Before you invest your money in the Forex market, you must answer one question: what is Forex? This quick guide will answer that question in depth so that you can move forward and learn more through hands-on experience.
Forex stands for "foreign exchange" and is often referred to simply as the "FX" market. While the U.S. stock market allows you to invest in companies operating within that country, Forex is an international trading market. Rather than investing in businesses, you invest in currencies and trade one against the other, hopefully earning a profit more often than you take a loss.
It starts by understanding currency pairs. This term refers to two different currencies that you can trade against one another. This is similar to trading in your money when you go on vacation. You may stop in at a bank or another business to convert money to the currency used in the country you are visiting.
When you trade on the FX market, you trade one currency for another in the same manner. You just don't have the currency in hand to make those trades. All trades are conducted quickly through your computer, smartphone or tablet. Whether you trade through a computer or mobile device will depend on your choice of trading platform.
The Forex market is active from Sunday evening through Friday night. It operates around the clock, so you can analyze the market and make trades whenever it fits your schedule.
That sounds convenient, but it also means that the market is constantly active. This contributes to volatility because you never know when something unexpected is going to change the value of a currency. You can go to sleep and wake up to a drastically different market.
The currency that you own at the start of a trade is your base currency. When you are new to the Forex market, you will start with the currency that you use to fund your account. As you learn Forex trading over time, you will buy other currencies which may serve as your base in later trades.
Every currency will do one of two things over time:
Your job as a trader is to determine which direction a currency will go so that you can make the appropriate trades. For instance, if you predict a currency is going to depreciate you may trade it against a currency that you predict will appreciate.
In order to learn Forex trading, you need to do more than compare Forex rates when selecting a trading platform. In order to make profitable trades, you must learn how to properly analyze factors that contribute to fluctuations in currency values. In simple terms: you have to accurately predict whether a currency is going to lose or gain in value so that you can trade accordingly.
There are two forms of analysis that will give you accurate predictions most of the time:
When you notice changes in a country's economic stability, you can expect the currency used in that country to follow suit in most cases. Sometimes currencies gain or lose value for short periods of time, and other times they crash hard for the long term.
In the example below, we can see how the Japense Yen has gone into a long-term decline. Betting on the decline of the Yen would have been a very profitable strategy.
You have to use your own instinct when determining how to react to an economic change, but you can discuss the issue with other traders and read professional reports that give predictions to help guide your own decisions. That's what makes Forex trading so much fun. You are part of this expansive community of traders from all around the world, and there are many different strategies that you can learn to maximize profit on your trades.
While this may seem overwhelming at first, most traders enjoy fundamental Forex analysis. It allows you to immerse yourself in cultural and political studies of countries around the world. It takes time, and it is sometimes difficult finding legitimate reports, but there are many Forex tools available to serious traders interested in doing their homework.
You now know what the Forex market is and have a basic understanding of what your job is as a trader, given you choose to accept the position. You must first understand that this elevated level of trading comes with occasional losses. Never invest money that you cannot afford to lose, especially while you are still learning the ropes and developing strategy.