Trading On The Forex Market: The Basics

If you are looking for a new skill to try your hand at this January, or a new business to move into, Forex trading could be a great option for you.

Forex trading is a type of trade which involves currency pairs, and it is the largest market in the world, which trades over $5 trillion every single day.

If you fancy trying your hand at forex this year, here are some facts for you to know.

What is Forex?

Let’s start simple; what is Forex.

Forex is an abbreviation of the words ‘foreign exchange’ and it is a type of trading which uses currency. The act of trading currency on the financial market is the oldest form of trading and is also the biggest in the world.

Although most of the participants of trading are banks and big firms, there are also small companies and individuals who trade every day and make a good living from it.

Exchange Rates

The main concept behind Forex trading and the reason why we trade currency at all is exchange rates.

Exchange rates are something which you will have heard of and likely observed when going on holiday abroad, but not a lot of us really know what exchange rates really are and why they exist.

Exchange rates go back to the 1800s when people used to trade gold and silver for commodities. However, since the world isn’t all equal, some areas had more gold and silver than others, and this high abundance in certain areas meant that the value was lower due to less demand.

Imagine there are 3 people. Number 1 has 1 apple, Number 2 has no apples, and Number 3 has 5 apples. If Number 2 wanted to buy an apple from the others, person Number 1 would charge more for it because that’s the only apple they have. This is the same thing which happens with gold and silver.

How To Trade

Trading currency is of course always going to be a complex job and one which requires some research and practice. It can be helpful to look into algorithmic trading and demo accounts when you start out to limit your risk and make sure that you are able to make the money you want.

When you open trade on the financial market, you’ll make a decision of whether to buy or sell one currency in a pair. For example, if we look at the value of USD and GBP at this current time, you will know that the value of GBP keeps decreasing, meaning that the relative value of USD is increasing.

In this instance, you would want to buy USD and wait for the value to increase before selling it for a profit. When you are ready to close a deal all you need to do is the opposite of what you did to open it. So if you opened a deal buying USD, close it selling.

Creating Orders And Closing

You can also make orders for your trades which will allow you to limit losses and reduce risk.

A stop loss order is a value you can choose as the minimum, and when the value of your stock reaches this minimum the stock will close to limit any further losses.

There are many other things you can do to ensure successful trades and a course can be handy to see how these work.