Investing In The Foreign Exchange Market: How Does Forex Trading Work?

Guide To Investing In The Foreign Exchange Market

Part 2

How Does Forex Work?

As said in the previous part, Forex trading works by exchanging two currencies to one another and that the Foreign Exchange Market or Forex is the world’s largest financial market. The Foreign Exchange Market trades about $5 trillion dollars per day, it’s larger than any stock market in the world. If you don’t know that yet, then you should really read my previous post all about Forex and the Forex market.

Part 1: Investing In The Foreign Exchange Market: What is Forex?

A person, regardless of his home country, that wants to invest on the Foreign Exchange Market can only start investing through the help of a Forex broker. In most cases, this can only be done online and with that person using the online platform that his chosen Forex broker will provide him with. To understand more about how you can invest on the Forex market, you can read more below.

Currencies Being Used In The Forex Market

Many people compares the Forex market to the stock market because they really have some similarities between them but they still differ in other things as well. One is that in the stock market you trade shares of a publicly listed companies while in the Forex market, an individual trade currencies. Here are some of the most common currencies traded in the Forex market:

Currency

Country

Symbol

US Dollar

United States

USD

Pound

Britain

GBP

Euro

Euro nations

EUR

Yen

Japan

JPY

Cad Dollar

Canada

CAD

Franc

Switzerland

CHF

Aussie Dollar

Australia

AUD

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Some say that the US dollars is the safest currency to have and that having other currencies not on the list above or what they call “rare” currencies can make your life harder when it comes to Forex investing. That’s what they say, I don’t know if you would believe them but I do think trading for the rare ones makes Forex investing more interesting.

Forex Trading Explained

Forex trading works by simply trading two pairs of currencies, like US Dollars to Yen or Euro to Pound or Franc to Euro and so on. I know you’ve know this, I just want to repeat it for you.used forx currencies on forex trading

You’ll be seeing many of these; USD/GBP or CAD/USD etc., because that’s the format they follow when it comes to trading currencies in the Forex market.

GBP/USD=1.9812

The one on top (GPB) is the base currency, the one on the bottom (USD) is the quote currency. Price (1.9812) indicates how much should be the quote currency to buy 1 unit of the base currency. In the example above, it requires 1.9812 USD to buy 1 pound.

What Does The Words “Long” and “Short” Means?

No, it’s not about the length. Here is an analogy that can make things easier for you to understand; long means to buy, while short means to sell. Simple as that, get those?

Now, Forex trading is all about predicting when one currency’s value will be going up. If one knowledgeable source tells you to buy US dollars because it’s price will go up and another trusted person tells you that the Japanese yen’s value will go down sooner or later, then it’s the great time to go long on US dollars and go short on your Japanese yen. By doing that, you will surely profit and help yourself a little bit by avoiding losing some of your money.

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Have you noticed that I used the words “knowledgeable” and “trusted” before the words source and person? I used those because you can’t just follow what others say, being a bandwagoner isn’t a great option for you to choose when it comes to Forex investing.

Just be careful when it comes to going long or short. Making one silly mistake can cause you a lot of money when it comes to investing in the Forex market, especially when you’re using leverage.

What Is Leverage?

A leverage in Forex trading simply gives you the power to control a larger amount of currencies that your money can provide. This is a great tool in Forex trading that you can use to maximize your earnings. A great example for this one is using a 50:1 leverage, this means if you have 500 dollars to invest, then you can control as much as 25,000 dollars by using the said leverage.

You may also opt to use 100:1 or other ratios that your Forex broker will offer you. Just keep in mind that by using a leverage, you may expose yourself into greater risks when it comes to Forex trading.

If you are already confused with all of those, don’t worry. Keep in mind that your just beginning to learn Forex trading. I’m sure you’ll get a hang of things after you created your demo account at any Forex trading platform online.

Just make sure that you use the best and be really careful in choosing though, there are some Forex trading scams going on nowadays. Remember that a great Forex trading platform can say a lot if you’re going to earn or not, so seek for other investors’ reviews and suggestions first.

Photo Courtesy of epsos.de
About the author

Mark Ross Canaoay

Hello! My name is Mark and I'm the one responsible for this website. I'm just a person with enough knowledge about finance-related stuffs. You can know more about me by liking my Facebook Page, following me on Twitter or by adding me in one of your circles on Google+.

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