What Is Forex And Why It Matters To You
Forex trading may sound like a far-off concept to people who aren’t already traders or brokers, but it’s far more relevant to the ordinary person than you might think. As the largest and most volatile financial market in the world, the forex market is responsible for a cascade of economic change that can be felt in everyday life.
What is forex trading?
Forex trading refers to a decentralised global market where all of the world’s currency is paired and exchanged with one another. It is the largest, most liquid market in the world, with trillions of transactions occurring in a single day. Most trades are made by brokers: individuals or collectives that take a look at how a currency is performing against other currencies, and buying and selling more of it as a response to these changes. It’s a constantly changing market of movement that can net people a lot of profit, but it’s also one of the riskiest investments finance-wise. In forex trading, it’s possible to make millions and lose them all in the span of a few hours.
Why does it matter to me?
To the average person, forex trading usually brings to mind many well-suited men poring over numbers and screens. In reality, forex trading impacts all parts of our lives, whether you’re aware of it or not. The most obvious area where you can see forex changes happening real-time is with currency exchanges. If you’ve ever travelled abroad, sent or received money from someone outside your country, or even purchased goods and services internationally, then you’ve contributed to the forex movement for the day. The moment your currency interacts with another currency, that’s already an aspect of forex trading.
How can I get into forex trading?
Let’s say that you want to get more directly involved in forex trading – you want to be there on the floor, getting those analyses in, developing your strategies, and calculating the best currency pairs to give you a profit. Where do you begin?
Find a forex broker
A broker acts as the middleman between you and the market, allowing them to deal with the nitty-gritty of actually realising what you want to trade on the forex floor. Always find a broker that has considerable experience when it comes to trading – anywhere between three to five years is a good start – and who has no history of non-compliance with legal regulations.
Make your account
Once you’ve found a broker, you need to set up a trading account. There are two kinds of trading accounts that you can set up:
- A demo account – which follows the movements and other changes on the forex market but doesn’t require you to make a deposit; and
- A live account – where you deposit your own capital for real-time trades
Most brokers highly encourage beginners to make a demo account before they make a live account, especially if you don’t have a lot of experience in forex trading. This allows you to have a realistic idea of what to expect when you make your live account, but without any of the considerable risks that come with it
Study the market
This is one of the most complicated parts of forex trading: understanding the market. The full list is very extensive, but here are some generalities you should watch out for:
- Local economic and political shifts in countries where your chosen currency is trading;
- Trade wars, trade deals, tariffs, and other international economic effects related to your chosen currency; and
- The performance of oil, mineral trading, energy distribution, and other commodities.
Studying the market involves a lot of paying attention to things that may not seem like they impact the economy at all. But since forex trading is a speculative market, anything from natural disasters to common holidays can impact the performance of a currency.
When you’ve finally gotten a firm grasp on the market and the possible performance of your chosen currency and its pairs, then you can start trading. Most brokers will advise that you adopt a cautious approach at the beginning, even if you begin with a relatively large position. Time your trades to the trading hours of the major forex currencies (EUR/USD, USD/JPY, GBP/USD, USD/CHF), and make your analysis based on real-time results.
Just remember the cardinal rule of forex trading: don’t expect to turn a profit overnight. With such a complex, interrelated market to consider, be prepared to take your fair share of losses before getting any gains. But with enough time, patience, and study, you may just make it in the world of forex trading.