What is Forex Trading?
The word Forex is short for Foreign Exchange and refers to an international and decentralized market in which currencies are traded. The objective of Forex trading is to facilitate the monetary flow derived from international trade. Today, Forex is the world’s largest financial market, generating transactions for a daily volume of about USD 5 trillion (USD), more than all the other stock markets on the planet combined.
It is a very attractive market for investors for many reasons, including the extreme liquidity of the market. However, it is also a highly risky market for those who are unwilling to learn about the subject.
How does the Currency Market Work?
To understand how Forex trading works, it is important to know the different elements that interact in this market:
- The inter-bank market: It is represented by the Forex operations carried out between central banks, commercial banks and financial institutions.
- The retail market: Represents operations between small speculators and investors. The members of the retail market are hedge funds, companies and individuals.
- These transactions are carried out through Forex agents or Brokers, who act as intermediaries between the retail market and the inter-bank market.
- But in addition to the main players, the foreign exchange market also influences companies that trade in foreign trade, since the sale of their products makes the price of one currency with respect to another currency in the country of operation.
The operations of these actors mean that the price of one currency relative to another can rise or fall.
It is important to mention that the price of foreign exchange varies by the interaction between supply and demand. It is for this reason that, if a country increases the amount of dollars available, the price of the dollar will have a downward trend with respect to the currency of the country.
Example: When the international price of oil lower dollar means that countries that export oil and sell in dollars, will receive fewer this currency, causing the dollar to rise (because of shortages) to The local currency.
How do you make money on Forex Trading?
Now that you understand how the Forex market works, you will surely be interested in knowing how to make money on it.
Suppose you have $ 2,000 and you are interested in buying Euros and that the current exchange rate is 0.89, i.e. for every dollar you receive 0.89 Euros (or, for every euro you receive 1,118 dollars). In total, for this transaction you will receive 1,780 Euros. After a month, things happened in the market that brought the price of the euro against the dollar and now for every euro you get 1.25 dollars, that is, when you sell your 1,780 Euros you will receive 2,225 dollars, obtaining a profit of 225 Dollars in your transaction compared to the initial $ 2,000.
Now, the foreign exchange market is so dynamic that all the time the price of currencies is fluctuating, allowing investors to make profits in shorter periods of time than in other financial markets.
As you can see, Forex is a high volatility market in which you can get a high return in a short time, but, in the same way, you can lose all your investment quickly if you do not train and prepare correctly. The recommendation is that you take the time to learn the basics of investing in the forex market so you can determine if it is the option you are looking for.
How to invest in Forex Trading?
In order to trade in this market, you must open an account with a Broker or Forex agent, which will give you access to a platform through which you will conduct the negotiations. Then you can decide whether to trade directly, or if you give a trader of the entity the responsibility of trading (managed account).
How much money can I start to invest in Forex Trading?
The truth is a question that must be analyzed from different perspectives.
On the one hand, in Forex you can invest from very small amounts, but logically the profits will be minimal, so it would be worthwhile to set goals and thus determine how much money to start to get the expected results.
It is also important to review the terms and conditions of the blocker we have chosen, because some of them establish minimum figures and limits when making deposits and transactions.
Finally, you should consider your budget, because the currency market, like any other market, represents a risk and you must determine how much you are willing to risk on your investments.
Tips to start investing in Forex Trading
If you are already determined to make your first investments in Forex, these tips will help you start with “right foot”:
- If you have never invested in Forex and want to practice a little, take advantage of the demo accounts offered by the different brokers to operate with money fictitious, so you can better understand the dynamics and operation of the market.
- When choosing your broker, read the terms and conditions in detail, you will know how much you will be charged as commission, types of accounts that offer you, minimum amounts and limits to carry out your transactions, etc.
- Make sure the chosen broker is properly regulated.
- Learn all you can about financial issues. It’s true some brokers offer managed accounts, but if you really want to be a great investor you need to educate yourself and understand how the Forex market works.
- Learn how to manage information and make informed decisions. You will find information on market trends in news, through brokers, Internet and many other means, but in the end it is you who decide how to manage invest your money.
- Some of the most recommended books to learn about investing in currencies are: “Live Trading” -Alexander Elder; “Technical Analysis of Financial Markets” -John J. Murphy and “Trading in the Zone” –Mark Douglas
All right, I hope this article has clarified some of your doubts, but this is just a hint of how much there is to learn about the currency market. If you look for specialized pages in the subject, surely you can learn everything you need to be a successful investor.