The Foreign Exchange Market: A Closer Look
Many Filipinos want to venture the world of forex trading but don’t know how it works, what the risks are, and thus, don’t know how to start. Learning about how forex trading works will definitely increase your financial literacy and even help you become successful. But of course, you’re reading this article because you have little or no idea about this at all. So read on as I give you the basics about the foreign exchange market, and how you can make money out of it.
The foreign exchange (forex) market has gained its reputation as the biggest financial market today. In fact, many equity traders who used to invest in stocks switched to forex trading because according to them, aside from offering convenience, in forex trading, you can make profit regardless of the market conditions.
Foreign currencies move relatively with one another. Unlike in the stock market where a company’s share price has nothing to do with the rest of the market, in forex trading, a movement in one currency’s value can greatly affect the other currencies.
In Forex trading, there are major and commodity currency pairs that are most popular and get the most trades. These pairs and their combinations make up almost all of the trades in the market. And because these pairs are mostly used by buyers and sellers alike, they have the tightest spreads.
- EUR/USD: Euro/US Dollar
- USD/JPY: US Dollar/Japanese Yen
- GBP/USD: British Pound Sterling/US Dollar
- USD/CHF: US Dollar/Swiss Franc
- AUD/USD: Australian Dollar/US Dollar
- USD/CAD: US Dollar/ Canadian Dollar
- NZD/USD: New Zealand Dollar/ US Dollar
How it works
Foreign exchange, is the change or conversion of one currency to another. Trading forex means you are betting that one currency will increase in value as the other decreases, which is how you make money out of it – by educationally guessing, and guessing right.
Trading forex requires extreme commitment as it is time-consuming and effort-demanding. To be able to trade successfully, you have to study the economies of the countries whose currencies you are trading. Once you master or at least gain knowledge about the pattern of the rise and fall of the currency values, you’ll have an edge in forex trading and of course, more chances of earning profit.
Earning vs Losing
There are two ways that you can use to help you trade successfully. First is by studying recent news about the economy of the country whose currency you’re betting on, and keeping track of all events that may lead to the fluctuation of the currency value. Staying up-to-date with the value of their currency can help you predict how it may perform in the future. Second, you can make use of the previous data as reference for the currency’s future trend. While, it may not completely predict how the values will behave in the future, statistical data from the past months will be of great help in predicting the right time for trading currencies.
There is actually a 50% chance of losing as well as winning. But in forex trading, you control the risks you’re taking. For example, if you have a leverage, you have a great chance of winning, but an equally great chance of losing as well. The amount of leverage provided to you can be 50:1, 100:1, or 200:1. This means that if you deposit an amount of Php5,000 with a 50:1 leverage, you’ll be able to trade 250,000 worth of currency. With any kind of leverage, when you win, you will definitely win big. But it can also work the other way around and the risk of losing a huge sum of money is also critical.
The general rule is actually simple: You win if you successfully trade your currencies for amounts greater than how much you got them for; and you lose the other way around. With equal chances of winning and losing, the only advantage you have is to be smart. Follow the two ways that may help you choose when to trade currencies and you’ll have the edge you need for forex trading.
If you haven’t tried forex trading yet but badly want to go for it, today’s the perfect time to pursue the market. Besides, with the countless online trading platforms which can give you the convenience of depositing and withdrawing money even when you’re at home, it won’t be hard for you to begin trading.
Most of these platforms also offer low start-up fees so you don’t have to worry about cashing out a huge amount of money just to start investing it in the foreign exchange market (For as low as $50). Better yet, initially, you can use demo accounts so you can observe how the market really goes. You can practice trading real-time through these accounts until you think you’re good enough and can do the trading alone.
Pros and Cons of Forex Trading
- Immersion and knowledge in the foreign market
- Easy way to make money if you know the necessary techniques
- Keeps you informed of the economic status of other countries
- Promotes critical thinking and enhances analyzation skills
- Fosters a healthy environment for sellers and buyers worldwide
- Can be addictive (whether winning or losing)
- Also an easy way to lose money and assets
- Needs time to understand market and analyze
After all this, it is still up to you to decide whether you will venture the world of forex trading or not. These are only some of the many things you need to know in order to start trading like a professional. But of course, everything gets better with experience. What is life without some stakes, right? No matter what your decision will be, just remember this: The risk is yours to take and yours to conquer. If you become a successful forex trader, it will be your victory. But also know that if you lose, it might be a great downfall. It’s up to you to decide.