Forex – What’s it all about?

Forex – What’s it all about?

27 June 2016, 10:51
Sherif Hasan
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This series of blog posts is designed to give you a truly beneficial insight into what Forex is and more importantly how we can make a regular income from it.

Any story begins with the start – so let’s dive straight in and take a look at what Forex actually is.

I’m sure you have been on a holiday away from your own country of residence and have been to collect your holiday currency, and noticed a screen at the counter with lots of different exchange rates displayed. You switch your home currency to the currency of your holiday destination and hey presto… you have just taken a trade.

We are of course talking about a very small scale trade here. But the principle is very similar when it comes to the Forex Markets.

But HOW can you make money from this? Well… the exchange rate is something that constantly changes on a daily basis. Going back to our holiday currency illustration, let’s say you are American and you are visiting Japan. You essentially swap $100 for yen. At the time of writing this article the JPY cost is 0.0092 USD per Yen.

So for your $100 you get 10896.80 Yen…. You have Sold the USD and Brought the Yen – this is a Forex Trade. Now, as we said, the exchange rates constantly move – so let’s imagine the cost of the Yen increases to 0.0192. You sell the Yen and Buy the USD back. BUT instead of your $100, with the new increase in the Yen exchange rate, you actually get $209.21 back. Of course we are talking small scale in terms of the size of the trade, and large scale in terms of the move but the principle is, that by buying a currency at a certain cost, and then selling it at a higher cost, you make profit.

Imagine it scaled up.

The FX Market (otherwise known as foreign exchange or Forex) is actually massive – it’s the largest Financial Market in the world, trading 5.3 TRILLION dollars a day in volume. Most people think of “Trading” as stock market trading, but this area is tiny in comparison with just $22 billion per day being traded.

Ultimately while you do not see anything physical when trading FX, you are essentially buying and selling money. Think of it as buying shares in a country. In the stock market, share prices are a representation of the markets opinion on the strength of the company. In FX, the price of currency is a reflection of the health of its corresponding country.

So say you buy the Yen – you are buying shares into Japan and betting on the health of the county’s economy. If the economy does well, you sell those Yen and make a profit (hopefully). All Forex trades come in the form of a currency pair, for example the USDJPY. If you buy that pair, you are buying the USD and selling the Yen, thus betting on an economy in the USA that is better than the economy in Japan.

In Forex we have “Major” currencies, Major meaning the currency has a “Major” bank behind it (we will get to that in later articles), and they are USD, EUR, JPY, GBP, CHF, CAD, AUD, NZD.

These major pairs are THE most traded currencies, though there are others known as “Exotics” after all, each country has a currency right, and each country has an ever changing economy.

Now, Forex Trading is largely based on market speculation. The more that Countries, companies and people trade, the higher the Volume of money moving around from currency to currency gets. The level of this trading volume is what is referred to as liquidity.

From an investment point of view, liquidity is what determines how easily price can change so it’s an important factor for investors to consider. The more liquid the markets are, the more trading volume there is to be used, and the more the markets can and will move. The liquidity can vary depending on the time of day and also economic indicators and the weight of news flows.

There are many reasons to trade Forex, and if you start on the right foot it doesn’t have to be AS difficult as it is known to be. Forex is a 24-hour market with no Middleman, No Fixed Trade Size and Low Transaction costs making it a very desirable industry to be in, and it is open and available for all to participate.

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