Foreign exchange (forex) is where investors and traders buy and sell currencies to try and make a profit. To maximize their earnings in forex trading, traders buy currencies for as low a price as possible and then sell for higher prices. Essentially, when you bet on a currency to go up, you’re also betting on another currency to down.
Currencies are traded on the forex market, which is the largest financial market in the world. It’s open 24 hours a day, Monday to Friday and trading happens continuously. It’s a highly liquid, decentralized market where rates are determined by the buyers and sellers through supply and demand.
The Basics of Forex Trading and Investing
All of the world’s currencies are traded in the forex market. However, there are eight currencies which are the most traded because of the economic strength of their respective countries. These include:
- US dollar (USD)
- Canadian dollar (CAD)
- Australian dollar (AUD)
- New Zealand dollar (NZD)
- Euro (EUR)
- British pound (GBP)
- Swiss franc (CHF)
- Japanese yen (JPY)
All currencies have a corresponding value against one another, as shown by the currency pair. For example, the US dollar paired with the Euro would be quoted as USD/EUR 0.89. In this example, one US dollar is equal to 0.89 Euros. The base currency is on the left side of the forward slash, while the quoted currency is on the right. Hence, the number represents the amount needed in the quoted currency to be equivalent to one unit of the base currency.
Similarly to all markets like stocks and bonds, forex markets involve bid and offer/ask prices. The bid price refers to what buyers are willing to pay for a specific trade. While the offer or ask price is the price that sellers are willing to sell for. As always, offer prices are higher than bid prices. The difference between the two is known as the bid-ask spread. This spread is quantified in pips; a pip is the last decimal place of a price quote; one pip usually equals to 0.0001 or 0.01 depending on the pair. It is also what the broker or market maker earns from the transaction.
How to Earn in Forex Trading
There are several strategies you can use to make money with forex trading. Ultimately, the best forex strategy for you depends on how much time you can dedicate to trading and how much risk you are willing and able to take.
Because of how fast the market moves, short-term strategies are usually implemented within a day or less. In general, you can use technical analysis, and market trends, and find an upward movement in the forex charts. Once the bullish trend reverses, it’s a good idea to exit the trade to reduce your losses. Forex investing strategies are beyond the scope of this article but we’ll explore them soon.
Long-term strategies, on the other hand, are implemented for a much longer period of time. Because a currency’s value is proportional to economic growth, you invest in currencies of countries with strong fundamentals.
Like the stock market, the forex market is unpredictable and you gain an edge by applying technical analysis and fundamental analysis in your trading. One method is not necessarily better than the other, and using both allow you to be a well-rounded trader.
Which Trading Platform Suits You
With advances in financial technology, you can now trade forex on your personal computer or even your phone. There are a lot of platforms to choose from, each with its own set of features and capabilities. However, the best forex trading platform is the one that meets all your requirements and allows you to do more trading instead of tinkering.
The Bottom Line
Like with any form of investing, it’s easy to have misconceptions and doubts. But as this article shows, it’s actually straightforward. As long as you’re willing to learn forex investing and all the related topics, you’re bound to find trading strategies and techniques that work for you.