Understanding Forex as a Beginner

Forex is one of the most popular forms of trading and investment nowadays. Buying and selling currency has been a common practice amongst seasoned traders for years; now, more people are moving into the space. 

You may not know much about foreign exchange and how it works but read this quick guide to understanding forex, how it works, and if it’s for you. 

What is Forex?

Forex stands for Foreign Exchange, which involves the buying and selling of over a hundred currencies from around the world. Investors use their native currency to purchase a foreign currency, using the exchange rate to determine how much they receive. 

You are then able to purchase and trade different currencies, with the only requirement being you own a currency that can be used to buy another. In simple terms, you can buy and sell pounds and yen even if you’re in the United States. 

How to Make a Profit

Profit is made through the exchange rate at the time of the trade. If $50 buys you £60, you will buy the pounds and then wait for them to strengthen. When they are worth $60, for example, you sell your pounds back for dollars, and you make a $10 profit. 

This is a very easy-to-understand example, but it demonstrates the essence of forex trading, you are trading on the exchange rate, not the currency itself. 

Currency Pairs

Unlike stocks or crypto, you don’t purchase an individual US Dollar or Euro in forex. You use currency pairs to trade, such as Pound Sterling/Dollar and Euro/Yen. There are many of these pairs available, but not every currency in the world is paired with every other currency. 

There are several standard currency pairs; these include the aforementioned Pound/Dollar, Euro/Yen, and the other major world currencies like the Canadian and Australian dollar and the Swiss franc. 

You then have “minor” pairs, such as Euro/Yen, Aus Dollar/Yen, and Canadian Dollar/Swiss Franc. You also have pairs that are known as “exotic,” which comprise currencies from smaller and emerging markets. 

These exotic pairs include Aus Dollar/Singapore Dollar and Swiss Franc/Swedish Krona. As mentioned, these pairs are for emerging markets and are those who want to speculate on long-term currency strength. 

Trading Strategies

There are a few trading strategies in forex, with four being stand-out options for beginners. These are scalping, day trading, swing trading, and position trading. 

Scalping

Scalp trading is a labor-intensive form of trading that relies on the slight ups and downs of the exchange rate that happen every minute. Scalpers look to make a tiny profit on trades, but they do tons of them a day, with the profit stacking. 

Day Trades

Day trades are exactly what you think they are, trades that start and end on the same day. These types of trades offer a bigger profit than scalping trades but also require slightly more technical analysis and time. 

Swing Trading

Forex is often affected by financial announcements and economic news, and swing traders take advantage of these changes. They will hold positions for a few days or a week and then trade when these swings happen. 

Position Trading

Position trading is for those that don’t have a lot of time to spend trading every day or week. A position trade is often held for a number of months, even years, relying on slow but consistent growth over a long time. 

Leverage

An aspect of forex that should be considered when trading is leverage. The broker you have your account with will offer a certain level of leverage, such as 10x, 20x, or even 50x. Leverage is used to help those with smaller budgets make a decent profit. 

Considering profits in forex are usually a few percentage points, the equivalent can end up being only a few cents if your initial investment is small. However, a 2 or 3% profit on $50,000 is far more money. 

Therefore, you can use leverage to turn your small budget into something that will make a great profit; a $100 investment can be turned into $5000 if your broker offers 50x leverage. Leverage should be used with caution, but it is still incredibly useful.