The world of forex may appear quite confusing to a novice, and it’s easy to become overwhelmed when faced with so much data and figures. Furthermore, various people have different perspectives, so you can get a lot of contradictory advice.
More people are becoming interested in forex trading and participating in it. Even though it is challenging, it appears to yield outstanding results and allows you to benefit handsomely. You will probably have heard of many professionals who are making a living from it.
But what actually is Forex trading?
Some people have a pretty cynical view of the industry and believe it is just as simple as gambling. But forex trading is not pure gambling, and there is a systematic way of making profits.
If you’re looking to get involved with forex, it’s best to know the distinctions and ensure you know how it all works. The best first step you can make for yourself is ensuring you fully understand the process you’re to begin.
So here is a brief explanation of what forex trading is and how it differs from gambling.
What is Forex Trading?
The word forex is simply a shortened form of foreign currency exchange, where one currency is converted to another. You will probably already understand currency exchange if you’ve been on holiday abroad.
If you live in the UK and go on holiday to France, you’ll need to convert your pounds into euros to buy goods there. Now that you understand what currency exchange is, you may be thinking about how one can profit from it.
Trading is based on the fluctuations of prices, whether it be stocks or currencies. This is the same for any business that’s involved with selling products. You buy a good or make a good for a low price, then sell it for a higher price.
Forex trading allows you to make money using the same system. Instead of goods, you predict if a currency will weaken or strengthen in relation to another currency.
For example, one of the most popular currency pairs is GBP/USD. This basically means ‘how many US dollars does it cost to buy one British pound’.
If you open a position at the price level of 1.36, you are buying a certain amount of pounds at 1.36 dollars per pound. If the pound price strengthens to 1.38 and you close the positions, you are selling your pounds at a higher price. This allows you to make a profit depending on the price rise and the size of the position.
So is Forex Trading Gambling?
The short answer is no.
If you have never researched forex trading before and simply open a few positions hoping that the price will rise, this would be classed as gambling. However, forex trading uses intense research and analysis to forecast the movement of prices.
There are two significant types of analysis used- fundamental and technical.
Fundamental analysis looks at the global picture of a currency and how that may affect its price. This means looking at the political and economic factors related to a currency.
For example, European central bank announcements are likely to have a significant impact on the price of the euro. Your job as a trader is to determine whether the announcement will strengthen or weaken the euro.
Technical analysis is quite different. If you like graphs, you’re likely to enjoy technical analysis. Technical analysis involves looking at trends and patterns in the price movement of currencies and using these to predict price movements.