What
is forex and forex trading?
If you have ever travelled to a foreign country, you may have needed to
exchange your money for a different currency. If so, you have already
participated in forex trading. “Forex” is the short form of foreign exchange. It can also be referred to as “FX” and currency exchange.
Forex trading in a nutshell
As you can imagine, forex trading is a bit more than just exchanging currencies
for a holiday. Companies use different currencies to buy goods in other
countries. In order to buy these goods, they need to obtain the local currency
first, just like we would when going on holiday. The difference is that these
companies will exchange huge amounts.
With all of the exchanging of currencies happening around the world, the exchange rate are constantly moving. Here is how it
works:
Trading currencies is like exchanging
money while on holiday
When currencies are exchanged, they have a certain price: the exchange rate. As
with the price of anything, the price for a currency is determined by the laws
of supply and demand.
If there is high demand for a particular currency – for example, many people or
companies want to change their domestic currency for the euro – the value of
the euro will then increase and the exchange rate will change against other
currencies. You can use this principle to make money. To illustrate, let's use
the example of going on holiday.
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The value of a currency will increase if there is a
higher demand for it, causing a change of its exchange rate against other
currencies.
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Say
you live in Europe and go on a holiday to the United States. You will want to
exchange euros for US dollars. At the time you do this, you get $1.40 for one
euro. You exchange €500, therefore receiving $700.
After two weeks, you head home, but you still have $250 left. As you have no
use for dollars anymore, you change them back into euros.
You notice though, that the price of the euro against the dollar has changed –
the exchange rate is now $1.30 for one euro, so you get approximately €190
back. Had the exchange rate stayed at $1.40, you would have only gotten €180
back. Therefore, you have actually made money.
Successful trading means using the
exchange rate to make a profit
Here is an even clearer way of showing this principle using the same example
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As the exchange rate of a currency pair changes, so
does the cost for purchasing one currency with another. For example, let's
say you changed €500 and got back $700 while on holiday. If you come back and
the exchange rate changed from $1.40 to $1.30, you would receive €538.5 for a
€38.5 profit.
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Let’s
say that you changed your €500 into US dollars and got $700, but you did not
spend any money at all and came back with $700. After the exchange rate changed
from $1.40 to $1.30, instead of getting €500 back, you actually receive €538.5.
You have gained €38.5 simply from holding your money in dollars while the
exchange rate changed. This is essentially how we trade in the currency market.
We buy a certain amount of a currency, hold onto it until the exchange rate
fluctuates, then change it back once the exchange rate has fluctuated, making
money in the process.
Trading to suit your
lifestyle
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Trading in the currency market means buying a
certain amount of a currency, holding onto it until the exchange rate
changes, then changing it back again when the exchange rate changes for a
profit.
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Using
a bureau de change and saving a bit of money from your holiday budget is not a
practical approach to forex trading. Fortunately, there is an easier way to do
this: through online exchange offices called “brokers”.
What this means is that you can exchange currencies online and take advantage
of the constantly changing exchange rates. Just like in the example of going on
holiday, you can buy different currencies and make a profit as the exchange
rates between the currencies change – this is trading the forex market.
Trading
forex online has many benefits
1.
You can trade
forex from your home or anywhere you have an Internet connection.
2.
The forex
market never sleeps. It is open 24 hours a day during weekdays and can suit your
daily routine.
3.
You do not need
a huge budget to get started. As little as $150 is enough to begin trading and
building your account over time.
Trading
forex will not make you rich overnight, yet it can provide an income stream
alongside your normal job. It can even turn into a business, depending on how
much time you are willing to invest.