Learning the basics of forex training isn’t difficult if you have experience making trades of other kinds. The principles of forex trading are similar to those of purchasing a stock; ultimately, you’re buying an asset with the hope that it increases in value.
The difference between conventional stock markets and forex markets is that instead of buying a small part of a publicly traded company, you’re buying currency. Specifically, you’re buying one currency with a different type of currency.
To simplify the concept, let’s say you decide to take a vacation, leaving London to visit the New York. Before you go, you decide to exchange £500 for U.S. dollars.
You won’t receive $500 in the exchange, because the currencies do not share equal value. In this case, let’s imagine that the GBP is worth 1.3x the USD. This difference, known as the exchange rate, determines the amount of USD you will receive for your £500. The equation is simply £500 x 1.3 = $650.
So let’s now return from our whimsical vacation to the U.S. and delve back into forex as a trading market as opposed to a form of travel prep, without forgetting the basics of how it works.
When you trade forex, you’re basically exchanging money for another currency. So you could buy $650 USD with £500, with the intention of re-exchanging your money back into GBP at a higher value. Of course, if the market moves in the wrong direction, you lose some of your investment.
Continuing with the example figures outlined above, you’re currently holding onto $650 USD. Now let’s say the exchange rate changes from £1/$1.3 to £1/1.27. In this scenario, the USD has increased its relative strength, nearing parity with the GDP. That’s good news for you, since it takes only $1.27 to buy £1, rather than the $1.30 it would have cost before the market shifted. When you close your position, your return would therefore be £512.42.
There are no prohibitions against trading one specific currency for another. But some markets are more commonly traded, and more accessible, than others.
Commonly traded forex currencies are known as major pairs. This includes currencies from established, generally prosperous and stable countries, being traded for one another. All forex brokers will enable clients to trade these forex pairs.
Then there are exotic pairs, which include at least one less established, less stable currency. Exotic pairs are more prone to fast fluctuations than major pairs, and therefore carry both greater risk and greater potential for reward. Not all forex brokers permit traders to exchange exotic pairs.
Forex is incredibly popular among traders. It’s a simple and comprehensible market that allows beginners to gain confidence without having to learn the intricate details of different companies.
To get started, you need to sign up for an account with a forex broker. If you already trade with an online broker, you can alternatively check to see whether their platform includes forex markets. But remember, not all brokers offer the same level of service. It is worthwhile to put in the effort to find the best available forex broker.
If you want to try forex trading, you’ve come to the right place. We don’t offer the service ourselves, but we do recommend some of the top forex brokers on the market.
If you’d like to do some research yourself to find out which forex broker is the best fit for you, check out their websites. Take into consideration their respective fees for executing a trade, the educational resources provided, and the quality of the trading platform. Our guide for selecting the best online forex broker is worth a read. It’ll inform you what to look out for and what to prioritize in an online forex broker.