If you’ve heard anything about Forex, then you’ve probably heard that it’s a quick and easy way to make money. That notion isn’t exactly false. Many people have made money on the Forex market while expending very little time or effort. But, in reality, that’s not often the case. Forex is a simple concept in theory, but, in practice, it can be much more difficult. That is to say, it’s possible to make a lot, but you can lose just as much (if not more). So, it’s always wise to understand what you’re getting into when you start trading Forex.
Forex at its most basic essentially means “foreign currency exchange.” When you trade on the Forex markets, you are really exchanging money from one currency to another. This isn’t like your typical stock market or even the standard practice of buying and selling goods. Your goal is simply to anticipate in which direction the value of a certain currency will trend in comparison to another. You don’t technically own anything when you “buy” and you’re not technically giving anything up when you “sell” (we’ll get into that a little later).
The Forex market is typically used by big companies who need to make purchases in other currencies (like a European company needing to purchase items from Japan in Japanese Yen). But, Forex trading is used much differently in an individual way.
When you deal with Forex, you’re always going to work with currency pairs. So, you might be watching the trends for something like the Euro (EUR) and the United States Dollar (USD). This is one of the most popular currency pairs for Forex trading. With this pair, the Euro is the “base currency” and the USD is the “quote currency.” This essentially means that you’re basing the value of any transaction off of the euro. The current exchange rate for this pair may look like this: €1.00 = $1.40.
The euro is more valuable than the dollar at the current rate. In Forex trading, you have to anticipate whether the value of the euro will trend up or down compared to the USD. If you think the comparative value of the euro is going up, then you would “go long” by buying the currency pair. If you think the comparative value of the euro is going down, then you would “go short” by selling the pair.
This is a relatively simple concept to understand. You essentially place your bets on currencies that you think are going to increase in value compared to another currency that might weaken. There are plenty of different currency pairs to choose from, but you will generally be working with powerful currencies like EUR, USD, the Great British Pound (GBP), the Australian Dollar (AUD), and others.
Other Forex Concepts to Know
Leverage is a term that’s valuable to understand when you’re trading Forex. It’s very easy for someone to take the basic concept of Forex and try to get rich quick, and large leverage amounts make that seem like a feasible option. Leverage is essentially being able to trade with large amounts of money (sometimes as high as 100 to 1) with a smaller amount of money as collateral. For instance, you could put $1,000 into an account with a 20 to 1 leveraging percentage, which would give you control over $20,000.
Before you jump into Forex, you should know that it’s more common for people to lose all of their capital than it is for them to earn any profit. Thus, you should always be cautious. Learn as much as you can about the Forex trading markets. Practice on demo versions so that you can get a feel for what’s going on. And, as always, don’t let your emotions get the best of you. If you lose a lot, don’t try extra hard to get it all back. It will likely end in failure. If you are diligent and make smart decisions, then Forex trading can be profitable.
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Aaron Stollman writes for FXOpen Forex broker, one of the leading retail Forex companies offering online trading services via the ECN MT4 platform. Aaron is also an experienced Forex trader and one of the main contributors of ecnstpfx.com, an ECN technology encyclopedia.