The Forex market can be a great way for investors to trade profitably and millions of investors participate daily. However, before getting into the Forex markets, traders should familiarize themselves with how it works, the terminology used, and how they can participate. Here is a guide to get you started on your way to investing in Forex.
What is FOREX?
The Forex market is the largest market in the world and operates nearly every day of the working week around the clock with the exception of holidays. There are trillions of dollars at play at any given moment on the Forex exchange.
Every nation or group of nations such as the European Union has their own currency, which is used domestically to purchase goods. However, to purchase foreign made goods, typically the currency needs to be exchanged for currency used in the country the goods were manufactured.
Since each country has its own monetary policy, many factors can affect the rate of exchange between the two countries’ currencies. Some of these factors include interest rates, political developments, and domestic economics.
With technological advancements in electronic trading, traders can execute transactions from virtually anywhere from their computers and phones. This has helped to expand the market. Since there is no singular regulatory agency worldwide, there are brokers everywhere that take deposits from investors wanting to participate in the Forex market.
This may seem a bit daunting to new traders with only limited capital. The market was originally used only by large banks, hedge funds, and other big financial institutions. However, it has evolved into a place for traders of all sizes and investment levels. Getting into the Forex market can be done with as little as $10 USD.
Glossary of Terms in the Forex Market
Open Position – When a trader enters into a transaction and while it is still active.
Closed Position – When a trader sells his/her position and takes a profit or loss.
Leverage – Money lent by a broker to a trader based on the trader’s available account funds and the asset being leveraged. This is sometimes called a multiplier.
Margin – The amount of money on deposit in a trader’s account. Used to determine how much leverage a broker might allow the trader to use when executing trades.
Spread – The difference between the current price offered to buy an asset and the current selling price of the offer. The closer the two prices are, the more quickly trades can be executed.
Pips – In Forex, a “pip” for the largest markets like EUR/USD is .0001 of the current price. For those markets, a change in the price of an asset of .0001 is a change of one pip. For other markets, a “pip” can be a variety of sizes. Essentially, a “pip” is the smallest unit of measurement in buy or sell bids placed on a market.
Currency Pair – Any two national currencies traded against each other on the Forex markets. The most popular pairs involve the U.S. Dollar, the Euro, and the Japanese Yen, but markets are available for nearly every currency in the world paired with more common currencies.
Examples of Currency Pairs and Their Abbreviations:
- JPY – Japanese Yen
- USD – United States Dollar
- EUR – European Euro
- AUD – Australian Dollar
- NZD – New Zealand Dollar
- GBP – Great Britain Pound
CFD – Contract For Difference. CFDs are positions opened by speculators based on their belief that a specific asset will increase or decrease in value. If they open a position expecting an increase, they will profit from the difference in the opening price and the price at closing. The profitability of CFDs can vary depending on the broker, time frames for positions, leverage, and other factors.
Long Position – Opening a trade with the belief that the asset will rise in value over a period of time.
Short Position – Opening a trade with the belief that an asset will decrease in value allowing the trader to purchase the asset at lower value and netting the difference. This can be done either by selling assets that the trader already holds or by selling borrowed assets and agreeing to purchase (covering the short) the asset at a future date. This is important since the asset needs to be returned to the lender.
National Interest Rate – The interest rate for a national currency set by the nation’s central bank. This is the rate at which banks borrow money from each other, but is used when a broker “rolls over” an open position in the Forex markets.
Trading in Olymp Trade Forex Markets
Essentially, the Olymp Trade Forex markets is made up of traditional currency pairs using Olymp Trade’s multipliers to provide leverage for Contracts for Difference trades (CFD).
Here is where traders can participate in markets with many different currency pairs, commodities, metals, and others. Multipliers provided by Olymp Trade allow investors to increase the value of their trades by up to 500 times the invested amount. Olymp Trade multipliers allow smaller investors to profit on small movements in currency pairs.
Risks and Rewards in Trading Forex?
Just like any market, there are a number of risks and rewards in trading Forex. Fortunately, the amount of either is wholly dependent on the investor, their experience, their ability to analyze data, and their independent decision making.
One thing to keep in mind is that there is a winner in every trade made between two parties based on the time that the transaction takes place and assets behavior following the trade. Traders should never risk more of their capital than they are willing to lose. Fortunately, with diligent effort and taking advantage of the plethora of educational tools available, a trader can often come out far ahead of the curve in profit.
On the surface, the exchange rate of assets in the Forex market might seem to move very little. For instance, the changes between the exchange rate of the U.S. and Canadian Dollars (USD/CAD) only fluctuated a total of 16 cents (0.16 USD) between 2017 and 2019. However, looking at the market chart below, one can see that there were many increases and decreases over that time period. These movements provided opportunities for investors to profit from these changes.
Because currency pairs are traded based on pips (often 0.0001 of the currency) as units and because of the sheer size of the amounts traded, there is plenty of activity within the market for traders to capitalize on.