Forex, FX or Foreign Exchange trading is the buying and selling of one currency to take advantage of a value change in that currency in relation to another. That is the ‘exchange rate’ between them. FX trading involves the trading in currency pairs, such as EUR/USD or GBP/USD, where investors speculate on whether the exchange rate between a particular pair will rise or fall.
For example, if an investor speculates that the value of GBP (the base currency in our example) will fall in relation to the USD (‘counter’ currency), then they would effectively sell an agreed amount of GBP, or ‘go short’ and buy USD with the proceeds. Then, when the value of the GBP does fall relative to USD, as they would be hoping, they are able to buy more GBP than they had started with. In the reverse, the investor would buy more GBP in the hope that they will increase in value in relation to the USD, and then buy more USD when GBP does rise. This would be to ‘go long’. Forex trading is not tied to a specific exchange as it trades on the OTC (Over-the-Counter) market and is open 24 hours a day from Monday to Friday. The art and science of Forex trading is to speculate correctly as much as possible.
Leverage, Margin and Spread
Leverage is used in Forex trading so that only a small fraction of the value of your position is required as a deposit. It allows you to trade with large amounts of ‘borrowed money’ for just a small ‘goodwill’ deposit. Margin or ‘margin requirement’ is the actual amount that will need to be deposited to allow the leveraged trade to commence. The Spread is the difference in pips, between what a broker will buy and sell for and constitutes their charges to you. Fortunately, since the FX market is very liquid spread prices are typically low and offer a highly attractive trading environment for investors.
Can I Make Money With Forex Trading?
It is possible to make money in Forex, but not without risk. As with any type of trading there is a possibility for one to make gains or losses, and learning how to be in overall profit is the key to becoming a successful Forex trader. Predicting which way a currency pair will move is done by analyzing market forces such as economic indicators, political conditions, international trade and investment flow. Learn as much as you can about Forex before trading and use free demo accounts to get a feel of the process. Finding a reputable brokerage will also make your trading experience smoother, and there are many established companies such as CMC Markets specialising in Forex trading for beginners and seasoned traders alike. These companies will be able to help you set up an account to get trading as quickly as possible.
What Are the Risks of Forex?
Dealing in Forex has its risks and one should be aware of as many of them as possible. Of course, broadly speaking, the main risk is losing all of your investment on a bad speculation. But there are some more specific risks to learn about;
Margin Close Out
You are busy trading and getting really excited about the day’s events when your account (deposit) drops below a specific threshold and all of your open positions are automatically liquidated with immediate effect. Current Forex trade rates would apply and could cost you dearly.
Economic announcements and political news both can take their toll on Forex price fluctuations causing volatility and when this happens spreads widen. When this happens you pay more for transactions.
Using an Unregulated Broker
In recent years Forex regulators have achieved a lot to weed out Forex brokers operating outside of the law but there may still be some rogue companies out to con Forex newbies. Be sure that any broker under consideration is a member of and has a good reputation with a recognized Forex regulator within the country of operation.
Now that you understand more about how to trade safely in Forex – as well as the associated risks – it is up to you to decide if it could be right you for.