Forex Trading: Everything You Need To Know

The world has currently gone mad with a stream of different investment news. First, we had the latest cryptocurrency boom, with people like Elon Musk getting very vocal about things like Dogecoin and Bitcoin, potentially influencing the market and bringing it back into the public eye.

 

After a rough couple of years, the crypto market seems to have taken off yet again. Everyone is obsessed with it, and then came the incredible news of hedge funds losing millions because of Redditors investing in GameStop. There was that whole RobinHood controversy as a result of this, so the world of investing is fresh in everyone’s minds.

 

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Consequently, you might be thinking of different ways of investing your money. The previous two things highlight the potential of crypto investments and the classic stock market investments. However, there’s another popular domain that might be worth looking into – Forex trading.

 

Forex holds many advantages, and a few disadvantages; both of which will be discussed in this guide. Please remember, this is not financial advice, and you are not being instructed to invest in anything. Use this guide as an educational tool to help you figure out the best ways to use your money.

What is Forex trading?

Forex is commonly known as the foreign exchange market. In essence, it involves converting one currency into another. From an investment standpoint, you will see numerous ‘pairs’ on the Forex market, which comprise two different currencies. For instance, this can be EUR/USD or USD/GBP, and so on. As you can imagine, there are literally hundreds of different combinations because of all the different currencies in the world.

 

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You invest your money by picking pairs and buying/selling them. Each pair comes with a base and quote currency:

 

• Base currency: The first figure you see, always displayed on the left of the pair. This is always equal to one.

 

• Quote currency: The second figure, always on the right of the pair, indicates how much of this currency it will cost to buy one of the base currency.

 

For example, let’s say you’re trading USD/GBP. The based currency (USD) will be 1, and the quote currency (GBP) will currently be 0.725380. Effectively, this means you have to pay that much in GBP to get 1 dollar.

How do you make money from your investment?

The idea behind Forex is that you capitalize on currencies getting stronger or weaker against one another. The best way to understand this is with a simplified example. Bear in mind, the figures used here are made up, just because it’s easier for you to understand.

 

So, let’s say you look at EUR/USD, and it will cost you $2 to buy €1. You would buy this if you think that the price of the Euro will rise against the Dollar. Basically, you think that you can sell your €1 for more than the $2 you bought it for. Let’s say it suddenly costs $4 to buy €1, you could sell your €1 for that price, pocketing a $2 profit.

 

Do you get the idea? It’s all about predicting which currency pairs will fluctuate in your favour, and capitalising in changes in exchange rates. Obviously, you’d probably deal with more money than the figures shown above, and the price won’t always change that dramatically.

 

What are the benefits of Forex trading?

There are many benefits of Forex trading, but you’ll see the top three in this section:

 

A volatile market

One of the reasons cryptocurrency is so popular is that it presents a volatile market where values can change all the time. If you want to make money through trading and investing, you need the market to move around a bit. If it stays steady, you’re not really going to make much money.

 

Forex has the advantage of being one of the most volatile markets, opening up numerous opportunities for money-making. In fact, exchange rates are shown to change during the day, which is why Forex day-trading is so popular.

Highly regulated

As the market deals with currency, it is one of the most regulated around. This is beneficial as it assures you of a high level of safety for your money and assets. Forex brokers have to abide by strict regulations, making it one of the safest places for you to invest your money. Again, without wishing to keep banging on about cryptocurrency, that is a market without much regulation at all – if any.

Extremely accessible

Forex happens to be one of the more accessible trading markets in the world. You don’t need much money to get started, and you will easily find more than one Forex trading app to set you on your way. There’s also lots of Forex software you can use to make your life easier, so it’s pretty easy for anyone to get involved in a matter of minutes.

What’s the disadvantage of Forex trading?

In all honesty, there’s only one disadvantage of Forex trading, but it’s potentially a dealbreaker for most people.

Extremely complicated

Did you struggle to understand the basic explanation of how you invest in Forex? It can be hard for people to get their head around, and you’ve barely scratched the surface in this guide.

 

There are online guides to Forex trading that are multiple pages long, and they dive into the depth of this world. It is extremely complicated for the average person to understand, meaning you need to do a great deal of research before you should get involved. When you know what you’re doing, then it does become very accessible. However, the extreme complexity – coupled with the volatility – can be a recipe for disaster if you don’t understand how Forex works.

 

Overall, Forex trading could be something that you’re interested in trying. One of the golden rules of investing is ensuring you diversify your assets. So, if you have money invested in stocks or crypto, moving to Forex can be a good idea to add another string to your bow.

 

 

Consult with a financial advisor regarding these important issues.

 

 

 

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Good luck!

Ken Boyd

Author: Cost Accounting for Dummies, Accounting All-In-One for Dummies, The CPA Exam for Dummies and 1,001 Accounting Questions for Dummies

(email) ken@stltest.net

(website and blog) https://www.accountingaccidentally.com/