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What Is Forex Trading And How Can A Newcomer Trader Get Engaged In It?
If you have seen ads on TV, on the internet or in magazines for forex trading, you may be wondering what is forex. The word forex is short for foreign exchange, which is the exchange of one currency for another on the international money markets. It is frequently shortened even more to FX.
Many people already have some experience of exchanging currencies when they are going to an other country for business or on vacation. You probably recognize as well that the banks are regularly changing money for businesses who have an import from or export to foreign countries. Even so, an estimated 70%-90% of currency transactions are speculative. This means that the person or institution making the exchange has no plan of taking delivery of the currency that they have ordered, but wants to trade it back at a profit. This is foreign exchange or currency trading.
Most of the world's currencies no longer have a fixed exchange rate, so their values or prices are constantly fluctuating. When a land is experiencing an economic boom its currency value will in most cases be strong, or high. When a country has an economic slowdown, its currency will usually fall too.
Since small changes in exchange rates are happening every minute to each currency, there is a lot of potential for foreign exchange traders to make money by buying a currency whose price is rising in exchange for one whose price is dropping. Unlike with other securities, you are always dealing with a pair of currencies because you need to give money in one currency to get it in another. Each currency is denoted by three letters and the major pairs will look like this: EUR/USD (euro/US dollar), GBP/JPY (British pound, Japanese yen) etc.
Unlike stocks of course you will not receive any dividends on a currency position. You have to act on rising and falling price movements or economic and financial news to decide when to buy and sell. You then close the trade by exchanging the opposite way and if the market has moved far enough in the direction you expected, you will end up with a profit.
Until nowadays the market was entirely in the hands of banks and financial institutions with large investment funds but the development of the internet has meant that much smaller investors can enter the markets via their home computer.
You need a broker and there are several who cater to the smaller trader by providing mini forex trading accounts so that you may start up with just a few hundred dollars. A larger starting fund is recommended. Like all speculative trading, this is a risky type of investment so you should only be trading with money that you do not need for other purposes. Luckily, most brokers offer free virtual accounts where you can learn trading skills by practicing in demonstration mode before you ever risk a real cent.
Besides practicing on a demo account, what can be extremely useful is using forex signals in your trading. Forex signals are basically price forecasts and trading recommendations from a currency market expert or a professional trader. There are many forex signal providers available online. But always check the track record first, as only reliable forex signals will make you money, not losers.
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