A Brief Introduction into Forex Trading

Written by LWM Staff. Posted in Managing your Money.

A Brief Introduction into Forex Trading

Foreign exchange, more commonly known as forex, is the global currency market. It’s where all the world’s currencies are traded and is the largest, most liquid market in the world — running 24 hours a day, 5 days a week. In fact, the average daily trading volume in the forex market easily exceeds $5 trillion, with individual people, businesses, and countries all participating.

If you find the sheer size of this market a little intimidating, know that the mechanics for earning money on forex are simple enough. Inter Trader explains that forex trading entails simply buying a currency at one price and selling it for a higher one in order to make a profit. In fact, you may have already participated in this market at one point or another without knowing it. That's because simply converting your dollars for euros or any other currency when you go abroad is one way to do so.

Like all investment opportunities, forex has its own set of pros and cons. Mastering its mechanics and rhythms can be difficult at first, but it is a profitable prospect for anyone who is willing to learn. That said, here are some of the basic things you need to know about forex trading:

Currencies always trade in pairs.

Every forex transaction involves exchanging one currency for another, as each currency has a particular price as measured against others. According to a guide on The Balance, the forex market uses symbols to refer to specific currency pairs. Because the euro is symbolized as EUR and the US dollar is USD, their pairing is shown as EUR/USD. Other symbols include GBP for the British Pound and JPY for the Japanese Yen.

Each forex pair will have a market price.

Market price refers to how much of the second currency it takes to buy one unit of the first currency. When it comes to market pricing, you need to understand a few terminologies. A pip, for example, is an acronym for Point in Percentage, referring to the fourth decimal place in a currency pair. How much each pip costs is called a pip value, and although these might seem like small movements, they can easily add up — especially as you trade larger and larger amounts.

FXCM provides a simple example in its article ‘What is Forex’ to illustrate this phenomenon. Say, for instance, that 1 GBP is equivalent to 1.19 EUR on Monday and rises to 1.20 EUR on Tuesday. This tiny change can be applied to a 10,000 EUR trade and result in a 100 EUR profit or loss — depending on which currency you started out with. Remember that these small movements determine just how much of one currency you'll need to buy or sell another, thereby governing how you make a profit in forex trading.

Prices in the market are always changing.

That said, there’s no easy way to learn about forex trading than watching how the actual prices move in real time. Experts would even advise you to place some trades using fake money through a paper-trading account in order for you to practice trading without any real risks.

It also helps to study why currencies move up or down to better understand the currency market and make more accurate predictions. Market Review points out how factors like inflation, global trade, economic uncertainty, and other global events can easily send currencies skyrocketing or free-falling. And as with any other skill, seeing and understanding these trends will take time and patience.

You need a few basic tools.

For starters, you should have a computer that has a fast processor and enough memory that can support your trading program without crashing. You don’t want it dying on you while you’re in the middle of trading. A cable or DSL internet connection is necessary as well, along with a trading platform of your choice. This will highly depend on your trading style, but your broker might suggest a few to help you get started.

Currency trading isn’t for everyone, especially not for the faint-hearted given the rapid movements of the market. But it can be a worthwhile endeavor — especially if you're looking to improve your finances. Some of our suggestions here on Living Well Magazine include contributing more to your retirement account, making more efforts to reduce your debts, and in this case, trying your hand on new sources of income. 


Prices in the market are always changing.

That said, there’s no easy way to learn about forex trading than watching how the actual prices move in real time. Experts would even advise you to place some trades using fake money through a paper-trading account in order for you to practice trading without any real risks.

It also helps to study why currencies move up or down to better understand the currency market and make more accurate predictions what influences forex pricing? Market Review points out how factors like inflation</a>, global trade, economic uncertainty, and other global events can easily send currencies skyrocketing or free-falling. And as with any other skill, seeing and understanding these trends will take time and patience.

You need a few basic tools

For starters, you should have a computer that has a fast processor and enough memory that can support your trading program without crashing. You don’t want it dying on you while you’re in the middle of trading. A cable or DSL internet connection is necessary as well, along with a trading platform of your choice. This will highly depend on your trading style, but your broker might suggest a few to help you get started.

Currency trading isn’t for everyone, especially not for the faint-hearted given the rapid movements of the market. But it can be a worthwhile endeavor — especially if you're looking to improve your finances. Check out this article for managing your money. Some of our suggestions here on Living Well Magazine include contributing more to your retirement account, making more efforts to reduce your debts, and in this case, trying your hand on new sources of income.

Remember the number one rule on investing is never put all your eggs in one basket! 

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