Forex Trading 101

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Forex is short for Foreign Exchange. It is one of the more volatile markets among all the securities. If you are planning to enter into this type of investments, you need to take steps to understand the concepts and how the market works.

Basics

Forex is often referred to as FX and in some cases it is known as the currency market which makes up the largest exchange in the world. Each day, some $4 trillion is being traded and it involves all types of major currencies like US Dollars, British Pound, Japanese Yen and such.

How it works?

Trading currency is very much like any other form of securities. What you want to do is to buy a currency at one price and then wait for it to increase before selling it out. On the other hand, you can sell the currency at a certain price point and then buy it at a lower price which will then give you the profit.

Some basic terms

If you are planning to go into forex trading, chances are you will come across terms like forex pairs or major pairs. This is where you might be trading based on 2 types of currencies for instance USD/EUR or GBP/EUR. In some cases, you can even trade minor currencies like the Polish Zlotty or Mexican Peso, among others.

The spread for forex pair is made up of a bid price. This is where you can sell the currency and then offer it at a price you would like to buy. In selling, you might want to refer to the lower end of the spread while on the higher end is the price you might want to buy.

How do you make your profit?

To illustrate this, an example will be used. For instance, the spread for GBP/EUR is 0.8410-0.8411. Based on your study and evaluation, you think that the British Pound will increase against the Euro Dollar. Hence, you would most naturally buy the British Pound at 0.8411 for every Euro Dollar. At a cost of GBP8411, you will earn Euro $10,000.

The most significant part of forex trading is that you are not buying in small amount. You will have to buy in large quantities in order to see any profit. Although you can still do so with actual currency, the differences will be quite low.

What are the risks?

In Forex trading, the risk is actually higher than many other types of securities. This is because the foreign exchange market is very volatile. In fact, it can be quite unstable at times. As a lot of markets trade in US dollars, this is one currency which must be closely monitored. For instance, the 9/11 attacks saw one of the darkest periods for the US Dollar where it crumbled in every market.

As such, it is very important to have relevant market information before you invest into this exchange. You have to be aware of what is going on in the economies of the currencies you are trading in before making any decision to buy or sell.

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