You have probably heard about Forex trading before coming to this website. Forex trading is getting more and more popular these days. The reason for that is that everyone can do it from his or her computer at home. If we go back ten fifteen years, you had to call your broker and they would place the trades for you. Nevertheless, what exactly is Forex trading and how can you make money on it?
Forex, also known as “FX” or “4X”, is short for foreign exchange. The foreign exchange does not get as much attention as stocks, options, and commodities. However, the foreign exchange is the largest market in the world and it offers investors an incredible opportunity for profit.
When you trade foreign exchange, you trade currency’s not the regular stocks or bonds. To simplify it for you, Forex trading is simply the buying of one currency and the selling of another currency at the same time. As exchange rates go up or down, you either make or lose money. As I said above, you are not investing in a single company or groups of companies. You are investing in the economy of a nation. You believe that the overall economic health of one nation will improve in relation to that of another nation.
Let us take an example; you are analyzing the Euro and the US Dollar. Your research tells you that the Euro is undervalued and will probably rise in price, at the same time you expect the US Dollar to lose value. In a scenario like this, the logical thing to do would be to place a Euro buy trade and US Dollar sell. If you make the correct assumption and the Euro strengthens against the US Dollar, you will make a profit. Remember that the Forex market does not always follow the logics.
Currency prices can be incredibly difficult to forecast because there are so many factors that can contribute to a change in exchange rates. In addition, you must remember that in currency trading you always trade in pairs. You buy one currency and sell another. So you cannot just look at one nation’s economy, you must look at two.