A Beginner Guide To Understanding Forex
You must have seen an ad for an application popping up on your feed at some point or another, telling you that it is possible to make big money with Forex trading. You then saw spiky red and green lines going up and down, and you were wondering: what’s Forex? Let’s start by the beginning, shall we?
What’s Forex trading?
First and foremost, Forex stands for Foreign Exchange, also named FX trades sometimes. Basically, it’s like the stock market, but instead of investing in companies, you invest in currencies. A currency value is based on the supply and demand of said currency. When you go to the airport and you want to exchange your money at the counter, you will see different FX rates on an electronic board.
These are the rates that Forex traders are speculating on, and of course, investing in. Nowadays, traders can even get Forex robots to do the job for them. Depending on the overall economy and political situation of the 2 countries involved in the exchange, the FX rate will increase or decrease accordingly.
Why does foreign exchange exist?
Here are the main reasons why the different countries in the world need foreign currencies:
- Tourism This one is the most obvious since when you visit a foreign country, you will most likely need to exchange your money. The more tourism, the higher the rates go.
- Business Companies often need to buy supplies from another country such as food, mechanical parts, or electronics. In the process, they will inevitably have to exchange their home currency with the supplier’s currency.
- Government Governments often need to get some funds from another currency, in preparation for an event or for any future international transactions.
- Investing/trading And of course, Forex traders can buy a currency before its value rises and then sell the latter at a higher price to get a profit.
What’s a currency pair?
It’s just another name for the FX rate we mentioned earlier. For example, the most popular currency pairs are EUR/USD and USD/JPY. On a Forex exchange broker, you’ll see these pairs usually at the top of the list, since they are the ones that traders are the most interested in. Some countries have what we call a hard currency, which is a stable currency, while other countries have a soft currency. Paired soft currencies are a bit riskier to bet on since they present higher volatility.
And that’s all for today! Now you know what Forex is and how it works on a basic level. If you are interested in the Forex trading markets, we recommend investing in the common currency pairs first.