Why invest in Forex?
Trading with foreign exchange is seen as one of the purest ways to enjoy playing with macro-economic themes as currencies usually move together while changes come from the economic conditions of the country. What makes forex trading so exciting is that, no matter what the economic circumstances, there will always be opportunities to profit in the marketplace. As such, many investors have moved large portions of their investment portfolio into the forex market.
There is, however, no “one size fits all” strategy that will work in the forex market: making it absolutely vital to analyse the market in-depth and keep constantly on top of its various movements and trends.
What is Forex Trading?
Often abbreviated to FX, forex is short for foreign exchange. The forex markets work on the idea that the currency of one country can be exchanged for another based on a specified price on an over-the-counter market. Of course, the values of currencies are constantly changing based on a host of factors such as the economic state of the country and political trends. As such, forex traders attempt to make estimates on whether a currency will rise or fall compared to another. Whenever you are able to make a prediction successfully, you will benefit in the form of a financial return.
Where is the Forex Market?
Many people assume that there is a physical forex market. However, this is not the case. The forex trading market operates 24hrs per day based on the movements of banks, individuals and global businesses.
One of the reasons for the popularity of the forex trading market is that it is constantly moving. It begins in New Zealand where trading starts in Wellington; before moving to Japan and Singapore for Asian trade; and then on to Europe, where London is the central base. North American trade concludes the day with New York City as the base. Currency prices are therefore constantly changing throughout the day presenting opportunities for traders to enjoy profits.
How does Forex work?
With the Forex markets, traders can take the positions they want, when they want, but there are many factors to consider.
In every case of forex trading you are effectively placing the value of one currency against the value of another. A base currency is compared to a counter currency with the base highlighted on the left of the currency pair in each case. The idea is that traders make predictions about the likelihood of the base currency leaping in strength compared to the counter currency. When the base is likely to increase in strength then the pair should be bought; however, when it is likely to fall then the currency should be sold. This is how profits are made. Of course, failure to make these moves in time can lead to significant losses. You don’t need to trade significant amounts either: a lot can be traded from as little as 1,000 units.
The idea behind currency leveraging is that it allows an individual to keep control of large trades: and savvy investors can potentially use it to magnify returns (although losses can also be magnified when leveraging is used).
As an example, if you had a 2:1 leverage then you could buy $1,000 worth of currency with $500 in your account. Some traders offer leverage of 50:1, 100:1 and 200:1 depending on the regulations. Effectively, high leveraging is one of the main factors that sets aside forex from other markets.
Stop and limit orders
With the forex market trading 24hrs a day, it can be useful to take advantage of stop and limit orders which allow you to open and close positions when certain points are reached: even if you are not actively trading at the time.
In the case of limit orders, the idea is that the order is executed at a better price compared to the current market price. So if forex trades drop to a certain level, the limit order comes into effect. Meanwhile, a stop order is executed at a price that is worse than that of the prevailing market figure. Many forex traders place stop loss orders when they open trades. Meanwhile, a stop loss is a price level which is set by the trader to automatically close an order once a certain price is hit.