Some basic trading strategies to understand at the outset.
Entering the forex market can be a new and different experience for an investor. While it shares plenty of similarities with other investment markets, forex is a unique environment that comes with its own challenges and opportunities.
Mastering forex trading strategies takes time, practice, and in-depth education on trends, history, and analysis. For those just beginning to look into this market though, there are some basics to understand at the outset.
- Forex Trades in Pairs
First, it’s important to know that forex trades in pairs. What this means is that even though the market is often referred to as the currency exchange, it’s not quite as simple as buying one currency with another. Instead, the idea is to buy or sell a currency “pair,” which represents two currencies’ relationship to one another. To give an example, the EUR/USD pair denotes how many dollars make up a single euro, and it can be bought or sold according to whether you expect the euro’s proportional value to rise or fall.
A handful of popular currency pairs largely define the forex market, though there is also a long list of so-called “exotic” pairs featuring less prominent currencies that can also be traded.
- Forex Never Stops
In a roundabout way, regular stock market trading’s schedule can cause investors to exhaust themselves. While the markets are open essentially during each business day, the stock market still has a reputation for demanding long hours of regular traders. This is because many of them feel the need to set up trades after hours, watch the futures, and wake up early to do analysis before the opening bell.
By contrast, forex never stops, at least during the work week. Trading is open for 24 hours, and while this may sound busier, it actually takes some of the “extra” work out of things for investors. You can essentially learn which hours are best for trading the pairs you’re invested in, and plan around them accordingly.
- Forex Involves Leverage
It’s also important to understand that many forex traders work regularly with leverage. If you’re not familiar, this is a system that allows traders to invest with an inflated sum relative to what they actually put into the market. For example, you might “invest” $1,000 on a forex trading platform, and leverage might then allow you to trade with $5,000. There are both risks and rewards associated with this sort of arrangement, but some forex traders like that leverage can allow them to deal in much higher volume, and thus with greater profit potential.
- Forex Can Be Traded Through CFDs
For people who might want an alternative to the basic purchase and sale of currency pairs, forex trading via CFDs is an option worth knowing about. It’s a style of forex dealing based on price trends more than actual prices, which some find to be more of a low-pressure arrangement. Buying the EUR/USD pair effectively means purchasing it at its current ratio. Setting up a buy CFD on the EUR/USD pair means betting on that ratio to strengthen over a given period of time.
We should also note that as with ordinary forex trading, forex CFDs can also be arranged with leverage.
- Forex Can Be Traded Via Futures
Futures trading is also an interesting alternative option within the forex market. Futures are a little bit like CFDs in that they have to do with price movement, but not with the purchase of currency pairs directly. But with a futures contract, you’re actually agreeing to buy a pair at a set price, and at a set time. That way, if the pair’s value increases in the interim, you’ll be buying it for less than it’s worth — essentially profiting off your investment.
Before you make any actual forex transactions, you’ll need to analyze the market, learn how to read the charts, and study the history. For entry-level understanding of the forex trade though, the tips and facts above should serve you well.