Introduction to Forex for beginners
The word Forex is basically a combination of two words, Foreign and Exchange. In Forex, we buy and sell one currency for another over the foreign exchange market. This is just like when you go to some other country on a trip, you sell your dollars in exchange to the local currency of that country, and by doing so you are practising in the Foreign exchange market. Forex is the largest financial market in the whole world. Moreover, it is the most liquid market in the world where an average daily trading volume exceeds 5 trillion dollars. This massive volume cannot be reached by stocks even if we combine the volume of all stock markets.
What are currency Pairs?
Forex trading is always conducted on the pairs of currencies which consist of two different currencies. A currency pair is actually a pricing structure and quotation of the currencies traded in the forex market. The value of one currency in a pair is determined by its comparison to the other currency of that pair. The first listed currency in a pair is called base currency and the second currency of a pair is called as the quote currency. Some examples of popular and widely traded currency pairs include EUR/USD, USD/JPY, GBP/USD, USD/CHF etc. Traders make money trading Forex when they buy any currency pair about which they are positive that it will shift according to their prediction and when it does they close the trade and earn the profit.
Forex Trading vs. Stocks
Forex Trading is completely different than stock and shares trading. Firstly, Forex trades are made over the counter, through forex brokers or through traders to traders. But stocks are traded through central exchanges. Unlike stock market which opens and closes on a time set by the exchange, the Forex market is open 24 hours a day. In forex, currencies are traded and pairs are used but it is completely different in stocks as it involves buying shares of companies. Forex is way cheaper than the stocks because you can literally start trading with just £10 in your account and get a decent profit on it. But in stocks, you have to buy expensive shares to get a decent profit.
How do exchange rates move?
Forex market is mainly affected by macroeconomic factors that influence the decisions of traders who decide which currency should be valued. Some factors that influence Forex are:
- An inflation rate of a currency’s country. The country where inflation rate will decrease, its currency’s value will increase, so if a trader already has the currency, he can sell it when the currency’s value increases and make a profit.
- If a country is in debt, then the value of that country’s currency will decrease. If the decrease in currency is temporary, a trader can buy that country’s currency and when the value of currency increases due to the decrease in debt, the trader can sell that currency to make a profit.
- Political stability can also cause a change in currency’s value. If a country’s political performance is stable and there is less risk for political turmoil, then traders will focus on that country’s currency.
- When a country faces recession, its exchange rates fall down resulting in the low value of its currency, which is a good time to buy that currency if the recession is temporary.
- Speculation is also a big factor here. If traders notice that a currency is expecting a rise in its value, they will buy it more. And that results in higher demand and thereby a further increase in its value.
Start Trading Now:
This is the best time for you to learn to trade and make money. Due to the availability of information on the internet, it is very easy for everyone to know the situation of a country’s economy which results in increase or decrease in its currency’s value. You can get plenty of information pertaining to forex for beginners from the internet to know how to start trading and what currencies should be the first in your list of trading. There is no rocket science behind the movement in currency rates, anyone can get the knowledge regarding their movements. Take help from a certified forex broker for your investments and you are good to go.