What is Forex Trading?
It refers to the process of trading foreign currencies. Forex is an abbreviation of the term ‘foreign exchange’.
How is Forex traded?
The market opens Sunday evening at 5 p.m. Eastern Standard Time and remains open until Friday at 5:00 p.m. EST.
Remember, in the world of forex you do not physically exchange currencies. If you are looking to purchase actual (physical) cash in other currencies you will need to use another platform for purchasing foreign currency.
To be clear, if you are going on vacation and need to buy Euro, you would not use the forex market (though that impacts your price) because you would not actually have the physical currency to spend on vacation. This guide on the cheapest way to exchange foreign currencies will be more beneficial for your needs. If you prefer to purchase physical currency, a platform like XE.com may be a better option.
How do you make money trading on the forex market?
The concept behind forex trading is relatively simple. Purchase currencies that are increasing in value. The stronger the value of your currency holdings, the more money you make.
You use $1000 USD (United States Dollar) to purchase 714.29 EUR (Euro). The USD to EUR rate is 1.4. In other words $1.40 USD will buy one EUR.
Assume that two months later the USD to EUR exchange rate is now 1.5. You would still have 714.29 EUR, but that now only represents $666.66 because the value of the USD strengthened in comparison to the EUR.
If the currency you are holding becomes stronger, you make money.
Forex trading is all about how currencies move in relation to each other. There is not a standard value against which a currency is measured. The only way to know the value of your currency is in comparison to another. At any given time one currency will be increasing in value as compared to one currency and decreasing in value as compared to another currency.
Why are their two sets of numbers (inverse) for each currency set?
At times you will see something like the following:
1.74 USD/GBP – This rate tells you how many USD (1.74) it will cost you to buy one GBP.
0.5730 GBP/USD – this rate tells you how many GBP (.5730) it will cost you to buy one USD.
How do I calculate how much of another currency one currency will purchase?
While all online platforms and calculators can make the calculations for you, the numbers are calculated as follows:
If EUR is worth, for example, 1.4 USD, you would get 7,142.86 EUR for 10,000 USD (10,000 ÷ 1.40 = 7,142.86)
Is Forex trading risky?
Yes. Extremely. The problem with Forex trading is that there are so many variables in place. In my opinion, it is almost impossible for the average investor to know, understand, and interpret all those moving parts.
The forex world is a volatile place to invest your money.
What factors influence the value of a currency?
Currencies move based on governmental policies, perceived strength of certain currencies, economic conditions of countries, export and import needs, trade deficits, stock market performance, interest rates and politics.
Why is trading forex becoming more popular?
Theoretically, there is money to be made every day – a lot of money.
Get online and scan your paper and you will notice that certain currencies have drastic increases and decreases. This excites the average person into falsely concluding ‘if I had bought “x” currency when it was worth “y” then I’d be rich. It appears simple, but it is not.
Can anyone participate in the forex trading market?
Yes. With the development of technology you can sign up for your own forex investing account on the internet.
There are forex advisors who will try to help you identify currencies with potential. This, however, is an extremely difficult thing to do because of the many factors that influence the value of a currency (see above).
Is forex investing a good way to protect yourself against a declining US dollar?
Theoretically, the answer is yes – as long as the value of dollar continues to decline. That, however, is a question only speculators know. There may be indicators, but there is no certainty as to the future direction of the USD. Therefore, while it is a viable option, it is also a risky one.
How do I get started with Trading Forex?
Is the $50,000 practice currency trading account at Zecco.com a good idea?
Absolutely not. This encourages you to experiment. Not a bad idea, right? The problem is that everyone who makes money (in the short term) will think they are prime material for forex trading. Your ability to successfully invest $50,000 of play has no relationship to your ability to successfully manage your own money over a long period of time.
How much of your investment portfolio should be used in the forex market?
Because of the risk involved your forex exposure should not exceed 5-10% of your total portfolio. One must also consider the amount of foreign stock or mutual fund holdings in their portfolio as these holdings are already moving somewhat in relationship to the forex market.
For most people, the following five tips will help reduce your exposure to a declining dollar.
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Photo by rixbaby.