Forex is the shortened version of Foreign Exchange, and it refers to a global market where different currencies are bought and sold. In other words, it refers to currency trading.
This is what you use whenever you go to a travel agent, Post Office or bank and exchange currency to allow you to have money when going abroad on vacation. While you are hardly searching for ways to make money via trading in this instance, it does still mean that most people have gone through the Forex trading scheme in one way or the other.
It’s argued that some $5 trillion is traded on a daily basis on this market. This does, of course, make it one of the busiest marketplaces in the world, and it is entirely possible for you to make money trading in these currencies if you know what to do.
But then, in order to make a profit from this form of trading, it will be essential for you to understand the basics at the very least. After all, this then provides you with a sense of when to buy and sell, or how to identify the correct markets as this will all have a distinct impact on your decision making process.
What is the Aim of Forex Trading?
The aim of Forex trading is easy to follow. All you want to do is to buy one particular currency at a low price and then sell it for a higher price as this allows you to make a profit. In this way, it operates just like any other trading operation.
The difficulty with Forex is the way in which the exchange rates would have been shown if they hadn’t sought to make it easier. You will notice that they combine currencies into pairs to show you what the exchange rate is between the two in question. This allows you to better understand what the rate is between say GBP and USD or whatever the pairing may be.
Understanding the Trading Spread.
Forex also deals in something called the trading spread, and understanding what that involves is going to prove to be important.
With this, there is a bid price and a sell price. You need to be careful as to which one you are operating on as this will determine if you are able to make a profit out of the trade. Once again, we are talking about doing so in these currency pairs, so allow us to explain things a bit better.
The trading spread will always provide you with the bid price for buying the first currency by using the second currency. Say you are looking at a pair of EUR/USD. The trading spread may state that the offer price is quoted at 1.3000. In this instance it means you will receive 1.3000 EUR for $1.
What you are looking for is to see if the offer price is something that will ultimately rise. If so, then you will be able to make your profit.
If you are in the selling market with the same rate and the same pairs, then it means you would receive $1.3000 for 1EUR. Of course, you would sell if you believed that this price was going to change and you would then receive less money for 1EUR.
Different Types of Trades on the Forex Market
Trading on the Forex market does involve a number of different options that are worth exploring. However, if you are new to this entire concept, then the best course of action is to stick with the basic buying and selling option so as not to further confuse things.
However, when you get more used to the inner workings of the market, you can then move onto more complex types of trades that are capable of boosting your profits. This includes spread betting as well as CFD trading.
With spread betting, then the clue is undoubtedly in the name itself. This is used primarily for short-term gains in the market and it is a common method that is used by experienced traders. For this, you effectively stake an amount of money in line with a pip movement of a certain currency pair. As an example, you may bid $10 on a USD/JPY pairing whereby you could make $10 profit for every pip movement that the USD makes against the Japanese Yen.
The other key option is CFD trading. You will either buy or sell a contract of a set amount between a currency pair. The profit or loss that you make is then determined by the price of the second currency. It’s worth noting that this particular type of trade does come with a significant risk attached to it, so it’s very easy for a novice to lose their money in a short period of time.
Forex trading is exciting as the market is constantly fluctuating. This does mean that you need to get a good grip of how it operates before you go ahead and start to invest your money. There is a significant profit to be made with trading in these currencies, but you have to take some time with getting a better understanding of the movements and how that influences your profit or loss.
This is a different type of trading to the norm, but it’s one that is highly effective when done correctly. You can pick and choose any currency pairing you care to imagine. The main thing is in knowing how those currencies are moving on the markets as that is the only way in which you will make money.
All that is left for you to do now is to spend some time looking at your different options. Watch how the markets move and learn to identify the ups and downs before they happen. As with any kind of trading, the key is in knowing when to buy or sell in order to make the biggest profit. If you master this, then Forex can undoubtedly lead to you making some rather impressive money.