Forex trading is popular with many people because you do not need to make a large investment to get started. However, while it’s certainly possible to make money from forex trading, it’s not easy. You need to be prepared to do plenty of research and study currencies and potential impacts if you want to succeed.
What is Forex trading?
Forex, or Foreign Exchange, trading involves the buying or selling of a particular currency in exchange for another currency. Most people and businesses participate in this process at some point; even if it’s only as the result of converting money to take on vacation. The value of a currency is determined by how much demand there is for it.
Knowing about currency pairs
Whenever you trade on the forex market, you do so by exchanging one currency for another. This is why all trading involves the use of currency pairs. By viewing the pair, you can see the value of one currency compared to another. For instance, the pairing EUR/USD will tell you how many US dollars you will need to use to buy a Euro. Some of the currencies you will see listed in these pairs include:
USD – Us dollar.
EUR – Euro.
GBP – British pound.
AUD – Australian dollar.
CAD – Canadian dollar.
JPY – Japanese yen.
Using the market
Once you begin trading on the forex market, you will hear terms such as pip being used. A pip or (point in percentage) is used to measure movement in the value of a currency. The pip is the fourth decimal place in a currency pair, or the second decimal place when the Japanese yen is involved. If the pip value increases you can measure your profit which is dependent on how much currency you purchased.
For instance, if you have a US dollar forex account, you bought 10,000 units of currency and there has been a 50 pip move, your profit will be $50 as each pip will have a $1 value. This happens when USD is listed second in the pair. If USD is listed first you need to divide the normal pip value by the current exchange rate for that pair, in order to work out how much profit you have made.
Remember that the directional currency is listed first. This means that if the price is increasing the value of the first currency is rising when compared with the second.
This is the very basic information that you should be aware of before you start trading. However, if you want to be successful, you should always keep learning and studying the potential effect that world events could have on specific currencies. Doing so helps you to anticipate which currencies will rise in value and which will fall.