Currency trading at its core is a straightforward concept but succeeding as a currency trader is anything but. Most people who trade currencies are not successful or struggle to make consistent profits, and it’s largely because they don’t understand the fundamentals. They jump into the market with some system they picked up online without understanding the basic principles that govern the markets. Let’s take a look at the basic concepts of currency trading if you want to start your trading career on a good foundation.
What is the Forex Market?
The foreign exchange, or forex market is a vast network made up of private institutions, central banks, and brokers. Brokers allow individuals to exchange one currency for another. The goal for investors is to make a profit from fluctuations between currencies, trading one currency against another. You trade currency over the forex market whenever a foreign exchange market is open, and since there are four major exchanges in New York, Tokyo, Sydney, and London, all of which are open at different times, there is plenty of scope for trading.
How to Make Forex Trading Work For You
The simplest way to make a profit when trading on the forex market is to buy a currency while it’s going up and sell it back later. For instance, if you notice that the UK pound is gaining value over the US dollar, you could buy a few pounds, wait until the price goes up to a level you feel is high enough for you, and sell it back. You’ll end up with more US dollars than you had when you initiated the exchange.
Major Currency Pairs
Currencies are always traded in pairs. The first currency in the pair is the base currency and the second is the quote currency. If you see that the AUD/USD pair is at 1.15, for example, this means that you have to pay 1.15 Australian dollars to get one US dollar.
You should also know that some pairs are more important than others. These are called the major pairs and contain the most-traded currencies. This includes any pair with the US dollar, the New Zealand dollar, the Japanese yen, the Swiss franc, the Australian dollar, the Euro, the British Pound, and the Canadian dollar.
Factors Affecting Currency Movements
Understanding what affects currency prices is the most important thing in forex. One of the factors that will have the most direct impact on currency is any changes in a central bank’s policy. Anything that affects business in a country will also reflect in the value of its currency.
Things like a trade deficit with another country can affect the value of its currency negatively while positive GDP and an increase in exports can increase it. Things like housing numbers, conflict, and even changes in political parties can affect the value of a currency as well.
The forex market offers tons of possibilities for patient traders with a good strategy. You should learn as much as you can about it before jumping in. That means using trusted resources such as books or online guides. Your broker may also have learning material that you can use. Don’t trust self-proclaimed experts on social media that try to sell you a trading system or encourage you to sign up with a platform they recommend, as they’re just driven by earning commissions and don’t have your best interests at heart. Try using a demo (pretend money) account for a few weeks before trading with real money. This will help you get a feel for how the market moves.