Forex Trading For Beginners
Essential Facts on Forex for Beginners
To understand forex for beginners, it would be better to start by saying forex is the short form of foreign exchange. However, the actual asset class in this context is currencies.
Therefore, foreign exchange is changing the currency of one country to the currency of another for various reasons, mainly commerce and tourism. Since business is a global phenomenon, it makes sense to transact with other nations in their own currency.
To understand forex for beginners, it is worth mentioning the Breton Woods’ accord of 1971 where currencies started floating freely against each other.
As a result of this accord, individual currencies have different values now resulting to foreign exchange services. Financial and investment banks have taken up this service. However, one can still trade different currencies using the internet, making forex for beginners a worthwhile venture.
Speculation and Forex for Beginners
There is ongoing fluctuation between currency values of different countries. This is because of varying demand and supply factors including trade flows, interest rates, economic strength, tourism, and geo political risk, among others.
Such fluctuation creates an opportunity to bet against the changing currency values where you can buy or sell one currency against a different currency while anticipating that the currency bought will increase in strength and that the one sold will weaken.
Therefore, speculation plays a big role in forex for beginners and even for experts in the industry.
Forex for Beginners – Why Trade Currencies?
As earlier mentioned, forex trade involves trading of various currencies. And currencies have two essential features. First, you can earn interest rate that’s differential between the two currencies.
Second, you can still gain value in terms of the exchange rate. This is an essential point for both forex for beginners and advanced traders.
Before the age of the internet, currency trading used to occur in the banks which did it for their clients. With time, banks set up set up their own desks and began trading their accounts. In the same vein, hedge funds, high net worth persons, and multinationals followed suit.
With the growth of the Internet, there is a retail market targeting individual traders. The market allows individuals to easily access foreign exchange markets. This occurs through brokers or banks themselves making forex for beginners a great venture.
Forex for Beginners Has Some Risk Involved
There is confusion as far as the risk involved in forex trading is concerned. A lot has been said about the unregulated interbank market and the thus risky because there is no oversight.
However, this thought is not completely true. A better perception on forex for beginners as far as risk is concerned would be an understanding of the difference between a centralized and a decentralized market. After this, you can then determine where regulation would apply.
Since the market comprises of each participating bank that provides bids and offers for a certain currency, supply and demand ultimately determines the market pricing mechanism.
Because of many flows in the system, it is nearly impossible for a single trader to completely influence a certain currency’s price. However, later on, we’ll look at some of the factors that affect pricing.
24-Hour Forex for Beginners
A key element behind the popularity of forex is the fact that markets involved in forex operate 24-hours right from Sunday evening to Friday night.
The 24-hour trading ensures that there is less price gapping (that is a jump in price from a level to the next one with no trade in between).
This allows traders to take a position when they want to, regardless of timing. However, the truth is there are various ‘lull’ times during which volumes fall below the daily average and this can widen the market spreads.
Pricing As It Relates To Forex for Beginners
Pricing is an essential aspect of forex for beginners. All forex is usually quoted in terms of a certain currency versus the other. For each currency pair, there is a counter currency and the base currency. The counter currency is usually on the right while the base one is on the left.
For instance, in USD/EUR, USD forms the base currency while EUR is therefore the counter currency. The movements in forex price are caused by the appreciation in currency value (strengthening) or depreciation in currency value (weakening).
For example, if the price of USD/EUR was to fall, it would imply an appreciation in the counter currency (US dollars) and depreciation in the base currency (Euros).
A crucial point in forex for beginners is that when you trade forex prices, you’d buy a certain currency pair if you really believe that the pair’s base currency will appreciate against its counter currency. On the other hand, you’d sell the currency pair under the belief that the value of the base currency will weaken against that of the counter currency.
Some of the major currency pairs you can find include:
EUR/USD – The value of one Euro expressed in United States dollars
USD/CHF – The value of one US dollar expressed in Swiss francs
A number of factors usually influence forex prices. These may range from investment flows and international trade to political and economic conditions.
This is among the things that make forex for beginners and experts an intriguing affair. High market liquidity implies that the prices may change quickly in response to short-term events and news.
This creates numerous trading opportunities for those involved in retail forex trade.
A few of the main factors influencing forex prices include:
- Monetary policy
- Economic and political stability
- Natural disasters such as tsunamis, earthquakes, floods and more
- Currency intervention
Forex involves the trading of different currencies. It is a huge market and trading takes place 24 hours a day. Initially, the trade was a preserve for banks but with the internet age, individuals can trade in different currencies.
Several factors affect forex trade and these include economic factors, political conditions and natural disasters. If you are starting up in this trade, it’s important that you know there is speculation and risk in forex for beginners and taking time to learn the ropes will pay off in the end.