Thu. Jun 20th, 2019

Forex 101: Basics and tips for beginners

Forex stands for “FOReign currency EXchange”.

forex 101 basics and tips for beginners - Forex 101: Basics and tips for beginners

e818ba95 forex2 - Forex 101: Basics and tips for beginners

It is an international market, where banks and corporations trade currencies. Forex is the most liquid market in the world, with around 5.1 trillion USD of daily trading volume.

Forex has two major uses: hedging and speculation. In order to provide you with a detailed review of the market, we’ve partnered with JustForex — a popular Forex broker in South Africa.

Forex as a hedging mechanism

Hedging is a method of nullifying the greater
risks by losing a smaller fraction of your profit. While it may take some time
to get your head around the concept, the process itself is pretty simple.
Here’s an example:

  • A company makes backpacks in
    the US. The production and distribution cost is 50 USD, and they sell them for
    80 USD in order to make 30 USD of profit.
  • When the company expands to
    the European market, they sell backpacks there for 70 EUR, with the exchange
    rate 1 USD = 0.87 EUR.
  • Two months later, the USD
    becomes stronger and the quote now is 1 USD = 1 EUR. The company is now forced
    to either increase the price and anger their consumers, or sell backpacks at
    much smaller profit margin of 20 USD.

However, if the company shorted the EUR on
Forex and bought more USD while they were at 0.87 EUR, they could offset the
loss. If the USD grew in value, they would have made more money from the
shorting. If the EUR grew in value, they would have made more profits from the
sales. It’s a win-win situation, at the cost of superficial losses.

Every international or simply export company
uses Forex for hedging. However, it is not something you should probably worry
about — unless you are running an export business, of course. Most Forex market
participants use it not for hedging, but for speculation.

Forex as a speculation source

Forex is very volatile compared to other
major markets — However, this change is not chaotic — there are good reasons
for it, as well as the ways to predict said change with decent enough
reliability. This makes it very interesting to the private and corporate
traders.

The currencies on Forex are traded in pairs.
For example, EUR/USD is a currency pair where EUR is traded for USD. Current
EUR/USD rate is 1.14000, which means that for each 1 EUR you can buy 1.14 USD.
The major currency pairs are EUR/USD, GBP/USD, USD/CAD and USD/JPY.

There are two ways to trade currency pairs —
long trading and short trading. Long trading involves buying currency, waiting
of its value to grow, then selling it later for profit. Short trading involves
borrowing currency, selling it, waiting for the price to drop, then buying it
back to return the loan and keep the leftovers.

The value of the currency inside the pair
depends on the economic performance of the country, as well as its geopolitical
conditions. For example, Brexit significantly wounded GBP and weakened it
against other currencies in its currency pairs. Other events that can affect
the market are the economic report releases, government reforms, major news,
etc.

How much money can you make on Forex?

There is no definitive answer to this
question. All Forex strategies have different levels of profitability, risk,
and investments involved. The best strategies for newcomers are Price Action
and scalping.

Price Action is more lenient and requires
only two hours of attention per day. However, the profits are rather low for
Forex — only 20% monthly, provided that everything goes well.

Scalping is a lot more demanding — most
scalpers trade at least six hours per day. However, profits make it worth it,
with 10-15% daily.

How to trade on Forex

If you are going to trade on Forex, you need
a Forex terminal. There are ways to obtain your own, since private traders have
been allowed on the market since 1990s, but it is unreasonably expensive. For a
personal terminal, you’d have to spend north of 6 000 USD, not counting the
additional fees and expenses.

However, there is another way to get on the
market — Forex brokers. These are companies already own the terminals and allow
private traders to access them.

JustForex is an international Forex broker with seven years of experience. The company is very friendly to newcomers and provides a lot of educational material. You can also open a practice account, in order to prove your trading acumen, before you start trading with real money.

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