Imagine driving the Bugatti Veyron 150 mph down the German autobahn (at least try to since most people haven’t driven anything near that). It has been said that FOREX trading provides the same type of thrill to traders. It is the world largest market and with that comes a certain type of excitement. FOREX trading is not for everyone. There are certain things every trader needs to know about FOREX.
WHAT IT IS
FOREX stands for foreign exchange, or the trading of currencies. It is the world’s biggest market since it involves almost every country’s economy. The market is also open 24 hours a day, 7 days a week. No one can trade the market the whole time, unlike the stock market. The trader who buys and sells in the FOREX market trades the currencies of countries all over the world. The most popular currencies are the US Dollar, the British Pound, the Euro, the Canadian Dollar, the Australian Dollar, and the Japanese Yen.
HOW TO TRADE IT
Originally, FOREX use to be the domain of big banks. They would trade the currencies between themselves and to multinational corporations that needed them. Retail FOREX has exploded recently due to the widespread use of the internet. No longer did anyone need to trade with the banks. Many sites sprung up over the internet. Some include forex.com, fxsolutions.com, among others. They serve as a broker for traders. Instead of commissions, these brokers take some pips off of the trade and keep it as the fee. A pip is a set amount for each currency, so it varies.
PRODUCT TRADED
When most investors trade FOREX, they are traded contracts that buy and sell $100,000 worth of a currency. When one sees a currency quote, it is usually in a currency pair. An example would be USD/JPY with USD standing for US Dollars and JPY standing for Japanese Yen. When an investor puts through a trade, they are really buying the one currency and selling the other. In this case, he or she is buying the US Dollar and selling the Japanese Yen.
LEVERAGE
A tool that has to be used in FOREX is leverage. In any other field of investing, the use of leverage is usually discouraged as it can be very dangerous. The problem with FOREX is that most investors can’t spend $100,000 dollars on one trade. Because of this, the FOREX brokers usually allow individuals to leverage to amounts higher than in any form of trading. One site allows investors to just spend $10,000 on a $100,000. As always, leverage can also hurt the trader. If the trade starts to go the wrong way, the trader will be forced to close the trade and maybe will even owe the broker more money.
THINGS TO WATCH
Because FOREX is a global marketplace, it is important that traders involved get news from all over the world. However, they all need to know which news to pay attention to and which to ignore. This only comes from practice. Most of the brokers’ platforms offer some type of news feed. Some news to watch for is GDP reports, unemployment reports, and inflation numbers. Also, watch what countries are doing to their interest rates, since this affects the interest earned on currency and its value.
Trading FOREX isn’t hard once the trader gets used to it. Like the saying goes, practice makes perfect. Most sites offer the chance to try out their trading platform for free for 30 days. It is highly recommended that traders take advantage of this. The worst thing that could happen is you wasted a month practicing trader. Who knows, you might be the next George Soros.