Forex Beginners – Understand How to Trade Forex
Foreign exchange, more commonly known as Forex is currently the largest market in the world, having trillions worth of currency as turnover on a daily basis. It is not surprising that a lot of people want to get in on this market. One could rack up huge profits with relatively low capital, but on the other hand, you can also experience just as much loss.
The concept of trading Forex is simple. You buy and sell a different currencies, which value constantly rise and fall depending on the exchange rate (the price of a given currency in one country compared to another currency). These exchange rates vary from country to country and are crucial if one wants to maximize profits. Once the exchange rate raises the value of the currency they bought, they sell it with its increased value.
Traders can choose any type of currency to buy and sell, but the most common choice would be US dollar (generally accepted over the world) and the local currency of their own country.
For example, a US dollar is worth 50 Philippine pesos, so you trade 1,000 dollars for 50,000 pesos. After some time, the exchange rate increases the value of the peso, and one US dollar is now 40 pesos. This means that the 50,000 pesos that you currently have is now worth 1,250 dollars. You trade the pesos back to US dollars, and you gain 250 dollars worth of profit. This does not look that impressive on such a small scale, but when buying or selling with larger amounts of money, the profit becomes more evident.
However, the exchange rate does not always go in favor of your currency. For example, starting again with a 1 to 50 exchange rate, you again trade 1000 dollars for another 50,000 pesos. However, the value of the dollar rises due to certain events, and the exchange rate becomes 1 to 60. You decide to trade your 50,000 back and get only around 833 dollars. You just lost 267 dollars. That is what makes the Forex trade risky.
Fortunately, there are lots of ways to help people start trading money and minimize losses. Constant analysis of your country economy (and the country which you want to change currencies with) can give you an idea of future exchange rates, letting you determine when to trade properly. There are also financial institutions that allow you to make a mock account that simulate real world exchange rates to help you get experience in the foreign exchange market without having to invest real money. By relying more on skill than purely on luck, the for