Forex for beginners can be a bit of a trick to navigate. It is best to start with ensuring you know common terminology, know how the market works if you can participate in Forex trading and know the profitability risk associated with the world of Forex.
Forex: the overall term for the currency exchange market.
Pip: a decimal value going to .0001 or .01 (depending on the country) used to determine how much a currency is worth against another currency.
Spot Market: a market term for when currencies are bought and sold at current value.
Forwards Market: a market terms for when there is an agreement between two parties that decide the terms of that agreement amongst themselves.
Futures Market: a market term for when a contract is bought and made between two parties, and the size and settlement is chosen based on a chosen public commodities market.
Broker/Brokerage: a person and/or company gone through to be able to execute trades legally.
Candlestick: a type of chart pattern that shows the increase or decrease in value that has a thick rectangle with a long single line out the top to measure times of growth and then rapid growth or the opposite, thus making the pattern look like a candle with a wick.
Major pairs – seven currencies that make up 80% of global forex trading. A few of the most common ones include EUR/USD, USD/JPY, and GBP/USD.
Minor pairs – these often feature major currencies against each other instead of the US dollar and are not traded as much. They include EUR/GBP, EUR/CHF, and GBP/JPY.
Exotics pairs– these currencies often include more volatile markets and a currency from the list of major pairs, some of these are USD/PLN, GBP/MXN, EUR/CZK.
Regional pairs – These are pairs that are made by grouping currencies by region, and a few examples include EUR/NOK, AUD/NZD, and AUD/SGD.
Countries That Participate in Forex
Not every country participates in Forex. Before you opt to start Forex trading, be sure your country participates. The following is a quick list of participating countries where Forex is legal:
- United Kingdom
- United States
- Most of Central and Eastern Europe
Some countries unlisted may have certain restrictions, and in others, Forex trading is downright illegal, so be sure to do your research.
Photo Credit: Admiral Markets
How Forex Works
Forex works by trading currencies with currencies and banking on making a profit in the conversion by pips depending on if one currency goes up or down in value and the leverage put against that.
Currencies always run in pairs, and trades can be made by choosing a pair from major, minor, exotic or regional pairs.
Trades are done on certain platforms and accessed through brokers or brokerages. Additional software and algorithms can be bought to run trades on the platform as well. A skilled broker will be able to take your portfolio goals and execute trades based upon that for you as well.
Forex traders are able to make manual trades or have an algorithm installed to the trading platform from bought Forex software to be able to run automatic trades.
The Forex market is one of the most actively traded markets in the world, and trades are done to the tune of nearly $5 trillion daily.
How Profitable is Forex?
Forex is far from a “get rich quick” scheme. Forex trading requires knowledge, skill, and patience, much like any other trading option.
If you go into Forex trading blind, then you will very likely fail and lose out on potential profits. By opting for an undiversified portfolio or by not taking a look at any analytics within the dashboard of whatever platform you use, you will be shooting in the dark in terms of profit.
As far as being patient, it does take time to turn a profit. You must remove emotion and avoid rash decisions as one bad market day can cause your portfolio to make a large jump or dip in value. If your portfolio takes a huge dip, try to wait and ride it out and see if you will recover. If you start to see a sharp profit, be sure not to hurry and try to make too many trades that you will not be able to back yourself in case they fail.