Foreign exchange trading – commonly known as forex trading – has become increasingly popular in recent years, with an estimated ten million people engaging in it around the world.
Some of those people make a lot of money doing it and many others, even if they’re not making much, find it a fascinating and enjoyable way to spend their time. To a beginner, however, it can look absurdly complicated. Just what does it really involve and is it as difficult to get to grips with as it seems?
How does forex work?
The first thing to understand about this kind of trading is that while it might seem exotic and confusing, you’ve probably already done it. Every time you convert some currency to go on holiday, you’re trading on the foreign exchange market. Every time you delay the exchange because you think you’re likely to get a better rate if you wait a few days, you’re making the kind of decision on which profiting from forex is based.
There are two differences between this and formal forex trading: the scale of the exchanges involved and the fact that you can profit from the currency pair you choose moving in either direction (as long as you predict it correctly). That’s possible because you’re not gaining from the trade itself; you are, in essence, placing a bet on which way the currency pair is going to move. The profits available on each trade like this are very small, which is why forex brokers offer leverage, letting you borrow money to trade with. What your need to remember is that that this not only magnifies profits, it magnifies losses, so you need to think carefully about the risks you take.
Why all the charts?
Forex charts can seem very confusing when you’re new to them, but really what they do is very simple. They’re there so that you can see how two currencies have changed in value in relation to one another over time. That makes it easier for you to anticipate the way they’ll behave in future. By changing the timeframe you’re looking at, you can look at long-term trends or zoom in on the last few hours. This means that the pattern of peaks and troughs on the charts will change but that’s only because you’re changing the amount of detail that you see.
Different kinds of indicators are used on forex charts to make it easier for you to see where the biggest gaps between the values of the currencies in a pair have been. Although they’re calculated in different ways, they all essentially point to the same thing. At the times when volatility is highest, there are the biggest profits available to be made. Your job as a trader is to use this wealth of past information – together with other observations you might make by, for instance, watching the news or following what major companies in a particular country are doing – to make predictions about where the relationship between any given pair of currencies will go next.
How to learn more
There are some great resources out there online if you want to know more about forex trading for beginners and you can also benefit from joining forex trading forums, which give you the chance to learn from other people’s experiences. It’s a good idea to make fantasy trades for a while and pay attention to the way they work out before you start trading with real money. This not only helps you to get a feel for the markets, it also means that if you take too many risks then you’re likely to realise you’ve got a problem – and tighten up your strategy – before your mistakes get expensive.
Beware the deliberately obscure
Finally, a warning: if somebody starts talking to you about forex in a way that you just don’t understand, back away. It really doesn’t need to be obscure but some scammers deliberately make it sound that way in order to make you think they have brilliant insights which you’ll never acquire for yourself. This is part of how they persuade people to buy into their schemes. If you can’t make sense of what you’re being told even after you’ve read a few basic forex guides, that’s probably because it doesn’t make sense. If you don’t understand it, don’t do it.
Part of the reason why so many people engage in forex trading is that it’s not as complicated as other forms of trading. If you seriously apply yourself to learning, it won’t take you long to get your head around it. The rest is just a matter of practice.
