The Forex market is where currencies are bought and sold. Trading in the FX market is relatively simple, and the basics of a trade have high similarities to those found in other markets, such as the stock market – meaning that those who have any sort of experience trading tend to pick it up quickly. In order to succeed in this market, it is all about market timing. Even if you have never traded before, it is still possible to make money trading Forex if you have the right attitude and learn the Forex trading basics covered below.
What Is Forex Trading?
The Forex, or Foreign Exchange, is a market that specializes in buying and selling foreign currency. This is typically done by experienced investors. A Forex trader invests in the foreign exchange market hoping to buy undervalued currencies and then sell these same currencies when they become overvalued. This particular type of investment is quite tricky to start engaging in. Keep reading to learn more before giving this investment strategy a shot.
Object of Forex Trading
Exchanging one currency for another one is the basic object of FX trading, expecting for an increase in value of the currency that you bought compared to the one which you sold due to a price change. For example, if you purchase 10,000EUR at the EUR/USD exchange rate of 1.1800 and two weeks later exchange your euros back into US dollar at the increased exchange rate of 1.2500, you earn a profit of $700.
Reading a Forex Quote
Currencies are always quoted as pairs in the FX market, for instance EUR/USD or USD/JPY. This is due to the fact that one currency is bought and another is sold during any foreign exchange transaction. The bid currency is the first currency listed, whilst the quote currency is the second one listed. When buying, the exchange rate lets you know how much you will need to pay in units of the quote currency in order to buy one unit of the base currency. When selling, the exchange rate tells you how many units of the quote currency you will receive when selling one unit of the base currency.
Long or Short Forex Trading Strategies
You should first decide if you are going to either buy or sell currency in the FX market. If you are looking to buy the base currency and sell the quote currency, you are looking for the base currency to rise in value in order for you to sell it back at an increased price. Traders know this as “taking a long position” or “going long”. On the other hand, if you plan to sell the base currency and buy the quote currency, you are hoping for the base currency to fall in value, giving you the opportunity to then buy it back at a reduced price. This is known in the trading world as “going short” or “taking a short position”. You simply have to choose one or two among many Forex trading strategies to figure out how the market works and to be able to make a profit from it.
Bid vs. Ask
All FX quotes come with two different prices; the bid and the ask or offer price. In the majority of cases, the bid is lower than the ask price. The bid refers to the price that the broker is offering to pay to exchange the quote currency for the bid currency. On the other hand, the ask price is the price that your broker is willing to sell the base currency in exchange for the quote currency. The difference between the bid and ask prices is commonly referred to as the spread.
Starting out trading Forex may seem complicated, but with practice, good mentors and good Forex options strategies, it can soon provide a viable second income!