The internet has made it possible for anyone to exchange currency online and even earn money by doing it. This practice is known as Forex Trading. If you’re interested in making some extra profit by exchanging currency, the first step should be learning about some Forex trading basics.
What is Forex?
The word Forex is short for foreign exchange. It refers to the process of changing one currency into another for various purposes, such as trading, commerce, and tourism. Forex is the biggest market in the world, with a daily trading volume of $6.6 trillion.
This is because everybody can participate in this market, and you can easily get in without much capital and knowledge. You can simply to go an online exchange, like US First Exchange, and dive right in. Just for comparison, the daily trading volume on the New York Stock Exchange is about one billion dollars, and only stockbrokers can participate.
A Brief History
People have been exchanging currency since ancient times. There is evidence of coinage exchange happening in Ancient Egypt as early as 259 BC. This went on for centuries, resulting in the first international banks opened by the Medici family in the 15th century to facilitate trade and exchange currencies on behalf of textile merchants.
By the 19th century, it became clear that gold coins are becoming impractical due to their weight. The alternative was found in paper money and plain metals, but to ensure the value of the new payment methods, England has adopted the gold standard, followed by other major countries, which resulted in the creation of the Gold Standard Monetary System.
IMF started operating in 1947, and the US dollar, as the world’s dominating currency, was fixed as the price of gold. 1973 is considered to be the beginning of the modern Forex market because that’s when the state’s control over foreign exchange ended and the conditions for a free market were created.
The first online currency trading was introduced in 1990. Continuous expansion of the network and internet approachability throughout the following years enabled almost anybody to participate in forex speculations nowadays.
How Does it Work?
Forex is not a centralized marketplace. Today, currency exchange is usually done electronically between two traders from anywhere in the world, making the whole world a forex marketplace. The market is open five and a half days a week, 24 hours a day, and due to the time differences, the market is always open in some parts of the world. This forex trading hours guide will help you understand it more clearly.
Whenever you’re buying one currency, you’re selling another. That’s why currencies are always quoted in pairs. It’s very important to understand how these pairs work before you start trading. And, for the safety of your investment, you must learn about FX Hedging as well.
These pairs always show the value of one currency relative to another. The first code in a pair always represents the currency that you’re buying, and the second code stands for the currency that you’re selling.
So when a pair shows EUR/USD = 1.16, that means that it costs 1.16 US dollars to buy one euro. If you reverse the pair, you will find out how much euros does it cost to buy one US dollar.
However, you can’t expect to exchange a currency at the exact market price. You will always use an exchange service to exchange money, and while these services usually don’t charge a commission, they do create conversion spreads to gain profit. The difference between the market price and what the exchange service will charge you is called markup.
Who Can Participate?
Forex trading in the past used to require large capital. That’s why most traders in the past were multi-national corporations, countries, or rich individuals. The internet has enabled a retail market to emerge, allowing individual traders to participate through banks or brokers generating a secondary market
This means that basically anybody with a banking account and access to the internet can participate in the forex market today.
Terminology
Forex has particular terminology that you should learn before entering the market. We have listed some of the most common terms used in forex trading.
Ask
An ask stands for the lowest price you’re willing to pay for a foreign currency. It is usually higher than the bid price.
Bid
A bid in forex terminology stands for the price at which you’re willing to sell a currency. Even though it’s usually lower than the asking prices, in cases when the demand is great it can exceed the asking prices.
Leverage
This stands for the use of funds that an investor borrows (usually from a broker) in order to increase their position beyond what would be available according to their actual account balance.
Leverage can be used to make a profit on small price changes in currency pairs but is also considered to be risky because it can leave you in-depth.
Margin
Margin is the money that a trader deposits to ensure the broker that they will remain solvent even if the trade goes the wrong way.
Pip
Pip is the minimum movement of a price, equal to four decimal points, which means that one pip equals 0.0001. It stands for percentage in point or price interest in point.
Spread
As currency traders don’t charge commissions, they use conversion spreads to make a profit. Spread stands for the difference between the bid price and the asking price.
Trading Strategies
You should have a strategy before you venture into the world of forex speculating. You don’t have to be an innovative genius and create new strategies; you can instead rely on some of the most common strategies that most traders use.
Scalp Trade
This strategy’s goal is to profit on multiple small price changes. It generally consists of holding the positions for seconds or minutes at most and selling again as soon as possible. This strategy relies on the predictability of price-changing trends and minimizes the risk of a higher loss.
Day Trade
Just like scalp trading, day trading is also considered to be short-term trading relying on incremental gains throughout the day for trading, but the positions are being held somewhat longer than with the scalp trades.
Swing Trade
This strategy implies that a trader is holding a position for more than a day. This strategy is used by more influential traders who are aware of some upcoming governmental interventions that could result in major price swings and are even capable of influencing currency rates.
Position Trade
Position traders can hold a currency for years before selling. They usually ignore minor short-term price movements and focus on long-term trends based on more precise analysis.
Summary
Forex trading is an ancient economical practice on which the economy of our globalized world lies today. Everybody participates in it, even just for the sake of traveling. You have probably exchanged currency before, but if you’re intending on making some money out of currency exchange, there is a certain science to it.
This article should be enough for you to peek into the world of forex trading but to make a significant profit exchanging currency, you should seriously devote yourself to learning the virtue of making money by selling and buying money.