What is forex trading and is it right for you?
How does trading work in the forex market?
Forex trading is always conducted in pairs where one of the currencies is the base and the other one is the counter currency. Consequently, despite the fact that two different currencies are traded in a single forex transaction, the goal is to predict the movement of the base currency of the pair against its counter.
The base currency which is also considered the basis of the transaction is the first currency you encounter in a currency pair. Therefore, a forex trader who aims to trade the EUR/USD pair, is hoping for the exchange rate of the euro (base currency) against the U.S dollar (counter currency) to go up or down in order to realize a profit.
Put simply, a forex quote of EUR/USD = 1.1199, means that 1 EUR is equal to 1.1199. This is the exchange rate that you need to pay attention to and be able to predict whether it’s going to rise or fall.
In any given forex trade, you only need to select the currency pair you are going trade, and whether you will be buying or selling. This is because, you can sell the currency pair if the exchange rate is dropping and still make a profit from the movement.
In our above example, if the exchange rate increases, it effectively means that the euro is gaining ground against the dollar and its value is going up. Conversely, if the exchange rate starts plummeting, then the dollar is gaining the upper hand and becoming stronger than the euro.
As already mentioned, however, both scenarios can be proven profitable for forex traders as long as they buy the EUR/USD pair when the exchange rate is going up or sell the pair when the exchange rate is moving downwards.
How does a currency become stronger?
Forex trading comprises currencies from countries across the world which makes it quite challenging to make accurate predictions on future movements.
If you want to find insights into what drives currency movements, you need to look at the health of the country’s economy, the political climate and the monetary policies of its central bank – all these are important factors that may affect a currency’s short-term and long-term performance.
Central bank announcements on interest rates, for example, are particularly notorious for impacting currency exchange rates. If for example, the Bank of England decides to increase interest rates, foreign investors will be enticed to invest into the British economy to take advantage of the higher rates. This will boost the value of the pound and therefore it’s a good indicator for forex traders to buy currency pairs where the GBP is the base currency.
How can a currency become weaker?
A currency’s exchange rate can plummet as a result of social unrest, political instability or economic announcements or reports that don’t provide a strong outlook. Market sentiment is quite sensitive to reports and data and when these are disappointing, they tend to cause a panic as investors try to move their money to less risky investments.
Terrorist attacks, riots or even natural disasters can impact a country’s economy severely flagging it as risky to outside investors who prefer more stable economies to invest their capital.
A country isn’t that different from a company in this regard; if the company is doing well, investors will flock to buy its stock which will rise in value due to the increased demand and the same is true for a country’s currency. If the country is doing well in terms of employment, manufacturing and trade, then it will draw more investors to buy its currency.
Thankfully, when trading forex, even when the exchange rate is declining there is an opportunity to profit from the market. The key is able to predict the movement accurately and close the trade before the markets starts bouncing back, which always happens eventually.
Is forex trading a good investment for me?
The forex market offers incredible benefits to traders and is one of the most accessible and profitable financial markets. However, traders should be aware of the risks as well. Currency exchange rates are quite volatile and unpredictable at times, which is why it’s so difficult to achieve consistent results.
Patient investors who are interested in a market that works around the clock, has limitless opportunities to profit at any given moment while offering competitive pricing and favorable trading terms, will definitely find that it’s more than worth their time to master.
Forex beginners can also take advantage of trading on a demo account where they can trade under real market conditions, but with virtual money and therefore no risk at all. This way they can familiarize themselves with the trading platform and the market’s movements without risking their own money.
Register now to start your forex trading journey today!