Forex is short for foreign exchange, also known as FX or currency trading. Buying and selling foreign currencies across the globe is a way to profit from the changes in value between the money from two countries. You might have been trading currency without knowing it. If you buy Canadian dollars with your U.S. money when visiting Toronto, for example, then you’re trading forex. One of your U.S. dollars buys you 1.36 in Canadian dollars, as of May 15, 2017. As foreign exchange rates vary, on May 16, your U.S. dollars might buy more or less Canadian dollars than the previous day.
Learn this speculative investing approach while practicing with virtual money on forex trading sites. Once you’re ready, use these forex trading tips to improve your investment strategy.
1. Study Forex Trading Strategies
So, what is forex trading? Forex trading is betting — in hopes of making a profit — that the value of one currency will rise against another. Investors, speculators, international businesses and others might need or want to exchange currency. If you’re ready to try your hand at currency trading it’s best to do your homework before wading into the currency market.
Forex trading strategies and products abound. For beginners, the most popular is the spot market FX contract. To make a spot FX transaction, buy or sell a specific amount of currency at the current “spot exchange rate.” The spot rate is calculated by the global market supply and demand for the currencies. If you expect the value of the Euro to rise against the dollar, you might pay 1 USD to purchase Euros for 0.91 EUR. If the Euro increases in value to 0.93 and you sell, you’ll have made a 0.02 USD profit. Trade large enough amounts frequently, and if your trades are successful, you can profit.
2. Trade the Huge Forex Market 24/7
The Forex trading market is the largest, most active trading market in the world, with more than $5 trillion changing hands daily. This foreign exchange market trading is 25 times greater than the global stock market trading. Unlike the stock markets, forex trades 24/7.
Currency trading occurs most frequently in these countries with corresponding currencies:
- USD: United States/Dollar
- EUR: Euro Zone/Euro
- JPY: Japan/Yen
- GBP: United Kingdom/Pound
- CAD: Canada/Dollar
- CHF: Switzerland/Franc
- AUD: Australia/Dollar
3. Buy and Sell the Most Popular Currency Trading Pairs
The U.S. dollar is the most popular trading currency because it is the global reserve currency. Although you can trade any currency, these are the most popular FX trading pairs, according to Nasdaq:
- EUR/USD: Euro Zone/United States
- USD/JPY: United States/Japan
- GBP/USD: United Kingdom/United States
- USD/CHF: United States/Switzerland
- USD/CAD: United State /Canada
- AUD/USD: Australia/United States
4. Practice Makes a Better Forex Trader
Plenty of Forex brokers are available, with sites designed to teach FX trading strategies. Many trading platform websites offer educational and practice trading portals. Additionally, in your forex trading practice, you’ll learn more about the exchange currency markets.
Even the best forex trading platform can’t keep you from losing money if a trade doesn’t go your way, though. So start your forex trading with money you can afford to lose.
5. Learn How to Read a Forex Chart
A forex chart shows the price relationship between the forex trading pair. Customize the chart to match your trading time frame, whether you’re a short- or long-term forex trader.
Here’s how to read a Forex chart:
- Set your time period. The time is on the horizontal axis and the price is displayed vertically.
- The vertical red and green lines are called candlesticks, showing the high and low prices for each day. Red means that the price has fallen from the prior day and green means it’s risen.
- Using the index above the graph, you can set important technical indicators, such as trend lines and moving averages, for further study.
6. Find Low Price Forex Trading
The price to trade Forex varies depending upon the platform. On some trading accounts, you pay only the spread, or difference between the buy and sell price to trade. On other types of accounts, you might pay a trading commission.
Another fee, the rollover rate, is the interest charged or earned for holding positions overnight. The fee is determined by the difference between the interest rates of the two traded currencies. Make sure to account for fees before diving into the FX markets.
7. Use Foreign Currency Futures Markets for FX Trading Later
Another type of foreign currency trade is the foreign currency futures contract. If you anticipate changes in the relationship between foreign currency pairs and want to profit, consider a futures contract. These standard contracts state the agreement between two parties to exchange currencies at a predetermined rate during a specific month. Currency futures contracts are bought and traded on regulated currency exchange marketplaces.
8. Know Where FX Contracts Trade
Like the Nasdaq stock exchange, foreign exchange is predominantly an over-the-counter market. Trades are placed on electronic platforms between banks and other intermediaries. To trade foreign currency, open a trading account on a popular FX trading platforms. Or, if you prefer a hands-off FX trading experience, consider buying a currency exchange-traded fund, such as iShares Currency Hedged MSCI EAFE ETF — which returned 6.57 percent in 2016.
9. Understand Forex Pros and Cons
Investing in currency investing offers both advantages and disadvantages. Forex trading markets are open 24/7 and are extremely liquid. Because there are only eight major trading pairs, it might be easier to research forex trading than individual stocks. But small FX movements can lead to both great profits and great losses, making it wise only for more aggressive investors.