Happy Saturday, Stackers! Let’s talk about alternative trading today…
Have you ever wondered about trading in the foreign exchange market? With so many terms it’s hard to know where to begin, so here’s a basic overview of forex trading.
What is “forex”?
Forex is trading currency. A simple way to look at it is that when you go abroad and change your money to the local currency, you are in fact trading currency. You’ll notice the exchange rate will determine how much you get in return for your home country’s money.
The market is open 24 hours, Monday to Friday, which makes it accessible to people all around the world. The main trading currencies, among others, include the US dollar, euro, Japanese yen, British pound, Canadian dollar.
Forex is easily accessible as a trader only has to place an order over the computer through a broker. The trader decides which currency (e.g. US dollars for euros) to trade. The amount and time of the transaction are decided by the trader.
The forex market is constantly fluctuating and is hard to predict, this is because any number of things can affect it. On Monday 30th September it was reported that the US dollar had been affected by fears of a US government shutdown in relation to the impending budget review.
Trading on a Margin and Leverage
Forex trades are placed through a broker. When trading on a margin it means that you can begin trading with a small amount of money in your account, you then essentially receive a loan from the broker allowing you to trade with more money than you have. – This is known as “leverage”. Leverage is appealing to experienced traders, because it means they can make significantly more money. The bad news? This also works on the reverse. With leverage you can lose a large amount of money, too. While it can appear to be a lucrative move, it’s easy to see how people get carried away if you are inexperienced within the forex trading arena.
Remember: any market is unpredictable and Forex trading is no exception. There is a chance that you could end up owing vast amounts of money to the broker.
Go long, Go short
The forex currencies that you trade with have a base currency and a quote currency. For example, in USD/EUR, the base currency is US dollar and the quote currency is the euro. If you go long on this currency pair it means that you are going long on the US dollar and short on the euro. What would this mean? Going long on this pairing would mean that you would believe that the dollar would be more valuable than the euro.
Bull and Bear
There may be terms bandied about that boggle your brain, such as a “bear” and a “bull” market.
These terms derive from the characteristics of each animal. Bulls are known to raise their horns to the air, whereas bears paw downwards to the ground. These two terms indicate which way the trend is heading. If the trend is escalating it is known as a “bull market”, however, if it is in decline it is a “bear market”.
For extra information look at some basic user-friendly online tutorials to get your head around forex before you start trading.