A lot of you must have heard the word “forex”. Have you ever wondered though where it derives its name from? Well, forex is an abbreviation of foreign exchange, also known as FX or currency trading and involves exchanging one currency for another for various reasons, including trading, commerce, or even tourism. Investing in forex occurs in the foreign exchange market, where currencies are traded. The forex market is considered the most liquid market around the globe and the largest one with $6.6 trillion daily trading volume in April 2019.
Currency exchange is vital in our lives as it allows us to buy goods and services both locally and worldwide. However, international currencies need to be exchanged to make a foreign trade or any other type of foreign business. For instance, if someone lives in Spain and wants to buy something from the U.S then she/he has to pay for the specific item in U.S dollars meaning that the importer will need to exchange the corresponding value of euros into dollars. Similarly, if you are travelling to a foreign country like Australia you might not be able to pay in your country’s currency as it might not be an accepted currency in Australia. So, you will have to exchange your currency to the local currency, at the exchange rate at the specific time.
Interestingly, the FX market where investing in forex occurs, is a decentralised market, meaning that there is no single marketplace to trade forex. Instead, forex trading occurs electronically, over the counter (OTC), meaning that traders around the world trade through computer networks rather than through a centralised exchange. Trading is possible 24/5 in the biggest financial centres of Frankfurt, Hong Kong, London, New York, Paris, Singapore, Sydney, Tokyo, and Zurich, in all time zones. As a result, when the market closes in the USA, it opens in Tokyo and Hong Kong, so it is continuously active, and prices are constantly changing.
What is forex?
As already mentioned, forex, or foreign exchange, refers to a broad network of people buying, selling and transferring currencies between each other. Unlike trading shares, trading futures and trading commodities, trading forex is the means through which different individuals, companies or central banks trade one currency for another. Although investing in forex takes place for many other purposes, the main reason why people trade forex is to generate profit.
Due to the high trading activity taking place every day, currency prices become extremely volatile. Forex volatility is what the majority of forex traders are attracted to, since it can increase their earning potential. However, higher volatility also means higher risk.
Understanding forex trading terminology
First things first, when investing in forex, currencies are listed as a three-letter code in pairs, since forex trading always involves selling one currency in order to buy another. The first two letters stand for the country and the other letter for the currency. For example, we have the USD/CAD, EUR/USD, or USD/JPY. The former represents the U.S. dollar versus the Canadian dollar, the second one the euro versus the U.S dollar and the last one the U.S dollar versus the Japanese yen. Taking the USD/CAD pair as an example, it involves buying the U.S. dollar and selling the Canadian dollar.
There will also be a price associated with each currency pair, like 1.3458. If the USD/CAD currency pair is associated with this price, it means that it costs 1.3458 Canadian dollars to buy a U.S dollar. If there is an increase in the price to, let’s say 1.4035, then it now costs 1.4035 CAD to buy a USD. If the price drops, the pair’s price will decrease. Therefore, the USD’s value has increased, hence the CAD’s price has decreased, as it takes more Canadian dollars to buy a U.S dollar.
The first currency listed in a forex currency pair is called base currency, whereas the second one is called quote currency. As a result, if you think that the base currency in a currency pair is possible to strengthen in price compared to the quote currency, you can go long and buy the pair. If you think it will weaken, you can go short and sell the pair. As previously discussed, each forex pair’s price refers to how much one unit of the base currency is worth in the quote currency. The forex market dynamics, economic news or geopolitical events have an impact on the foreign exchange market and affect the price of currencies.
How to trade forex?
Once you have a clear understanding of what investing in forex means as well as of how currency pairs work you can start trading. Below are some useful steps on how to trade forex:
- Learn everything about forex
Although trading forex is an easy endeavour, suitable to both beginners and professionals, it is a whole market of its own and requires loads of study time and some basic knowledge. For instance, you need to be able to know what leverage is, what lots and pips are as well as what hedging and speculation mean. With the development of technology, there are numerous online materials on investing in forex. - Register with a broker
In order to be able to trade in the market, you will need to open a live forex trading account with a trusted forex broker. Brokerages usually charge low or no commissions at all, but they use spreads, which is the difference between the buying and selling prices. Moreover, forex brokers can help you choose among a big variety of trading products and accounts and help you trade on the industry standard MT4 platform through advanced tools and support. If you are new to this industry, it is preferred that you practise on a demo account before opening a live one. - Develop a solid trading strategy
Although speculating on price movement is not easy, but rather time-consuming, it would be really helpful if you built a solid trading strategy to stick to, before investing in forex. This will help you set your limits and risk parameters. Try to build your plan based on your current financial situation and goals. Bear in mind the amount you can afford spending and losing. Keep in mind that forex is a high-leveraged and liquid market. - Be in charge of your trades
After you get started with trading, try to keep track of your positions before you end your trading day. The leading MetaTrader 4 platform already provides daily reporting and more. Simply make sure that you do not leave any pending open positions and that you have placed your stop-loss orders and have enough money in your account for future trades. - Be patient and leave out emotions
New people investing in forex are usually frightened and influenced by their emotions, which are full of unanswered questions. Your head will probably be bombarded with questions such as: “Should I have held my position longer?” or “Why did I lose that one?” If you are obsessing over such unanswered questions, you will probably become even more confused. This is the reason why you should develop your plan which will help you not get carried away by any vulnerabilities across profits or losses or by any emotional breakdown.
Why trade forex?
There are numerous reasons for investing in forex. Let’s examine some of them. First of all, the forex market is the largest in terms of daily trading volume worldwide and therefore the most liquid, as already mentioned. Liquidity in forex means that currencies can easily be bought and sold and that transactions can be easily completed. In fact, one can enter or exit a position in seconds. Also, transaction costs are often low, creating therefore opportunities for traders to speculate on price movements with just a few pips (spreads).
Secondly, the market’s flexible hours enable traders from all around the globe to trade anytime, anywhere, on any device. Leverage is another important advantage in investing in forex. It gives traders the ability to trade a larger amount of what they’ve initially deposited in their trading account. Furthermore, forex trading requires low initial capital. As a result, it is considered easier to get started with forex rather than with stocks. Also, the fact that the market is decentralised leaves low potential of manipulation of currency trades by external parties.
All in all, the foreign exchange market is open to pretty much everyone, including central banks, retail investors, beginners and professionals. All these participants are able to potentially make a profit over price fluctuations that have to do with the economy globally.
What drives Forex prices?
Since investing in forex and the forex market in general consists of currencies from various countries worldwide, exchange rate predictions become more and more difficult because of many determining factors that could affect price movements. Nevertheless, similar to what happens in the majority of financial markets, investing in forex is first and foremost influenced by the power of supply and demand. Therefore, it is vital that you understand the factors that have an impact on price fluctuations.
- Central banks
Central banks make up the first factor since they control supply. Banks are responsible for announcing measures that might have major impact on currencies’ price and movements. For example, quantitative easing, refers to adding more funds to an economy. This can lead to a currency losing its value as more funds will be pumped into the economy. - News reports
Other investors and commercial banks tend to invest their capital in strong economies. As a result, when positive news regarding specific countries is released in the markets, this boosts investments and enhances demand for that specific country’s currency.
The difference between supply and demand is the main factor that makes a currency’s price increase, unless the two increase in a parallel way. Likewise, when some negative news hits the market, this can lead to a decrease in investment and in a currency’s price. That’s the reason why currencies are the reflection a country’s economic status most of the time.
How to place a forex trade with FXGiants?
Investing in forex with FXGiants is pretty straightforward. In fact, you can open a live trading account in less than a minute. Once you do that, you can download the MT4 trading platform, choose your preferred currency pair that matches your trading requirements and begin to trade. Next, you need to understand the pair’s movements through technical, fundamental or any other type of analysis. The goal is for you to speculate on where the price will move. Finally, you will need to place your trade. You can examine alternative opportunities regarding other trades at a later stage.
FXGiants is a reliable broker giving traders from 150 countries around the globe, access to more than 300 tradable instruments on 6 asset classes like forex, metals, futures, commodities, metals and shares. To facilitate investing in forex, the company provides both live and STP/ECN account with low spreads for all types of traders. There is also a 24/5 customer support team ready to assist you throughout your whole trading journey. Last but not least, the broker offers access to PMAM (Personal Multi-Account Manager) which enables you to manage different accounts simultaneously as well as to VPS (Virtual Private Server) which gives you the opportunity to access your account from anywhere in the world by simply connecting your account to the server.
DISCLAIMER: This information is not considered as investment advice or an investment recommendation, but is instead a marketing communication
