The foreign exchange (forex) market trades more than $5 trillion every day. For this reason, trading currency through this market is a popular way to invest. It’s also the most liquid market in the world, so it’s possible to turn a profit much faster than with other types of trading.
What is forex?
Simply put, forex is the global market where all the currencies in the world are traded. And if you’ve ever traveled to another country, you’ve probably dealt with the forex market. You may have converted your US dollars to pounds, or your pounds to euros. Either way, you have participated in forex trading—exchanging one type of currency for another.
What is a pip?
To invest in forex, you will have to know what a pip is. A pip, which stands for “point in percentage” is a “very small measure of change in a currency pair in the forex market.” Basically, it indicates the smallest amount a currency can change. For USD pairs, a pip is usually $0.0001. This is what is called the basis point. So, if a currency were to rise by one pip, it could make it a profitable exchange from a currency that has remained stable. For example, if the market is showing a live rate of 0.8355 USD/EUR and then experienced an increase of one pip to 0.8366, this would make the US dollar more valuable. Therefore, it would be a good exchange to trade your euros for dollars.
How forex works
In this type of trading, you’ll watch the current exchange rates and buy and sell currency accordingly. In other words, you will buy one form of currency when it is at a low rate and exchange it for another form of currency that is selling at a higher exchange rate. Here’s an example:
Let’s say that the value of a British pound is $2 USD. On the forex market, this would be represented as 2.0000 GBP/USD. The market groups currencies together in pairs to display the current exchange rate. The first number represents one of that currency and how much it is worth in the second.
Forex trading strategies
Most people who trade in the forex market use a combination of current information and instinct to determine how they think prices will rise and fall. Current information includes things like stability, interest rates, and economic policies. But to be specific, successful investors have their own strategies. These strategies can be based on chart analysis, news-based events, or technical analysis. But the best forex trading strategies are sometimes a combination of them all.
The most commonly traded currency pairs are EUR/USD, GBP/USD, USD/JPY, USD/CHE, USD/CAD, AUD/USD, NZD/USD. These are known as major currency pairs. When people start trading, they typically stick to the major currency pairs. And in fact, it’s wise to start out just watching one or two. This strategy gives you time to get a feel for the market.
How to trade forex
To trade on the forex market, you will have to open a brokerage trading account. You have many ways to do this, but most of the platforms are completely online. And most of them have mobile apps so that you can watch your money at all times. This is beneficial because many of the changes in currency valuation happen overnight in US time. Most brokerage sites do not require a fee upfront. Instead, you’ll pay a percentage of your gains or your active trades. Some do require a minimum deposit, however, to get you started.
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