daily volume of 3.2 trillion US dollars and a 24/7 trading action. Equities can also be likened to forex, but there is a world of difference between them. The following are the main characteristics of Forex trade:
- You don’t need huge capitalization to get started in forex. It is also very accessible wherever you are in the world.
- The 24/7 trading action gives you flexibility on how to trade and when to trade.
- Forex deals in currencies which you can concentrate on, rather than looking at the huge number of stocks on the market.
- The bid/ask spreads are the only fees you need to pay in forex. Brokerage firms do not charge commissions in this kind of trading.
- You can trade on leverage, although this could be risky as losses and gains could be twice as much.
The high risk involved in the foreign exchange on margin is not for everyone. Deciding to enter the world of foreign exchange should be considered at your level of experience, the risks involved, and your goals for your hard earned money. If the money that you plan to invest is one that you cannot afford to lose, steer clear from forex trading since this is a type of trading that could make you lose some or all of your investment money at once. Seeking help from an independent financial advisor could help clear away the doubts regarding forex, as well as make you decide whether this is for you or not.
Go one step further with these related books:
- Forex For Beginners
- A Three Dimensional Approach To Forex Trading
- Understanding Price Action: practical analysis of the 5-minute time frame
- Quantitative Trading with R: Understanding Mathematical and Computational Tools from a Quant’s Perspective
- The Death of Money: The Coming Collapse of the International Monetary System
- Economics of Monetary Union