Forex is the short version of "foreign exchange", and forex trading involves buying and selling international currencies. Forex can deliver substantial profits, but like other investments, this is not without risk. You need to understand how the markets work, and know what you are doing when you start investing. This introductory guide will help get you started on the right path.
How Does Forex Trading Work?
With forex trading, instead of buying shares of a company and hoping they go up in value, you buy a currency and hope to profit from shifts in its value. Currencies continually fluctuate in relation to each other. For example, the Euro will go up and down in value relative to the US dollar.
Currency values change based on supply and demand, much like other markets. Economic factors and political developments cause shifts in either direction. Unlike the stock market, the forex markets trade 24 hours a day. Investors go through a broker to place their orders.
What are the Benefits and Risks of Forex?
One of the biggest benefits is that forex traders can highly leverage their trades, getting even more leverage than with spread betting or CFDs. Forex leverage can be as much as 500 to one, and you can compare forex brokers to see the leverage they offer. When you operate with such a high level of leverage, it gives you the potential for enormous profits, but it also carries the downside of enormous risk if the market moves against you.
Currency fluctuations are typically much smaller than the volatility that you see in the stock market. Usually you don’t see major shifts, just smaller changes in one direction or another. Forex investors use leverage to increase their transaction sizes. This way, a large profit can be made off a small shift in the currency value. Forex trading also lets you profit whether a certain currency is going up or down.
Forex is the most liquid type of investment you can find, since essentially you are investing in cash, just in a different currency. This liquidity and the around-the-clock trading of forex means that your trades can be executed more quickly than in most financial markets.
How Do You Get Started with Forex?
The first thing you need to do is learn how the markets work. Study the currency exchange rates, and learn about how they typically respond to different triggers, like economic announcements. The more knowledge you have, the better you will be able to read the markets and profit from what is happening with world currencies. You also need to understand how to manage your risks, which can be significant due to the amount of leverage involved.
Next, you need to select a broker. Compare what different brokers are offering, looking at their spreads, the margins they offer, and how their trading platform works. Make sure you understand all of the costs that could be involved. If they offer a demo account, try it out so you can see how their system works.