If you’ve been exploring investment opportunities, you may have heard that the Forex market is potentially quite lucrative, however, it can be a challenging market for investors and it needs to be approached in a level-headed way, but there are big rewards available when you learn how to handle it. What do you need to know to get involved?
What is Forex?
‘Forex’ is short for ‘foreign exchange’; the Forex market is the global online marketplace in which currencies are exchanged. If you’ve ever traveled to a country where you had to use a different currency, you’ll have used the Forex market to buy some of that currency. You’ll be aware that the value of any given currency varies over time based on factors like the state of the national economy to which it’s linked, international political issues that could affect the future of that economy, and sentimental factors influencing what other traders are buying.
You can make money in the Forex market in two basic ways: by buying a currency when it’s cheap and selling it for more; or by selling a currency whose value you expect to decrease. Your degree of success will depend on the accuracy of your predictions.
Three kinds of market
There are three main markets operating within the Forex system:
- The spot market – the largest and most straightforward part of the Forex system, where pairs of currencies are exchanged according to their current market value.
- The forwards market – contracts are bought and sold representing agreements to trade particular amounts of currencies at particular times on particular dates, with details agreed by the participants.
- The futures market – non-customizable contracts are bought and sold representing agreements to trade certain amounts of particular currencies on public commodities markets at particular times on particular dates.
The spot market is by far the most popular choice for individual traders, from beginners to old hands, with the forwards and futures markets mostly used by companies to help balance out trading risks.
Anticipating the market
Making the accurate predictions that can enable you to prosper in the Forex market requires you to have a thorough, up to date understanding of what’s going on in the global economy. The Hammerstone Group provides an information feed which can be an invaluable aid in achieving this. Of course, not only real events can influence the markets – fake news like the recent Twitter hoax claiming that Angela Merkel’s coalition was falling apart, which caused the value of the Euro to drop, is sometimes used in illegal attempts to manipulate the markets. You need to be savvy about the information you receive but you also need to bear in mind that what ultimately shapes the behavior of currencies is what the majority of traders believe.
Understanding leverage
If you’re making exchanges based on the fluctuations in currency values, it doesn’t take an expert to work out that you’re not going to make very much money based on the sort of amounts you might exchange when going on holiday. Trading through a liquidity provider enables you to put down a deposit and acquire leverage, which basically means that you’re borrowing money to use for making exchanges and you’re therefore able to trade larger sums. Your deposit should insure against losses, but you’ll still need to keep your wits about you.
Making your first trades
When you first start trading Forex with leverage, it’s easy to get carried away, especially if you have early successes. You may feel that you’ve cracked the system and be tempted to keep raising the stakes. But although this could increase your profits, it could also increase your losses – to considerably more than the money in your deposit. Give yourself a strict trading limit to begin with and take your time to get the hang of how it works. Some platforms even let you make fantasy trades before you try the real thing.
Things to remember
Humans evolved to be good at spotting patterns – even when they’re not there. If you think you’ve spotted a magic formula that nobody else can see, it’s time to stop, because even if they’re lucky at first, traders who rely on such notions always end up in trouble. Similarly, you shouldn’t keep on trading after a run of bad luck because you believe it has to come right in the end. Only make trades that make individual logical sense based on real information. Over time, as your knowledge of the market deepens, you’ll see your profits rise. For smart, patient traders, Forex can be a real money-maker.
