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Over the past few years, we’ve seen a marked increase in people taking an interest in their financial health and security. Many people have turned to the world of trading and investing as a route to improving their finances. There are many different types of investments available, from stocks and equities to funds and exchanges.
One term you might have come across is Forex trading. This can seem like a bit of a strange concept at first, one that is reserved for shrewd financial experts and trading pros. However, forex trading is actually far simpler than you might expect and can present a viable investment option for people looking to explore the industry. Let’s take a look at what it is and how you can begin your trading journey.
What is Forex Trading?
Short for foreign exchange, to put it simply, forex trading is the process of purchasing one kind of currency while trading another. It can be a far simpler and more straightforward option for trading and investing, but there are a number of concepts and ideas that you need to understand before you can begin trading yourself.
The forex market is open 24 hours a day and has an estimated total daily transaction value of around $6.6 trillion. It is one of the world’s most active markets and presents an attractive option for new and experienced investors alike.
How Does Forex Trading Work?
In forex trading, different currencies are grouped into pairs. You’ll commonly see currencies like the pound (GBP) and dollar (USD) paired together, as well as combinations including GBP and the euro (EUR) and USD and Japanese yen (JPY). The currencies that make up a pair are indicated using their abbreviations, such as GBP/USD or USD/JPY.
The first currency in a pair is referred to as the base currency, with the second known as the quote. The base represents one unit of that particular currency, while the quote is equal to the quoted price of the pair. The quoted price indicates how much of the quote currency it takes to purchase one unit of the base currency.
At first, this might seem like a tricky concept to grasp. In reality, it is actually rather simple. All forex traders are doing is attempting to accurately predict the movement of a particular currency. If they think a currency is going to perform well, they buy a pair with that base currency. If they then predict that the value of that currency is set to fall, they sell the pair. Buying a pair when the base currency is low will allow you to sell when its value increases, netting you a profit.
There are a number of different ways to trade forex. Some people will purchase and hold currencies for long periods of time, often several years, hoping to take advantage of long-term market shifts. Others will buy and sell multiple pairs every day, predicting short-term market fluctuations in what is a high-risk but potentially lucrative practice.
There is obviously a lot more involved in forex trading, but this is a basic overview that should give you all you need to get started. Let’s say you want to move forward and get involved with trading yourself. What is the best way to go about it? Let’s find out.
Choose a Forex Exchange
Forex trading is conducted on exchange platforms. Each exchange will offer individual advantages and disadvantages, and some will be more suited to beginner traders.
To choose the best one for you, draw up a list of the major forex exchange platforms and compare each of their pros and cons. This way, you’ll be able to assess what each platform can offer you and make the best decision for your trading journey as you move forward.
When choosing an exchange, pay attention to what kind of currencies and markets they have available, as well as any potential signup or transaction fees the platform might charge. Beginners often start with relatively small amounts of money, so transaction fees can be a big stumbling block and can eat into your profits.
Establish a Plan
One of the most important things that you need to do before you begin trading, or make any kind of investment for that matter, is to establish a plan. Set out clear and defined goals for your trading style and strategy, and think about what exactly you hope to achieve and how long it will take to achieve it.
Think about how much you are willing to invest as well. Draw up a budget and ensure you stick to it. Making a loss is disappointing, but it is part and parcel of the trading and investing world. By having a budget in place, you will ensure that you are never spending beyond your means and will prevent yourself from getting into financial difficulty.
Forex trading has become an increasingly popular choice for those looking to get into the world of investing. It presents an accessible and understandable process that allows for a range of different trading strategies. Follow the advice in the guide above and begin your trading journey.