Forex: The Basics You Need To Know

03.12.2018

Forex is a form of trading which stands for Foreign Exchange Market. It is the act of trading currency between countries and it is the largest market in the whole world for trading. So, if you aren’t too familiar with Forex and you are looking to learn, we’ve got a quick round-up of what Forex is all about and how we can trade currency on the stock market.

 

What is Forex?

As we mentioned, Forex is the market where currencies are traded around the world every single day by big banks, corporations and individual investors. But what does it mean to trade currency in the first place?

 

If you have ever been on holiday abroad you will likely be aware that every currency is worth a different value compared to your own local currency. So, for example, GBP currently (as of writing this) is equal to 1.28 USD. This means if you were to give someone £1 coin, you would get $1.28 in return. This difference in value is relative and is known as an exchange rate. Exchange rates exist because back in the mid-1800’s people used to use gold and silver as payment for items. Different parts of the world would have more gold and silver than others and this would mean that the demand for this commodity was lower, therefore decreasing the value.

Let’s imagine that you have 3 people. Person number 1 has no sweets, and they want sweets to eat. Person 2 has 4 sweets, and Person 3 has 10 sweets. It would be a bigger loss for Person 2 to give Person 1 a sweet and therefore they would charge more for the pleasure, whereas Person 3 has an abundance of sweets and therefore will offer them at a lower price. This works the same way with currency and other trades too. Exchange rates work in the same way and they always work in pairs. So you will see a different relationship between GBP/USD and USD/EUR because they have a different relationship when it comes to supply and demand of trade, currency, and other commodities etc…

Now we know a little about exchange rates we can talk more in relation to Forex itself. The Forex market is responsible for exchange rate values and this is why you will see them changing every single day as people trade currency between eachother. You may notice that a currency never has a specific value, and this is due to the fact that they are always counted in pairs, and the value you will see is the RELATIVE value between the two. For context, you will see that since Brexit, the value of the Pound against many other currencies has dipped because people don’t want to buy into the UK anymore.

The Forex market is one which runs 24 hours a day from Monday to Friday and is closed on the weekends. The reason it runs for 24 hours a day is that it is international and runs all over the world. Due to the scale and the fact that Forex is carried out everywhere in the world, there is little to regulate it because no single governing body controls it. This can be a great thing because it gives traders the freedom to trade at their own pace and use their own methods.

Currently. Forex traders exchange approximately $5.09 trillion every single day.

 

How does it work? 

 

Now that we have introduced the idea of Forex, its time to see how people actually trade on the market every day. Forex trading is something which can take a lot of practice, and of course there will always be a lot of complication involved, however, it is something which is actually straightforward, to begin with. If you want to trade Forex and try your hand at this game these are some of the initial things you need to do and need to know:

 

Choose a currency pair

 

Before you do anything else, you need to choose a currency pair to trade between. It is very common for people to choose their own local currency alongside another currency. So if you are from the UK you may decide to trade with GBP/USD or GBP/EUR etc. Have a little look online and see what your options are and which ones may be best for you.

 

Buy or Sell?

 

When you come to trade currency you will have 2 options: buying or selling. Which one you decide to do will depend on the relative values of your currency pair and how you predict them to change over time. For example, if you were to trade between GBP/USD, you would first want to look at the current values of these currencies. Let’s say that the values are as follows:

 

1 GBP= 1.28 USD

 

In the current situation with Brexit and the tumultuous relationship Britain has with the USA, it can be assumed that the value of the Pound will drop compared to the Dollar. In this case, it would be better to sell GBP and exchange it for USD, as this should increase in value over time and give you a profit. In the opposite direction, you would want to buy USD in exchange for GBP. It is always worth keeping on top of current affairs and news to give you an idea of this.

 

Orders

 

When you buy or sell currency on the forex market you will have the option to add an order to the trade. This is essentially a rule which you attach to the trade which states that if a variable is met, you close the deal. Here are the two main types of order:

  • Stop loss – this order is to close out of the deal if the value of your trade dips below its original value. It prevents the risk of you losing money on a deal
  • Limit order – This order is to close out when the value gets above a certain threshold to maximize your profit and ensure you get as much as you can out of a deal

Monitoring

 

It is always important for you to monitor your stocks as they go as they will be constantly changing every single day. Be ready to close out at any given time and always trust your gut instinct.

 

Closing

To close a deal all you need to do is the exact opposite of what you did when you opened it. So for example, if you opened by selling £100, close it by buying £100 back.

 

Trading Forex doesn’t have to be complex, however, it will require a lot of skill and risk management to make a success in the trading world. If you need more advice or want to take a training course. We offer a Free introduction to trading as well as an intensive course to give you all of the knowledge you need to trade in the real world. Visit our Trading Courses page to find out more at http://alphatrader.co.uk/alpha-trading-course/

 

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