The very essence of investing is to make money by speculating on value – of stocks, commodities, indexes, bonds, etc. Investors will hold an asset with the hopeful expectation that its worth will increase. It is always exciting to learn about these assets and to acquire new ones, eagerly anticipating the wealth that will follow.
Not all investors are aware that, in their pursuit of money, they can devote their own financial resources to money itself, literal money. FOREX is a widespread electronic market in foreign currency. Investors who join FOREX can speculate on foreign currency values.
How Does FOREX Work?
At its most basic level, FOREX operates on the same principle by which a tourist exchanges currency when abroad. The new currency will be worth more or less than that which is traded in – the tourist's purchasing power will rise or fall when the currency is traded.
Of course, an investor need not leave the house to trade on FOREX, a market available Sunday at 5 p.m. EST through Friday at 5 p.m. EST without closing. Since trading is performed over the counter (OTC), in contrast to a central entity like the New York Stock Exchange (NYSE), it is done so through a network of brokers and dealers, conveying additional flexibility.
Each of the world's 180 currencies is designated by a three-letter symbol, akin to a stock's ticker symbol. Trading, then, is expressed as a ratio of the two currencies involved, e.g. USD/CHF, that is, the U.S. dollar traded for the Swiss franc.
The dollar is referred to as the base currency, while the franc is known as the quote currency. The rate of exchange equals how much of the quote currency is required to acquire one unit of the base currency. Using our example, if the exchange rate is 1.4, then one franc is worth $1.40.
Successful FOREX traders understand that, when the exchange rate goes up, the value of the base currency has advanced relative to the quote currency, e.g. the dollar has risen relative to the franc. In the same way, when the base currency declines in value, the exchange rate declines also.
Read More: How Does Forex Trading Work?
Ways Currencies Are Traded on FOREX
Currencies can be traded with investor aims in mind. The three trading markets are:
- Spot Market: This is where trades are immediate as currencies are dealt and rates are calculated on the basis of supply and demand. This is the common form of FOREX trading.
- Forward Market: This is where traders can confidentially contract with one another to lock in an exchange rate for a specified sum at a date yet to come.
- Futures Market: While the forward market contract is private, the futures market contract is made on a public exchange.
Read More: Are FOREX Profits Taxable?
Learning FOREX Vocabulary
Traders on the FOREX must deposit some cash before actively trading; this security is known as the margin. A lot is a uniform set of currency units, often 100,000. Expressing the smallest increment of price change within a currency pair, a pip, in keeping with FOREX notation, equals 0.0001.
How to Join FOREX
Using an internet connection, aspiring traders can search for, locate and connect with the best brokers for FOREX. Once one is selected, you can establish an online account and make a deposit into your new trading account. Make sure the broker sets you up with a trading platform, either the broker's own or that of a third party like Ninja Trader. Once you're set up, you are good to go.
- Determine your desired level of risk carefully. Forex trading is highly leveraged. This means that traders can purchase much more currency for their accounts than their actual cash balance allows using the standard exchange rate. High leverage is required to meaningfully profit from small fluctuations in exchange rates. But some accounts offer lower minimum trades sizes than others. This may not be a consideration when simulating, but once real money is on the line, you will not want to risk any more capital than necessary for your risk tolerance.
Adam Luehrs is a writer during the day and a voracious reader at night. He focuses mostly on finance writing and has a passion for real estate, credit card deals, and investing.