Welcome to TradeOnline.Today‘s complete guide to Forex fundamentals and how to trade and profit from currencies. Forex is a very popular and exciting global financial product that gives you the chance to make large profits even if you are a beginner.
Forex, or foreign exchange, can be explained as a network of buyers and sellers, who transfer currencies between each other at agreed prices. Forex is the method for individuals, companies, and central banks to convert one currency into another currency. If you have ever travelled to another country, then most likely you have made a forex transaction.
You may think that currency conversion is only for travelers, but the vast majority of currency conversion is done with the goal of earning a profit: online trading. The amount of currency converted every day can make price movements of some currencies extremely volatile. It is this volatility that can make forex so attractive to traders. When there is big volatility, there is a great chance for large profits.
What is the base and quote currency?
A base currency is the first currency listed in a forex pair (eg. USD/JPY), while the second currency is called the quote currency. Forex trading always involves selling one currency in order to buy another, which is why it is quoted in pairs. The price of a forex pair is how much one unit of the base currency is worth in the quote currency.
Each currency in the pair is listed as a three-letter code, which tends to be formed of two letters that stand for the region, and one representing the currency name. For example, GBP/USD is a currency pair that involves buying the Great Britain Pound and selling the United States Dollar.
To keep things ordered, the forex industry splits pairs into the following categories:
Major Pairs – Seven currencies that make up 80% of global forex trading. Includes EUR/USD, USD/JPY, GBP/USD and USD/CHF
Minor Pairs – Less frequently traded, but these often feature major currencies against each other instead of the US dollar. Includes: EUR/GBP, EUR/CHF, GBP/JPY
Exotics – A major currency against one from a small or emerging economy. Includes: USD/PLN, GBP/MXN, EUR/CZK
Regional Pairs – such as Scandinavia or Australasia. Includes: EUR/NOK, AUD/NZD, AUD/SGD
What moves the Forex market?
The forex market is made up of currencies from all over the world, which can make exchange rate predictions difficult as there are many factors that could contribute to price movements. However, like most financial markets, forex is primarily driven by the forces of supply and demand, as well as the following major factors:
Money supply is controlled by central banks, who can announce measures that will have a significant effect on their currency’s price. For example, sudden injection of more money into an economy can cause its currency’s price to drop.
Commercial banks and other investors want to put their money into economies that have a strong outlook. So, if a positive piece of news hits the markets about a certain region, it will encourage investment there and increase demand for that region’s currency.
Likewise, a piece of negative news can cause investment to decrease and lower a currency’s demand and subsequently, price. For example, if US unemployment increases, the USD can drop.
Market sentiment, which is often in reaction to the news, can also play a major role in driving currency prices. If traders believe that a currency is headed in a certain direction, they will trade accordingly and may convince others to follow suit, increasing or decreasing demand in large volumes.
How do I make money from Forex?
Now you have the basic understandings of forex, why people trade forex, and how to trade forex. First, we need to understand all of the risks that prevent you from making money. Truly understanding the following risks will help you make money in Forex.
1. Asymmetric Risk: Experienced forex traders keep their losses small and instead they aim for large gains when their investment proves to be correct.
Most unsuccessful traders, however, do it the other way around. They make small profits on many positions but then they hold on to a losing trade for too long, resulting in a substantial loss. This is very dangerous, so please keep the mindset of an experienced trader.
2. System Malfunction: Imagine your stress if you have a large position and are unable to close a trade because of a platform malfunction or system failure at a mediocre broker, which could be anything from a power outage to an Internet overload or computer crash.
Before you open a Forex account, you need to visit our page of Recommended Forex Brokers so that you can start your trading journey with a trusted and secure platform.
3. Currency Volatility: Remember the Swiss franc crisis? High levels of leverage mean that money can be depleted very quickly during periods of unusual and high currency volatility, such as the Swiss franc crisis in 2015.
Thank you for reading this detailed introduction to Forex. To begin your trading experience, we recommend you do one of the following:
1. Check out TradeOnline.Today’s articles on economic news, Forex strategies, and other educational materials.
2. Visit our page on Recommended Forex Platforms and decide which broker is the best fit for you. Forex is a very competitive industry, and so all brokers usually offer very good trading conditions and also excellent customer service. When you create an account, there is no pressure to deposit money right away. You can create an account and then chat 24/7 with their customer support right away, as well as using their free demo accounts. They will then guide you to all of their trading tools and educational materials. When you feel comfortable, then you can make your first deposit, anywhere from $1 to $100 to $1000.
Forex is simple, and it should be simple even for beginners. Good luck on your trading journey!