The Forex market is a global virtual marketplace for currency exchange. Foreign currency trading is used by many traders including countries, banks and private investors, and is intrinsically one of the most liquid markets in the world. It is also open for 24 hours a day on every day except weekends, turning over more than $4 trillion on each one of those.
Because of the nature of currency, investors are able to speculate on the relative prices between them, and profit from this. There are a number of ways of predicting market fluctuations, including the response to financial news and close market analysis. Forex traders allow you to trade currency on the virtual marketplace online from anywhere.
This is a brief guide to basic trading for Forex beginners. While one Forex trading company may have varying online systems and processes from another, basic principles remain the same across the board.
Each currency traded in the Forex market has an exchange rate against every other currency, with each one having a unique 3 letter reference. The US Dollar for instance, is shown as USD, and the British Pound GBP. The relationships between these currencies are then expressed and traded in a currency pair. A currency pair shows the price for one currency against another. GBPUSD1.5699 would therefore indicate that 1 GBP would cost 1.5699 USD. The first currency is referred to as the base, and the second the quote.
When using a Forex trading company or broker, the margin you trade with is determined by the leverage you choose. Leverage of 100:1 for instance, means that you would only need £10 to trade a contract to the value of £1000. All profits and losses are to full value.
Let’s look at a straightforward example buy trade at an initial GBPUSD1.5699:
- News suggests that the GBP will strengthen against the USD in the next few days
- You decide therefore, to buy at £5000 and in doing so simultaneously sell at $7849.5
- Using leverage of 100:1, you need to deposit £50 to take out the position
- Your speculation proves to be correct, and the GBP strengthens against the USD to 1.6124, so you decide sell to make a profit on your investment
- Your initial $7849.5 is now $8062, resulting in a profit of $212.5, or £131.79
This is the most basic form of trade and there are a great many other formats available from Forex traders which are not so straightforward. A key point to take note of is that using leverage means that, should speculation not go your way, you could lose more money than you initially deposited. Had the GBP weakened to 1.5213 against the USD for instance, you would have lost $243, or £153.79, three times the deposit. Risk is always a factor in foreign currency trading.
This guide should serve as a brief introduction to foreign currency trading and making money on the volatile Forex market. Such trading should never be considered a way of getting rich quick, but careful strategy and observation are the principles successful investors adhere to.
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.