Contrasting to other investment markets, the Forex market doesn’t involve trading physical goods; trading Forex is representative to a currencies valuation against another. The Forex market involves the buying and selling of currencies from around the world with the anticipation that the value of a currency will change.
Foreign Exchange is a global working market that is open 24 hours a day, 5.5 days a week. Due to the several advantages the Forex market has, including the vast stretch of global participants, the market is now considered the largest and most powerful market to invest in. Between $4 trillion and $4.5 trillion are traded in volume on a daily basis in the Forex industry preventing any market manipulation. The market is not known to be controlled by a particular agency which makes it a free flowing trading environment.
Each nation’s currency fluctuates independently and traders in the Forex market make a profit or lose profit from the changes in the specific currency’s value.
Forex functions around the notion of ‘free-floating’ currencies. This means that worldwide currencies are not supported by any specific materials such as silver or gold. This free-floating system was established in 1976 which indicated that currencies had different values based on a country’s economy performance at a specific moment. Prior to this however, major currencies worldwide abided by the ‘Bretton Woods system’.
The Forex market has only been established because of the free-floating system currencies follow today. In the past however Forex would not have been able to operate due to the Bretton Woods system. The Bretton Woods system stipulated a fixed exchange rate that linked to the US dollar and meant that other world economies would hold their value of their currency adjacent to that of the US dollar which was then exchanged for gold. In 1971 currencies were finally liberated from the Bretton Woods system and in 1976; the free-floating system was introduced slowly leading to the introduction of Forex.
In the past, Forex was only accessible to major banks and financial corporations. However in the late 90s, the Forex market offered the average person a friendly form of Forex trading. This allowed retail traders and small traders a chance to begin trading currencies with small initial investments and greater flexibility; leading to the many factors that have made the Forex market so admirable today.
Each forex broker should be regulated by a legal institution and should supply all the necessary components Forex trading requires. In order to find out which broker suits a trader most, there are ways to do this online by researching through each broker’s website.
So what do you need to be prepared for once you have chosen a broker?
A trader must be ready for certain measures when finally settling with a broker. Regularly by law, brokers demand certain information off a trader who is willing to trade with them. To open an account, the trader needs to present information such as name, phone number, home and email address, birth date, occupation and so on, as well as financial information and identity references such as a Social Security number, a passport number or a tax identification number. Brokers require this personal data so as to verify that you will not bring fraudulent trading of funds into the company.
A trader who is ready to open a live account and has verified that he/she knows the market thoroughly will be asked to place an initial investment. Forex has become such an attractive venue for trading for one other reason other than the benefits stated at the start of this article. Entering the Forex market simply requires a low initial investment. This is a great plus point for small time traders or beginner traders who begin with a generally low initial capital. Forex is suitable for all classes of traders whether they are middle class or high class unlike other markets where the initial fee is exceedingly high.
The initial investment that most Forex brokers demand can be anything from $5 to $10,000. A trader does not need to invest millions simply to profit with Forex. Any trader in any economic position has the ability and access to start trading with Forex, as long as he/she has the sufficient knowledge of the market and a computer or device with internet connection. It is important to keep in mind however that placing small initial investments does not promise high profits in return. The more funds a trader deposits, the more assurance there is of gradually winning high profits over the course of several trades.
Nevertheless, a trader must be able to control and professionally manage his funds. It is warned by many brokers before you begin trading that Forex can cause the investor to receive a heavy loss. It is wise to not place too much funds in one trade as it involves a vast amount of risk. It is advised to simply place the amount you can afford and will not fall back on.
There are plenty of major and commonly traded currencies that are used in the Forex market. Some of the most popular are the US dollar, the Euro, the Canadian dollar, the Australian dollar, the Japanese Yen, the New Zealand dollar and the British pound. These currencies are the most commonly traded currencies in the market.
A novice trader must keep in mind that in the Forex market, he/she will not see the full name of the currency. Instead, he will see a currency stated in its own symbol. For example, the US dollar will be seen as USD or the British pound will be seen as GDP. At first it will seem difficult to memorise these currency codes however, overtime with plenty of research and studying, the codes will become easy to interpret. Here are some others to recognize:
Every trader’s profit depends on the exchange rate of various currencies. With the smallest investment, a trader can make a decent amount of profit.
Trades can only be executed with currency pairs. A currency pair is expressed for example as USD/JPY. This trade is using the US dollar and the Japanese Yen.
The quote of a currency pair signifies the value between the two currencies. For example, a quote expressed as 1.0000 / 2.0000 means that your 1st stated currency is worth two times as much your 2nd currency. In a Forex quote, the first currency is called the base currency. The quote will always represent the value against 1 of your base currency.
Identifying whether or not a trader has made or lost profit means tracking the pip change in a currency’s value. A pip (percentage in point) represents the amount a currency has increased or decreased compared to another currency.
Example: If a currency pair’s value is written as 1.0001/1.0004, this would point out a 3-pip spread. This is because of the 3 number difference of the fourth decimal place. With most currency pairs’ the value is identified by the fourth decimal place, except for USD/JPY currency pair. The USD/JPY pair always represents the change in value by the second decimal place for example, USD/JPY 1.01/1.04. This is still a 3 pip spread as the pip is always the last digit on a quote.
Leveraged finance was used when the Stock Market crashed in 1929. Leverage was able to save the market and was helpful in stabilizing the economy.
Using leverage in Forex trading means borrowing a specific amount of cash from your broker in order to proceed with a transaction. This widely used aspect of the Forex market is also known as trading on margin and is a successful yet risky method to magnify your capital. Leverage enables the trader to trade with bigger amounts of funds than he/she is actually spending, determining a success in gaining more money or unfortunately losing a quantity of money. Leverage is a ‘Double-Edged Sword’.
A trader is advised to practice on a demo account before deciding on what leverage to take to a live account. A trader may consider the risks taken are thrilling and worthwhile. But a trader must be cautious as they could experience the bad side of leverage, causing a trader to receive huge losses. A trader with lower leverage would not have been lost such a high amount of funds than someone who placed the exact same trade with a higher leverage.
Practice, practice, practice!
Like anything else that someone is new to, it is important that you gain enough understanding about what you are getting yourself into. The Forex market is fairly profitable and can be rather intriguing at times. However like any other business, it carries risk and in order to avoid risk it is best advised to practice using a demo account as much as possible before trading with a real account.
There are several online services as well as simulated Forex accounts that are obtainable for novice traders. Through an online broker, you can purchase a Forex demo account that enables a trader to practice in the market with virtual money. A novice trader can try out different trading strategies and systems with no risk involved so as to find out which type suits them best and even discover if the Forex market matches their preferences. The trader can see what aspects and trading methods to avoid and which ones to use before entering the real Forex market.
It is vital that you speculate and fully read up on the broker’s website as well. We advise this because there are several online brokers that offer demo accounts for a certain period of time and then they will immediately transfer you to a start trading with a live account even though you are not prepared. Therefore make sure that you sign up with a broker that offers an unlimited demo account trading time.
It is advised however not to use a demo account for a long period of time as it will get the trader too comfortable with this form of trading. Demo accounts do not involve all the factors that come along with Forex trading, such as the emotions that come with losing or winning. This is because you are trading with virtual money, not real money, and that influences your trading mentality greatly.
There are many factors which could affect the Forex market and your trades in the market. Like every other market, many issues arise that change the direction of an instruments price. Every trader dedicates his time and money to Forex, so it is crucial you are aware of the factors affecting the market and it is critical that you fully become acquainted with them.
Supply and Demand
Supply and demand is an underlying factor that can get disrupted by many factors in the Forex market. In the economic world today, there are many constant variables that are changing, for example, oil and the demand for it. Supply and demand is being extremely affected due to the many controversial issues around the world such as national disputes, political affairs or war conflicts. Each of these factors over time alters the function of Forex as currencies are being affected by them.
Unnecessary purchase of products
When a nation has an extensive amount of necessities to trade for the citizens and society, other countries are in more demand, allowing that nation to generate a greater budget. A simple example of such necessities is technologies or innovations in existing products. A large quantity of necessities in a country can also have its disadvantages. Sometimes there is an unnecessary want for products that are not needed by the country. This leads the country to waste money over things that are not required. Eventually the country’s economic status could be in trouble causing its currency and your Forex trades to also suffer the drawbacks.
Most countries practice the process of ‘flight to quality’. This is used when a nation strives to survive in today’s trading network. For instance, Middle Eastern countries obtain a lot of oil, although in general they are poor countries. In order to battle through the deficit spending and lack of other resources, Middle Eastern countries demand a high price for oil so as to maintain their economic status.
Where there is an increase in inflation, citizens of countries undergo difficult purchase abilities while the nation’s currency will decrease in value. Because of inflation, interest rate and leverage financing has become so commonly used.
Overbought and Oversold
‘Overbought’ and ‘Oversold’ are terms used when a country buys more of a product or sells more that can either help a nation’s economy and currency or cause terrible consequences for it due to improper thinking.
Forex is a wide spread form of investment and can land traders huge profits and successes. Forex trading has turned many individuals into wealthy businessmen or investors; there is a vast amount of renowned people that are involved with Forex trading. There is no myth of becoming a successful trader; everyone has the chance to earn a very profitably return…
Warren Buffet: Buffet is known as the world’s richest man. Buffet has invested over $20 billion in several currencies in the Forex market. His revenue is acknowledged to have over $100 million in profit as a result from Forex trades.
George Soros: Soros is an eminent financer that also executes trades with Forex. Allegedly, he generated over $1 billion in profit from one single day of trading back in 1992. Soros supposedly gained over $7 billion over three decades of trading with Forex.
Yes, Soros’s types of trades are rather rare in Forex however it goes to show how profitable Forex trading can be for an investor if you are lucky or skilled enough.
Involving yourself with the Forex market simply does not only require knowledge about trading. Trading with Forex requires determination, patience, skill, experience, time, and practice. Of course, a trader needs to have the full familiarity with the Forex history and technicality but there are other aspects that guide a trader towards experiencing greater profits and fewer losses. Practice makes perfect for anything in life therefore demo accounts are a relish for determined Forex traders. A person must have the patience for Forex and determination to achieve great prosperity. Without the experience that the most successful traders have such as Soros and Buffet, profits will not come as easily as expected.
Any type of person is able to trade with Forex and it is a quick and thrilling way to earn extra capital or even as a hobby on the side. The Forex market is today recognised globally as the most popular form of financial investment. It will continue to expand and prove to people that it is a fine way to produce extra cash in a stable and safe manner.