What is forex? A beginner’s guide
Forex, quite simply, is the foreign exchange market where currencies are traded by governments, banks, corporations and individuals. Forex is a decentralised market with transactions conducted directly between two parties, resulting in a highly liquid market; between three and four trillion US dollars are traded every day.
How forex works
Exchange rates are the rate at which one currency can be traded against another, and the rates are written out in that way. For example, if one Euro buys 1.29550 US Dollars it is displayed as EUR/USD 1.29550.
The value of a currency against another is affected by many factors, including:
- Interest rates.
- Central/government bank meetings.
- National government decisions and policies.
- Economic news and forecasting.
- Global industry news.
- The weather.
Understanding these factors is the key to making a profit, buying when a currency has a low value and selling when its value has risen.
Being able to keep a keen eye on these factors is the key to successful trading, and there are a growing number of specialised websites dedicated to providing you with the best trading information.
Forex explained
We are all aware that currencies fluctuate or move up and down relative to each other. You only have to ask any holidaymaker how a difference in the exchange rate can make them feel richer or poorer when they travel abroad. For example, if the pound rises in value against the Euro, anyone on a holiday in Spain for example can buy more with their pounds and have a cheaper holiday. Of course the reverse can happen when the pound falls against the Euro and our holiday costs increase.
This is the basis of Forex trading which is how you can make or also lose money when your chosen currencies fluctuate. A huge amount of money is exchanged every day - by some estimates, about $3.2 trillion worth of currency changes hands every day. To give an example of how Forex works, this is typically done through a broker. What happens as a Forex trader you would choose a currency pair that in your opinion is going to change in value, shall we say Euros and US Dollars. Let us assume that you had purchased €1,000 at a time when €1 was worth $1.2, this would have cost you $1,200. Over a period of time if the currency changed in favour of the Euro and was now €1 was worth $1.3 your €1,000 would now be worth $1,300 or a gain of $100.
This is the simple basis of Forex trading and you can choose as many different pairs as you wish, if you want to become a Forex trader, the first thing that you should do is to find a good online broker and use their platform to practice Forex trading before you invest.
Is Forex more of an investment or a hobby?
Investors who visit Tradeforex and similar sites are interested in Forex trading for a variety of reasons. One of the reasons why it is such a popular investment choice is that it offers a very diverse range of options. Most people think of it as an investment activity, although some also pursue it as a hobby. The good thing about Forex is that it offers the advantage of an exciting hobby that can also generate an income.
Because Forex is such a major power in the financial market, many investors have been trying to get their share of the income potential. The currency market generates trades at a rate that far surpasses the securities market. In many ways, it has far fewer risks than the securities market, making it a better choice for more conservative investors. Many people have made a lot of money with much smaller investments.
Forex can easily be seen as a hobby as well as an investment. There is a certain amount of excitement involved with the trading process, especially for those who are interested in finances. Making predictions based on the current market conditions in a given country is very exciting indeed. Those who engage in Forex trading as a hobby often prefer to use fundamental analysis, which relies heavily on data collection.
There is a lot of value in treating Forex trading as both an investment and a hobby. Many people desire to have a hobby that is profitable, which makes currency trading a satisfactory choice. It is quite common for Forex traders to do their trading at night, on weekends or at other times when they are not working. Regularly taking part in profitable trading has allowed some to reduce the number of hours that they work or move into full time investing.
Making the most of your Forex trading mistakes
Forex news sites are very valuable resources for any trader. When you have access to good charts and other resources, you can do a better analysis of the trade decisions that you make. This is an effective way to learn from your mistakes so that they are not repeated.
Finding a healthy balance between a good analysis and over-analysing to the point of obsession is essential. Some people follow their trades so obsessively that they become mired. It is more helpful to observe the mistakes and make notes of them whilst moving on to the next task. Traders who spend too much time dwelling on their mistakes could end up repeating them.
Make sure that there is a trading plan that you intend to use and stay with. When you deviate from this plan in any way, you should make note of where your mistake happened. After making note of any mistakes, think of how you can stay with your plan in order to avoid further mistakes. Review the plan that you use regularly to evaluate whether you are closely following it.
Always evaluate losses in light of whether you used a proper trading plan, as well as any wins. It is not uncommon for a trader to try a new technique that brings them a lot of money. You will want to make sure you carefully document anything new that you try. This could be a winning strategy that can be used again.
Traders who use diaries will be able to make the most of any mistakes. The diary can be referred to at any given time to learn what techniques should be avoided. Make note of even the smallest mistakes, because these could prove to be quite important later on. Use either a traditional diary or a word processing document on the computer.
Choosing a Forex trading approach that works
There is quite a bit of analysis that needs to be undertaken in order to make the right trading decisions. If you familiarise yourself with the most common approaches, you will have a better idea of what works in your situation.
Fundamental analysis relies heavily on different factors that may affect the trading process. Local economic issues, such as job rates and inflation, frequently come into play with this method. People who prefer this method generally find these factors to be better indicators of whether they should make a trade or not. When using the fundamental analysis method, most people will rely on economic news to help them make their decisions.
Many others prefer using a technical analysis. Rather than studying economic trends, this method relies on price trends with the currency that is being traded. Most people who prefer the technical analysis method feel that this is more reliable than the fundamental analysis approach. Studying Forex charts is a major part of this particular method.
Before deciding which type of analysis to use, investors should consider what their strengths and weaknesses are where data is concerned. Fundamental analysis requires going through a large amount of data on a regular basis. This approach works best for those who only deal with a single currency pair. Technical analysis makes the comparison process much easier and also requires less research.
What is Forex?
Forex is short for foreign exchange market and is also known as currency trading. It is a global marketplace, open 24 hours a day, in which traders buy and sell currencies with the aim of profiting from fluctuations in their values.
Some businesses trade Forex simply to allow them to pay for goods and wages to overseas branches or subsidiaries. Many individuals and businesses trade Forex simply to make a profit. It is one of the fastest growing global marketplaces.
Traders use high-speed internet to buy and sell currency using a trading platform. They often use Forex brokers, who act as intermediaries between themselves and the corporation they are buying or selling currency from. Different brokers offer different leverage, the amount of lending and charge different spreads, the gap between the buying and selling price of a currency at a specific moment.
The aim is to buy currency while it is low in value and sell it when it is worth more. The bigger the difference between the buying and selling price, the more profit will be made.
Good time management for Forex traders
Forex traders often find themselves quite pressed for time whilst trading. It is all too common for traders, especially those who are new to Forex, to end up spending too much time on their trades at the expense of everything else. Sometimes, realising that even the most seasoned traders take time to live a normal life is just what you need to get back on track.
Many traders spend too much time watching charts in the hopes that something will change dramatically during that time. In reality, this technique sets many back because it causes them to focus too much on the possibility of failure. Conducting research prior to a trade is always a good idea, but this, too, can get out of control. If a solid plan for conducting trades isn't in place, no amount of obsession over current trends or expert advice will correct it.
There are many different advantages to having a working plan for your trading. Organisation is one of the major advantages, but a solid plan will also help you manage your time more efficiently. Remembering the fact that successful people generally have a plan will in turn help you stay focused.
When you have a good plan for managing your trades, you will have more freedom to do other things and feel less confined by your trading activities. You will be able to focus more on the meaningful parts of the trading process and less on worrying about the minor things.
Overdrafts as a form of business finance
Overdrafts are a form of credit provided by banks for their account holders. For businesses an overdraft facility can be used to help them make such things as one-off purchases. Ideally an enterprise securing a bank overdraft should be able to pay it off as quickly as possible.
Just as with business loans, a business with an overdraft will have to pay interest. But unlike a loan, which is usually payable over a pre-set period, interest is paid only while the account is overdrawn and on the amount outstanding.
Before arranging an overdraft facility, the company will need to have a business account with the particular bank. Generally there are two forms of overdraft facility available. There is the formal overdraft where the business will set it up with the bank in advance. Depending on the bank, the agreement can run for a set period, such as for up to 12-months. The business owner may have to pay an arrangement fee when the formal overdraft is agreed, and again when it is renewed.
Sometimes enterprises overdraw on their business accounts without telling their bank first. This is known as an informal overdraft and the bank may charge a fee each working day the account remains overdrawn as well as interest. If this is likely to happen frequently then the best advice is for the business to try and arrange a formal overdraft.
Overdrafts are recommended as only a short-term form of credit. They are, however, flexible and arrangement is usually very quick. As soon as the overdraft is cleared interest payments stop.
On the downside, the bank does have the right to ask for the overdraft to be cleared on demand, which could cause problems if an enterprise is having cash flow problems. There are also extra charges should a business exceed its overdraft limit.
Choosing the best FX currency pair to trade
Once a trader has traded on a demo account for some time and it becomes time to trade with real money, such a trader has to decide which currency pair(s) to trade in. Although this is largely a matter of personal preference, a few guidelines might aid the decision.
Volatility
As a general rule, the more volatile a currency is, the harder it becomes to predict its future movements and hence to trade it profitably. In this regard it might be a better solution to concentrate on the bigger currency pairs, such as the USD/GBP and the USD/EURO, than on currency pairs involving developing currencies such as the Indian rupee. This rule is not, of course, set in stone - third world currencies often present unequalled opportunities for the more experienced trader.
Patterns
Certain currency pairs tend to display fairly easily discernible patterns over time. The AUD, for example, has been appreciating fairly steadily against the USD over the past decade – forming an excellent longer term trading opportunity. This is where the trader’s timeframe plays an important role. Traders with a longer trading horizon can make use of such longer term trends, while short-term traders have to concentrate on opportunities that arise during brief market fluctuations. As a rule, these are much more difficult to predict.
Certain currencies are directly influenced by commodity prices. The Canadian dollar is an example here. Canada is a major oil exporter, and a drop or increase in the price of oil can serve as a leading indicator for the USD/CAD exchange rate. This presents great opportunities for astute traders.
Liquidity
You will never have a problem with liquidity with major currency pairs such as the EURO/USD. If you trade in obscure third world currencies, liquidity might sometimes become a problem.
Whichever currency pair you decide to trade in, a service such as tradestream could prove to be invaluable.
Studying for a job in Economics
If, like many people you follow the news including the financial and business sections then a career in economics might just be for you. Economics isn’t just about money, it’s about understanding a range of subjects they have an impact on the economy including political, sociological, geological and historical issues.
Studying economics at university can lead to a job in many areas of the financial and managerial sectors including banking, accountancy, trading and auditing. Other career paths that economics can help in include positions in marketing, management and sales roles.
While economics does not focus solely on number-crunching, reading charts or spreadsheets, students will have to have an aptitude for both mathematics and information technology. Problem solving and an understanding of currents affairs throughout the world are also good traits to have.
Throughout an economics degree, the student will learn a wide range of skills, opening up a wide range of career prospects (as mentioned above); some of the skills taught include:
• Analysing complex data and forming conclusions based on them
• Creating and presenting arguments
• Approaching issues from multiple angles, including the use of computer software
• Strong numeracy skills
• Strong IT skills
• Strong research skills
• Problem solving
• Planning and meeting deadlines
• Self-management skills
• A good understanding of current affairs
Some students even go on to consultancy roles giving advice to banks, large business or even government agencies, while some use the knowledge gained to start their own business.
For more information on economics or to see some economics coursework examples click here.