Forex is one of the biggest markets that currently available for traders as well as people who would like to earn some extra money on part-time basis. Also referred to as currency market or foreign exchange, this method of trading offers high liquidity, a competitive as well as a 24 hour market.
When it was first created, it was mainly meant to cater for the supply and demand of currencies for both banks and financial institutions. It has not changed that much as of now but it has experienced tremendous growth in size as well as accessibility.
Just like cars, computers, stocks and bonds as well as many other goods and services that are traded on the market, currencies are also traded in an open market.
The value of the currency fluctuates based on the variation in the demand and supply. If there is an increase in the supply or a decrease in the demand of a certain currency in the market, the value of that currency will fall. A decrease in the supply or an increase in the demand of the currency is going to cause the value of the currency to rise. Back in the days up to about the late 1970s, retail investors used to trade forex through banks.
A rapid increase in the trading volume started seeing a shift on how currency is traded. The investors gained exposure to new and more sophisticated trading platforms that were readily available.
Forex trading has since been a booming business to many. Nowadays, people can use online forex trading software, book forex as well as account managed forex. The best thing you can do if you want to be successful in this business is to take advantage of the free forex trading tools that are available on the internet.
So how exactly does forex work?
Well, currencies in forex are usually assigned a three letter code, for instance the US Dollar is USD while the British Pound is GBP. During trading, you will be doing it in pairs and therefore two currencies are paired together to form a six letter code.
The most popular currency pairs you will come across include EUR/USD, GBP/USD, USD/CHF and USD/JPY. The process of exchanging a currency for another is referred to as exchange rate. The first currency in the pair is referred to as the base currency while the second currency is known as the term currency.
If for instance you are trading the following currency pair, EUR/USD, the EUR will be the base currency while the USD will be the term currency. The profit or loss will be calculated based on the USD. If the exchange rate for this pair is 1.3123 when you are trading, it implies that for very Euro you will trade you will get 1.3123 or simply 1.31.
Forex trading usually involves buying one currency and selling another at the same time. Therefore, when you are trading with the EUR/USD pair it means that you will be buying the Euro and selling the US Dollar in the same buy as well as sell position.
The main objective of forex trading is simple. It is usually buying one currency at a cheaper price and selling it at a much higher price in order to make profit. At times, you may only get a marginal amount for every forex trade, but the currency may also rise depending on the status of the forex market.
It might be able to rise up to a point where you may be able to make six figures or more every year. Some people are actually making a livelihood out of forex trading.
Here is an example of how profit is made when trading forex. If for instance you change 1000 Euros into US Dollars at a currency exchange rate of $1.50, it implies that you will be selling 1000 Euros and in the process you will buy back $1,500 US Dollars.
Maybe it is holiday time or you just have needs that you need to spend money on and therefore you part with $1000, so you are left with only $500. If you go to change the dollars back to euros and realize the exchange rate has risen to $1.60, you are going to get only 312 pounds if you convert the $500, and as a result you will have made a loss.
For you to make profit, you will need to wait till the exchange rate goes below $1.50, for instance 1.40 to 1.00 before trading the money.
Forex is usually traded in a global decentralized market which operates through a network of banks, financial institutions as well as individual traders all over the world. These systems trade one currency against another and the forex market is not limited to a physical location.
There are also margin accounts where private investors, fund managers, retail investors, as well as brokers are found. A huge percentage of the forex transactions are usually initiated by the major pairs in the market namely USD, EUR, CHF, JPY, CAD, GBP and AUD. Other pairs usually have larger spreads and therefore are more risky to trade or require significant accounts. They are referred to as exotics.
The more interesting pairs in the forex market from which you can gain more profit are usually determined by the size of the spread as well as the value of the Pip. The EUR/USD is the best pair, followed by the GBP/USD, and then USD/JPY, and then USD/CAD, and then AUD/USD, and then EUR/JPY and last but not least, EUR/GBP.
Once you learn and master what you are doing, foreign exchange can be a great way to make money. It is a market that is open 25 hours a day and 6 days a week and you can get a huge leverage from it. There are so many sources of information and education on this business, so you can spend quality time to understand it before getting into it.
Using a demo account for practice is a perfect way of getting started since it will give you a clear picture of what to expect. You can also learn from other professionals who have already gained massive success in forex trading.