Forex trading, or foreign exchange trading, is a very promising way to increase your income. But that is only possible if you know the ropes of the market. To put it simply, forex is a form of day trading wherein currency is exchanged in a market that’s available 24 hours a day. Day trading is the practice of buying and selling and closing all positions in the same day. Most experts say that forex is one of the most, if not the most liquid market around. Global forex trade was last reported to have a daily average of 4 trillion in US dollars (2007 by the Bank for International Settlements). Forex investment is on an all time high and still rising.
Buy Low, Sell High
This is a basic principle in currency exchange. Since there are no other financial instruments except money in forex, buying low and selling high is the only way to go. In trading one currency for another, the buying price should always be lower than the asking price. This is the ideal situation. Say you are trading EU to USD and the bid price is 1.3510 and the ask price is 1.3515. The difference in the bid price and the ask price is what you gain per dollar that you trade. That is: 1.3515 – 1.3510 = .0005. .0005 is what is called pips. In the cited example, the spread is 5 pips. Spread is the difference between the buying rate and the selling rate.
Study the Market
As with all other business pursuits, study the market in forex trading. This will give you an edge over other traders. In studying the market, you must include three basic things:
1. Economic Factors – this means the economic policies and conditions of a currency region.
2. Political Conditions – politics plays a very vital role in the rise and fall of currency values. Beware of unstable countries and observe countries that are on the rise.
3. Market Psychology – be wary of reacting immediately to a movement of a currency. Traders sometimes jump on the bandwagon too hastily and this may result to a market being overbought or oversold.
Get Acquainted With the Trading Tools
There are a number of online forex trading software that you can use and learn from. Some websites even have trials and trading games so that you can practice or try your hand at forex without risking losses. Once you have acquainted yourself with these software, you can move on to the real thing.
Learn the Lingo
The best way to trade is to learn everything you can know about the market. One of the essentials is to learn the lingo. That is, to learn forex trading language. Familiarize yourself with the technical and slang terms used so you wouldn’t get lost in the translation. If you know the language, you can have an easier grasp of the goings on in the market.
Use a Broker
A broker is an individual or a company that takes care of your business for you. There are a number of forex brokers available on the internet. You just have to be careful about choosing the right one. What you can do is research about the broker you’re interested in. Most firms have websites that you can look into. These sites usually offer a broker’s history and reputation.
All in all, forex trading is easy but risky. If you’re careful and patient enough to study and observe the market yet, enough of a risk taker to make decisions, then foreign currency trading is just right for you.