Forex Trading has become a hot topic all over the world today. The interest in the forex trading has 'compounded' post the big crashed in the stock markets of US and UK, as more proactive investors have already started searching for greener pastures. And amongst all this talk of forex market and currency trading, one can't help but feel the need to learn and keep oneself up-to-date with the present knowledge.
Before we start, let us get some answers about some basic questions you may have about the forex market.The forex market is a platform on which currency trading takes place. Why are currencies traded? Currencies are traded for two basic reasons. People trade currencies for operational reasons. If you are running a business in multiple countries, you are going to need currencies of those countries. Companies who want to expand their operations into other countries need foreign currency. People involved in foreign trade need currency of different countries too. The second lot trade foreign currency to make a buck from the fluctuations in the prices of the currencies. How do you measure the value of a currency? The value of a currency is relative to another currency (pair) with which it is being compared. For example, the only way we can 'measure' the value of a Dollar, is by comparing it to the value of another currency such as a Pound or a Euro. What determines this comparative price? Like the price of everything else in a free-market system, the comparative price of a currency is determined by the shifts in the demand and supply of both currencies.
I may have oversimplified the concept of forex market. Actually, estimating the demand of a currency depends on a multitude of factors and hence is really tough. Experts in this, spend their lives working to estimate currency price fluctuations and even they don't have a 100% accuracy rate. One could say that estimating share prices is a much easier prospect as the share prices depend only on one thing: the company's performance. Currency prices depend on several things such as the domestic industries of a country, political and economic stability, inflation, policy towards foreign investment, GDP, growth and employment, etc. All this is compared to the same factors of the country with who's currency, the domestic currency is being paired. So yes, estimating price fluctuations is no mean thing.
Forex Trading
Unlike the national stock exchange, a forex market is multinational and a lot more volume is traded on it. Hence you, as an individual investor with foreign exchange, might not have much of a say in the price fluctuations and demand, as there are other institutional investors that are trading in a much greater volume.
In case you are completely unaware of the market trading, it is essential that you first enroll yourself in some financial literacy classes that will teach you the basic economics of demand and supply and how it affects pricing.
It is a good idea to learn to trade the forex with the help of a broker. At least in the beginning, a broker's advanced knowledge of this field will give you direction, if you intend to go solo someday. He'll tell you all the things about foreign exchange hedging, etc. Consult a broker with a good reputation. You may be lured by a firm that asks for less brokerage, but it is any day better to have a trustworthy broker charging high brokerage, rather choosing the former.
While your broker is managing your investment, you can keep a track on your investment using some charting software. You can also chart the progress of other currencies and keep notes. Keeping an eye on the news and the newspapers is also a good practice.
You can use fake forex trading websites for practice. There are fantasy websites that let you invest 'play money' and actually let you follow-up on real currency prices. As the actual price of the currency advances, you make 'profits'.
It is a very dynamic market and quite thrilling to observe. But it requires patience, a keen eye and regular follow-up. Use these tips and you will surely do well at forex trading.
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