What Is Currency Trading And How Can A Novice Trader Get Involved In It?
by Chris on February 15, 2010
If you have seen ads on TV, on the internet or in magazines for forex trading, you could be wondering what is forex. The word forex is short for foreign exchange, which is the exchange of one currency for another on the global currency markets. It is sometimes abbreviated even further to FX.
A lot of people already have some knowledge of exchanging currencies when they are going to an other land for business or on vacation. You probably find out as well that the financial institutions are constantly changing money for companies who have an import from or export to foreign countries. However, an estimated 70%-90% of foreign exchange trades are speculative. This means that the individual or institution making the exchange has no plan of taking delivery of the currency that they have bought, but plans to trade it back at a gain. This is forex or currency trading.
Most most of the globe's currencies no longer have a fixed exchange rate, so their quotes or prices are continually fluctuating. When a nation is experiencing an economic growth its currency value will generally be strong, or high. When a land has an economic downturn, its currency will more often than not drop too.
As small changes in exchange quotes are happening all the time to every currency, there is a lot of opportunities for financial traders to earn profits by buying a currency whose price is going up in exchange for one whose price is dropping. Dissimilar to stocks, you are always trading with a pair of currencies because you have to give money in one currency to get it in another. Every currency is indicated by three letters and the major crosses will look like this: EUR/USD (euro/US dollar), GBP/JPY (British pound, Japanese yen) etc.
Unlike stocks of course you will not get any dividends on a currency investment. You have to move on rising and falling trends or economic and financial events to choose when to buy and sell. You then close the trade by exchanging the opposite way and if the market has moved substantially in the direction you expected, you will end up with a gain.
Until recent years the market was totally in the hands of banks and other institutions with large investment funds but the evolution of the internet has meant that individual investors may enter the markets via their home computer.
You need a broker and there are several who cater to the independent trader by offering mini currency trading accounts so that you can begin with just a few hundred dollars. A more significant starting capital is recommended. Like all speculative trading, this is a risky type of investment so you should only be risking the money that you do not need for other purposes. Fortunately, most brokers provide free demo accounts where you can master trading skills by training in demonstration mode before you ever risk a real cent.
Beyond practicing on a demo account, what can be extremely beneficial is using forex signals in your trading. Forex signals are basically market predictions and trading recommendations from a forex market expert or an experienced trader. There are a lot of forex signal providers available online. But always check the past performance first, as only reliable forex signals will make you money, not losers.
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