Forex has become the largest investment sector in finance today with more than 4 trillion USD being traded every day. The boom was enhanced by the web making FX accessible to retail clients from all around the world. If you are
considering an investment in Forex or just out of curiosity, this guide will explain the basic characteristics of the industry.
The concept: The aim in Forex is to predict the price movement either up or down for a specific currency pair. For example let's say that the current rate of the British pound against the U.S Dollar is at 1.6249, when the pound gets stronger then the price will go up (> 1.6249) or down (<1.6249) when it's the dollar. If you predict the correct shift in price movement then you earn a profit based on the difference from the starting and closing rate of the currency pair you are trading.
What affects the market: The rate and movement of a currency pair is affected by a number of factors. From unemployment rates and non-farm payrolls of a nation to government bonds and the economic crisis, all are example of what could shift the market and make a currency pair take a 180 degree turn.
Some general characteristics of Forex trading are:
Currency pairs: In Forex trading all currencies come as pairs since you are trading the difference in price change of one currency against the other. Each currency is expressed by a 3 letter combination meaning that the Euro against the Dollar will be shown as EUR/USD. The most popular currency pairs are the EUR/USD, USD/JPY, GBP/USD and AUD/USD.
Leverage: In order for traders to maximize their profits when predicting small price changes, leverage was introduced. Leverage is essentially a multiplier that gives you the ability to trade volumes that you could not actually afford, thus multiplying your profits from every trade. It is expressed in the form of 1:10, 1:20, 1:50 and varies from broker to broker with some companies offering leverage up to 1:1000. Leverage is also a major risk factor since you can also multiply losses as well as profits.
Spreads: Spreads is the difference between the bid price and ask price. Forex brokers are being compensated in the form of spreads and rates vary for each currency pair. Before choosing a broker it is often recommended to check and the compare the spreads in order to find a broker that meets your requirements as a trader.
Forex trading could be profitable but it could also be risky. Careful understanding of the characteristics of the industry and planned risk management is essential in order to have a successful trading experience.
Richard J Broomstick is a financial writer. Check out his reviews at: http://fxmoz.com/etoro-review-by-fxmoz/ and recommendation about the best forex broker
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