As the largest and most liquid market in the world, the foreign exchange (forex) market allows you to trade almost any currency pairing. This is done electronically through placing buy/sell orders, and it is possible to invest in multiple currency pairings at a time.
Fluctuating exchange rates drive the forex market, as they offer opportunities for traders to potentially make a profit from currency values rising/falling (one currency will always rise or fall in value against the currency it is paired with).
The forex market is open 24 hours a day, five days per week, making it one of the most flexible and accessible markets.
Currencies are always separated into pairings, which include the ‘base’ currency on the left and the ‘quote’ currency on the right (GBP/EUR, for example).
When considering how to trade forex, it is important to first look at which currency pairings are available to you. They are separated into three categories:
* Major: These pairings always include the dollar as either the base or the quote currency e.g. USD/GBP
* Minor: These pairings consist of numerous currencies which do not include the dollar e.g. EUR/JPY
* Exotic: Currencies from smaller or emerging economies (lira, rand, krone) which are paired with a mainstream currency e.g. USD/NOK
You should always invest in currency pairings which you think will be profitable, so it is also necessary to do some research into their different behaviours, the factors that influence their value and levels of volatility they may exhibit.
Once you have chosen which currencies you wish to invest in, you can start trading forex. Basic trading principles apply here:
* Buy if you think a base currency will increase in value (appreciate) against the quote currency
* Sell if you think it will decrease in value (depreciate) against the quote currency
If the market moves with you, you will make a profit for every point which the currency increase or decreases by, but if it moves against you, then you will make a loss.
Given the volatility of the forex market, it is important to monitor your trades so that you can react to the ever-shifting market. You can set a stop loss order on each trade, which will automatically close the trade at the best price available price (helping negate losses incurred from losing trades).
To close the trade, you simply sell the currency if you bought it to open the trade and vice versa if you took a sell position to open it.