What is Forex?
Forex simply means foreign exchange; it comprises of buyers and sellers who deal in currencies at a predetermined price. These buyers and sellers can be the central banks, companies, or individuals. Many people indulge in forex without knowing. For instance, you want to travel to Japan from the United States. You can’t use your US dollar in Japan because they use the Japanese Yen. Therefore, you first have to change your US dollar to the equivalent Yen before you can buy anything in Japan. The process of changing the money from one currency to another is known as forex.
Although various foreign exchanges take place for practical reasons, however, the majority of these currency conversions are done to generate profit from buying or selling.
BENEFITS OF TRADING FOREX
Trading forex comes with numerous benefits. These benefits include:
- No commissions – you don’t have to pay clearance fees, government fees, brokerage fees, or exchange fees when trading forex. Nevertheless, when compared with our traditional business, where individuals must pay certain fees, this makes forex a great option for many investors.
- Minimal transaction cost – The transaction cost for most trade is usually below 0.1%.
- No intermediaries needed – You don’t need a central bank or any regulatory authority.
- 24/5 market – One distinctive feature of the forex market is the fact that it is always open for traders to trade. From Monday up until Friday, the market is open even if you are sleeping. With the forex market, you can profit as long as you know when to buy or sell.
- Leverage – Importantly, forex trading comes with the benefit of depositing little amount while using a bigger contract value. For instance, with $100 in your account, you can perform trades worth $5,000 depending on the leverage you choose.
Base and quote currencies
In forex trading, you will always see currencies in pairs. For instance, you will see GBP/USD, AUD/JPY, CAD/JPY, AUD/USD, etc. The currency on the left-hand side is usually called the base currency, whereas the other is the quote currency. Since forex involves buying a currency to sell the other, they usually come in pairs. For instance, if GBP/USD is the forex pair and the current price is 1.24810, it means that the worth of a Pound is 1.24810 in the US dollar.
If the price of the pound rises against the dollar, then one pound will have more value than the dollars, which will give rise to an increase. However, if the pound drops, the price of the pair will also decrease. Here is the secret – if after looking at the market you think that the base currency, which is the Pound in the example above, will increase when compared to the quote currency (US dollar), then the best option is to buy the pair. Nevertheless, if the reverse is the case, then your option will be to sell. Don’t be confused if you hear traders saying they are going long or going short; it means buying or selling, respectively.