By Sam Evans, Co-Founder and Lead Coach
Trading stocks is often what comes to mind when people think about trading and investing. However, there are other ways to take part in the financial markets. By far the simplest and easiest place to start for most is the Forex market. Forex stands for Foreign Exchange. Rather than buying and selling individual shares of companies as we do on the Stock market, we can buy and sell actual currencies against one another. As the price of one currency goes up, there will be another going down at the very same time. This creates opportunities on a day to day basis to potentially profit from the changes in the valuation of these currencies, much like we would do when trading and investing in stocks.
In Forex (FX) we always trade two currencies in a single pairing like say the British Pound against the US Dollar or the Euro versus the Japanese Yen. Remember, if one is getting stronger, then the other currency in the paring must be getting weaker. It’s these changes in price which create the moves which happen. We always trade Forex in parings. Why you may ask? Because you cannot value a Dollar against a Dollar, can you?
Buying and selling Currencies Around the World
Different currencies are bought and sold pretty much every minute of the day. All through the working week. Major banks, funds, companies, governments, and central banks make large transactions around the clock, as they move money from one currency into another. Think about this for a second: how many global companies and banks operate their businesses in multiple countries around the world, do you think? Worldwide, companies are dealing in more than just Dollars each day as their business interests reach far across the world. After all, a company like Apple doesn’t just sell iPhones in the USA. When Apple sells millions of cell phones in different nations around the world, its profits will vary from country to country depending on the Forex rates.
This is the same for major banks and intuitions too. They are moving billions of Dollars around each day when they buy and sell various currencies against each other to both protect and profit on their holdings. These transactions create major Supply and Demand for money. This results in prices moving up down in the Forex market. In turn, this allows us to participate in these moves as well.
Key Benefits of Trading Forex
Now we know a little about the Forex Market, let’s investigate what the key benefits are to trading Forex. Firstly, it is a global market and the largest financial market in the world by far. This makes it very easy to get in and out of trades because it is so liquid. We won’t get stuck in positions that we can’t get out of. Also, because it is such a large market, there is plenty of competition amongst FX brokers to attract new clients and provide them with a way to participate in the currency markets. This means that you will typically need little capital to open an account. Most brokers will allow a new trader to open an account with as little as a few hundred dollars.
This is unlike in Stocks where the minimum day trading account needs at least $25,000 to get going. Getting started with Forex can be incredibly low risk. It is great for someone who wants to start small as a beginner. Plus, you can even open a Demo account with most FX brokers before you put any real money at risk. These “Paper Money” accounts can be set up online in literally minutes. Even better, there is no obligation to fund a real money account. Check out someone like Oanda.com for more details.
Much like the stock market, we can use price charts to see a visual of the changes in the values of currencies. Here is a chart example of the Euro trading against the US Dollar, also known as the EURUSD:
In the above chart, we see a downwards trend on the EURUSD. This indicates that the Euro is getting weaker as the US Dollar is getting stronger. On the flip side of this, we have another chart below, showing the opposite on EURUSD:
https://stockability.com/resources/In this example, the upwards trend on the currency pairing of EURUSD shows us that now the Euro is getting stronger as the Dollar is weakening. Remember, that two currencies make a paring where one will always be going up as the other is going down and vice-versa. If you are new to charting and candlesticks, then watch the StockAbility StartUp Lessons to learn more.
Another great thing about Forex is that it is open to trade for longer hours than any other market. It typically opens for business on a Sunday afternoon (Eastern Standard Time) and then remains open to trade 24 hours a day continually around the clock until the following Friday afternoon. The Forex market is only really closed on a Saturday. This offers great flexibility for everyone and plenty of opportunities to take trades. FX trading is perfect for those whose time is short and have full-time jobs. There is plenty of movement in the currency markets overnight as well as during the day.
It should be noted that not all global currencies are tradable. This is due to the fact that some nations restrict access to their currency. However, there are still plenty to take part in like the US Dollar, Japanese Yen, Euro, Pound, Australian, New Zealand and Canadian Dollars and the Swiss Franc. This makes it a lot easier for a newer trader as they have fewer markets to look at and can focus more on just a couple of pairs instead of a watchlist of a hundred plus stocks!
Finally, Forex brokers offer us great leverage when we open a trading account. When you trade Forex, the broker effectively “loans” money to buy and sell with. This is known in the industry as leverage. A single US Dollar in your FX account will typically be able to buy from $20 to $50 worth of currency. This allows us to make greatly enhanced gains with smaller sums of money. It also means we can lose faster too. Therefore, using risk management techniques like stop-loss orders to limit our risks, are always a good idea when trading and investing in any markets.
We cover the world of Forex trading in both our IncomeAbilities course and each week in our Guided Trade Sessions. You can find out more information and register for the complimentary StartUp Sessions here.
Be well and take care,