Forex markets have become one of the most popular options for rookie and veteran traders alike in recent years. The relative simplicity of forex trades makes it ideal for those looking to find their feet in the financial world, although, as with all markets, forex doesn’t come without its risks. This guide will help you determine all that you need to know before beginning to trade in forex markets.
What is forex?
Forex is short for ‘foreign exchange’, while you might also hear forex trading referred to as ‘currency trading’ or ‘FX trading’. Fear not, as they all ultimately mean the same thing: conversion between currencies. If you’ve ever traveled to a different country and needed to obtain the local currency, you’ve already experienced how forex markets work. You may have needed to convert dollars to euros ahead of a trip to France, only to find out that your money is worth less on your return to American soil.
That demonstrates just how quickly markets can change, although there’s not much you can do about it during a vacation. Forex traders work in exactly the same markets as holidaymakers but, rather than being beholden to a certain exchange rate, look for opportunities across a range of currencies to profit from trades. The core idea is to purchase currency at a low price and sell it on for a profit, which is the same principle that underlies the practice of index trading.
Why should you trade in forex markets?
These markets are particularly suitable for part-time traders who are looking to integrate speculation into their usual routine, as there is no centralized hub facilitating forex trading. Forex markets are open 24 hours a day during the week to cater for the working days of different time zones. If you know that you can always allocate a specific hour or two each day, you can focus on the markets that are open at convenient times for your schedule.
There are always traders looking to buy and sell at any given moment. This ensures that the forex market retains high liquidity, therefore remaining attractive to investors looking to make a profit. A frequently cited forex figure is $5 trillion, as the average daily trading volume of forex markets exceeds this total. No other market comes close to such a high level of daily liquidity, which means that there are ample opportunities for traders to find value.
What big decisions will you need to make?
The potential volatility of forex markets is both an advantage and a drawback. Volatility provides an opening to generate significant profits from a small investment, due to a sudden fluctuation in a currency pair. However, what goes up can also go down. Be clear about how much you are going to set aside for forex trading and try to remain levelheaded through the ups and downs – there will be both.
The volatility of markets also means that there are times where you will want to act quickly to capitalize on a swing in value. It is vital to use a forex trading platform that is easy to use and allows you to make your moves with minimal fuss. Take some time to find the best forex broker for beginners, as different brokers will offer different bonuses and benefits for users. Reading reviews of brokers will help you establish which platforms can be trusted to deliver a reliable service.
How does a forex trade work?
Currencies are always traded in pairs. There are major pairs which consist of the world’s most influential currencies (GBP/USD, USD/JPY, EUR/GBP), with these markets generating higher liquidity. Emerging currency pairs and exotic pairs include currencies that are less commonplace in forex markets. While minor pairs can deliver trading opportunities for those with rich knowledge of niche markets, the lower liquidity means that beginners are better served by sticking with major currency pairs.
Here is an example of a forex trade, using the GBP/USD currency pair:
You can look at the histories of each currency to determine whether there are any patterns to be found, whether certain currencies make recurring rises and falls (or vice versa). The most important thing to remember is that forex markets are inextricably linked to global events. Political developments and social changes should be keenly followed before and during forex trades.
Market sentiment can also play a huge role. Sometimes, the anticipation of an event happening can be just as influential as the event itself, with traders pre-emptively acting off the back of popular expectation. There are many complicated factors in play that surround forex markets, but beginners can quickly become familiar with the trades themselves.
One final piece of advice for beginners: use a demo platform first. When you’re looking for the best forex brokers, see what educational services they provide. Using a demo platform gives you a risk-free environment for you to hone strategies and learn how the markets work. Once you’re confident with demo trades, you’ll be ready to join thousands of forex traders in the world’s most popular market.