Forex stands for “Foreign exchange” or let’s simplify it even more-it means the exchange of different currencies. It may be a bit confusing for beginners, but it’s not that difficult to understand. Everyone at some point has participated in a forex trade, even if you don’t realize it.
For example, you’re going on a vacation and you live in the USA. You want to go to Europe and you want to get some of your money converted to euros.You will probably go to a change bureau to do it. There you can see that your 1 USD gets you something around 0,906 EUR. Let’s say that you have 200 USD and you convert them all to EUR, which means that you will get around 181 EUR.
After the vacation is over you notice that you only used your credit card and now you want to convert the money back to USD, so you go to another change bureau and there your 181 EUR are converted back to USD, but there is something weird- you end up with more money from where you started- 205 USD.
That’s happening because while you were at a vacation the USD lost some value compared to the EUR and vice versa.
So let’s summarize, “FX” or Forex trading is about selling and buying currencies.It can be influenced by a lot of factors, for example even politics play a huge role in this market. We should also mention that the Forex market is the biggest financial market in the world! Go look it up on Google!
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Why Forex Trade?
That’s only one example for beginners, trying to understand how forex trade works exactly. There are a lot of benefits in the forex trade, which may make it extremely appealing for you. However, we will keep it simple, since this is directed towards beginners and people who already have experience may find this not that helpful.
1. It’s a 24-Hour market for five days
That means that the forex market is pretty much worldwide, so the trading is possible as long as there is an open market somewhere in the world. The forex market doesn’t just close at the end of the day, it just shifts to different centers around the world!
2. High liquidity
“Liquidity” in the forex world means the ability of one asset to be converted into cash quickly, which is one of the main advantages that forex has against the other trades.The high liquidity also means that the taxes are often very low. That’s what we call spread.
3. Low taxes
The spread is measured in pips, so here is an example for the beginners:
One pip is the smallest move that a currency can make. Usually, a pip means 0.01% of a single unit of currency, but that’s not the case with the Japanese yen for example. In EUR/USD a move from 1,0001 to 1,0002 is considered one pip, but in USD/JPY a move from 120.01 to 120.02 would be a single-pip move.
The forex market is not stable, such as the stock market,allowing the traders to gain huge profits if they know what they’re doing. You can potentially have a great success, but you should keep in mind that this may be a double edged sword and you can lose your money quite as easily. This can create a very good opportunity for short-term traders, looking for a quick profit.
The leverage allows you to control more money from what you currently have, so for example if you invested 1 USD into a forex trade you can possibly gain control over 50 USD and the profit or loss you make affects the full value of the money you hold, so except from quick profit you can also make losses, exceeding your invested money.
6. A lot of trading apps and tools
You can find a wide variety of apps offering great tools or even demo accounts, allowing you to practice without investing money into the forex trade whatsoever! There are tools, keeping track on the currencies in which you invested and selling them in case of a big drop in prices, saving you a lot of money!
Yes, the forex trade is great, there is a lot of info about it out there, but you shouldn’t put all of your money there, because the chance of something bad happening to them is HUGE! However, if you take your time to fully understand it you can build your own trading style. We highly recommend using a demo account before even thinking about putting your money into the market! The always changing prices provide great starting opportunities and possibly some quick profits,but the market can quickly turn against you as well!