Forex has been the largest financial market for decades. It is the root of all transactions and in a broader view, the root of all other financial markets. These reasons make Forex become an ideal place for investing, speculating for not only institutional participants but also retail traders. Nonetheless, the fact that 80 to 90% of traders lose their money in the market is still discouraging potential investors. So, how to truly understand the market and how to invest the right way? Let’s figure it out in this article.
The forex market and how to trade it
Forex or Foreign exchange is the market of currencies in which participants exchange a currency for another. In other words, the currencies are valued by one another and they are always quoted in pairs. Let’s take EUR/USD as an example; if its rate is now 1.20000, it means 1 Euro is worth 1.20000 US Dollar.
In the forex market, the rates of pairs never stay the same but move continuously due to the change in the value of the currency. As a result, traders can take the advantage of that to buy at a low rate and sell at a higher price to gain a profit. The value of a currency is driven by many factors like the strength of the economy, monetary policies, disasters, conflicts, etc. These reasons skew the supply-demand balance of that currency, thus changing its value.
Regarding trading forex in the common term, we are talking about trading the contracts for difference (CFD) of currency pairs. To be specific, traders speculate the change in the value of a pair over a particular contract time instead of buying and selling the physical money. This concept of trading has significant pros as follows:
Traders can buy and sell regardless of the market direction. For example, you are now trading EUR/USD, if the rate is going up, go long (buy EUR/sell USD) and gain profits from the bullish EUR. In opposite, if the rate is going down, go short (sell EUR/buy USD) and gain profit from the bullish USD.
Margin trading is allowed. If you notice, the rate of a currency pair changes on a very small scale. The change is as low as it is measured in pip (the fourth decimal of the rate). Therefore, to make a significant profit from that, it requires a giant investment of up to hundreds of grand. And here comes the margin trading, speculating the CFD, traders can borrow money from your broker to leverage your position hundreds of times. For example, NSBroker offers 1:100 leverage. As a result, a small change in value can get a big return.