Getting involved in Forex trading can be a lucrative prospect for many, but there’s a lot to be learn!
In light of this, trading forex is simply the buying and selling of foreign currencies for a profit. To trade forex, one must understand that they are buying/ selling one currency against another. Therefore, forex trading is the simultaneous buying of one currency and selling of another. The two currencies involved in the trade is usually represented in pairs. For example the euro and the U.S Dollar (EUR/USD) pair or the British Pound and the Japanese Yen (GBP/YEN) pair.
The Forex market unlike other financial market like the London Stock Exchange (LSE) does not have a physical location or a central exchange. This makes the forex market the biggest financial market available.
If you are selling, you are betting that the currency you are selling will weaken compared to the currency you look to buy.
In making trading decisions, traders tend to analyze the market in two ways – fundamental analysis & technical analysis.
Fundamental analysis is a way of looking at the forex market by analyzing economic, social, and political forces that may affect the supply and demand of an asset/currency. The idea behind this type of analysis is that if a country’s current or future economic outlook is good, their currency should strengthen; this information could possibly impress on the trader to buy that currency against other currencies.
However, technical analysis involves the use of price movement/action to determine the future price of a particular currency pair. Technical analysts look for similar patterns in the price charts that have formed in the past, and will form trade ideas or decision believing that price will act the same way that it did before. Technical analysts use charts because they are the easiest way to visualize historical data.
Although there is a lot of money to be made from trading foreign currencies online, discipline and education on the dynamics of the market should be utmost in the mind of the trader. Forex trading is a SKILL that takes TIME to learn. Skilled traders can and do make money in this field.
In summary, unlike any other financial market, investors can respond to currency fluctuations caused by economic, political and social events at the time they occur without having to wait for exchanges to open. An enormous proportion of FX market activity is driven by speculation, arbitrage and professional dealing, in which currencies are traded like any other commodity.