Forex (short for foreign exchange market, or currency market) is a decentralized international market that regulates and facilitates the transactions and changing of one country’s currency into another’s. In the present, forex is the largest market in the world by trading volume, followed immediately by the Credit Market.
While the largest participating parties are public and private financial institutions and governments, individuals can also engage in the forex market as independent investors. Unlike the stock market, forex is much more accessible for beginners and chock-full of opportunities. For those of you who want to give it a try but do not know where to start, here are a few basic, easy to understand forex concepts.
Learn Basic Forex Terminology
Nobody is born an expert, so the first step you have to take is learning a few basic forex concepts. These words sit at the core of this field, and every course that teaches forex for beginners will stress their importance:
- Base currency – the type of currency you are spending or getting rid of.
- Quote currency – a technical term that describes the currency that you are buying
- Exchange rate – a basic indicator that shows how much quote currency you have to invest in order to purchase a base currency.
- Bid price – the sum of money the broker is willing to spend to purchase the base currency in exchange for quote currency. The bid price can also be used to describe how much you are asking to sell your quote currency.
- Ask (offer) price – the price that the broker will ask for base currency in exchange for quote currency. Alternatively, it also describes how much money you are willing to spend on the market.
- Going short – buying quote currency and selling base currency.
- Going long – purchasing base currency and selling the quote currency.
Spend Only Money You Can Afford to Lose
With all the technical tools and strategies forex is, at its core, a speculative market in which practice, innovation and a keen knowledge of market trends are essential for success. When it comes to forex, you will only learn through trial and error. This means steadily investing minor sums of money and celebrating the small victories until you are comfortable enough, both from a financial and psychological standpoint, to take it to the next level.
This is why you should not invest large sums of money right from the get-go in the hopes of getting rich overnight. Do not base your entire livelihood on this hobby, like quitting your job, neglecting other financial responsibilities or accessing emergency accounts to fund your forex venture. Some people strike gold and make it on the market, some not – but the prospect of success is not worth risking your entire livelihood right from the start.
Focus on The Big Forex Markets
Unlike the stock market, where investors have hundreds of variables and stocks to take into account before making a decision, forex traders have to keep watch on only eight countries. These countries are called ‘’The Big Eight’’ because their economies and currencies are strong enough to have a significant impact on the forex market:
- New Zealand
- United Kingdom
- United States
- The Eurozone, particularly France, Italy, Germany
Obviously, just checking the exchange rates and calling it a day is not quite enough to take your trading career to the next level. You need to know at least some general facts about their political and economic systems and be up to date with any new government policies that could influence the forex market. Fortunately, all of the countries mentioned above release daily economic reports that will help you decide which currency is worth your hard-earned money.
Understand the Differences Between Technical and Fundamental Analysis
Analyzing and interpreting charts is an essential core process of forex trading that you will have to fully internalize in order to become successful. While most famous forex traders made a fortune by mastering and exploiting only one type of analysis, as a beginner, you should try to employ both of them into your trading strategies until you find out which one is more suited to your style.
Forex technical analysis is based on the principle that history, even in the financial sector, tends to repeat itself. In other words, by analyzing past pricing trends through the smart use of technical tools such as trends and charts, you could technically predict future developments and exploit them to your advantage. To apply this method efficiently you will need to accommodate yourself with handling huge amounts of data – fortunately, there are hundreds of online tutorials, guide and even books dedicated to this subject.
Traders who employ the fundamental analysis focus on factors that indicate and influence the general state of a country’s economy, such as employment, gross domestic products, interest rates, international trade, exports versus imports and so on and so forth. After assessing this information, the trader can determine at what level these factors can influence the value of a particular currency.
The idea behind fundamental analysis is that the price of an asset will not necessarily coincide with its value. Through trade strategies and speculation, the markets could occasionally misrepresent the value of an asset – a value which, according to fundamentalists, will always return to normal after a while.
These are the key differences between the two methods. Whether or not one is better than the other is still the subject of heated debates between trader – but until you will be versed enough to take a side, it is best to give each method the benefit of the doubt and experiment as much as possible.
While there are a few forex-related technical aspects that could send your head spinning, this particular market is very accessible and easier to break into than other fields. As a beginner, making a habit out of analyzing the world’s eight largest economies, learning basic terminology and understanding the differences between technical and fundamental analysis is enough to kick-start your forex career.
Familiarize yourself with the basic concepts presented in this article and soon enough you will feel comfortable enough to turn a hobby into a successful business venture.