You may have already heard of Forex trading. This is the foreign exchange market and it's where you can invest in currency pairs. You are essentially predicting whether a currency will increase or decrease in value against another selected currency.
This was previously a closed market for the average investor, but the Internet has enabled everyone to get involved in this high-liquidity fast-paced market.
If you prefer to have your finger on the pulse at all times, Forex trading is for you. With $1.9 trillion traded every day, this is by far the biggest market in the world.
Trade 24′s senior analyst, David Becker--are trading platforms keeping up with technology?
"Trading platforms who are in this business for the long run have to stay up with the market" says Becker from Trade 24, a UK based trading platform, "Forex Trading platforms need to supply investors with the right tools to be on top of the market and support the traders around the clock, which is not an easy task in this day and age. Unlike a stock market, you are trading 24/7 and traders need the right tools to accept their calls on the spot at any time. Currency pairs are always changing in value, regardless of where you happen to be at the time. What you are doing when you exchange in currency exchanges is investing your money in one currency and pulling it out in another currency."
"For example", he says," if you buy 100 US dollars against the Euro and US dollars' increase in value the purchasing power of those 100 US dollars has increased. This means you may be able to cash out your investment and you would gain 102 US dollars. That's the principle of Forex trading."
"The principle is exactly the same as stock trading. Buy low and sell high. The difference is this is much faster and far more volatile and therefore the Platforms need to be sensitive and responsive to the traders needs."
What is in the Exchange Rate?
The principle you need to understand is the exchange rate. This is a globalized decentralized marketplace. There are no central areas, such as in the case of Wall Street. All markets are in different locations, which makes Forex extremely difficult to defraud.
The figure you want to look at is the exchange rate. This tells you how much Currency A is worth in relation to Currency B. Keep in mind that it's always based on a one to one ratio.
What Influences Currency Pairs?
This is an open market and currency pairs can change all the time. They often change from minute to minute. There are multiple factors that come into play that determine the value of a currency. These are the factors you need to take into account.
That leads to two separate forms of analysis:
Technical Analysis - The investor reviews the latest market trends, such as previous trading prices, and makes a decision based on the numbers. This is an extremely mathematical process that can be as simple or as complex as you desire.
Fundamental Analysis - This is where you use current world events to determine where a currency may go. For example, the recovery of the European economy has led to the euro gaining in value against both the British pound and the US dollar.
A successful Forex trader uses both of these types of analysis to make a decision as to what they want to invest in.
Vocabulary and Getting Started
First of all, you have to receive a quote for each currency pair. Since currencies are always valued based on their value against another currency, this is what you have to look at. It's easier to start by looking at major currency pairs, such as the euro, dollar, and pound.
You will immediately come across something known as a lot. This is the smallest trade size available. It's usually 1,000 units of currency, but different brokers may have alternate rules on this. You have to consult with the broker first.
A pip is another aspect you need to understand. This is what profit and loss is calculated with. All currency pairs, minus the Japanese Yen, is quoted to four decimal places. If the Pound/Dollar currency pair rises from 1.6302 to 1.6307 that would be five pips, so you would have five pips of profit.
So What is Leverage and What is a Margin?
All trades are technically conducted using borrowed money. Don't let this scare you, though, you can't lose more than what you put into your account. Nevertheless, what this concept allows you to do is to benefit from something called leverage. This allows you to make trades while using only a tiny security deposit.
For example, with 400:1 in leverage you would only need $2.50 to make a trade of $1,000. In other words, now you can benefit from even the smallest movements in currency. Do beware of leverage, though, this is how you can get into serious debt.
Finally, the amount you need to put aside to maintain a position is known as a margin requirement. Think of this as a good faith deposit in order to ensure the broker maintains your market positions. It's simply a portion of your account's equity, as opposed to a fee.
What questions do you have about Forex?