In a volatile economic climate it can be difficult to find the right kind of investment vehicle to trade with, but an increasing number of individuals are opting to enter the foreign currency market, also known as forex. Forex offers a unique opportunity as it enables profits to be made even if the market is dropping, unlike a traditional stocks and shares portfolio.
Forex works by linking two different currencies and buying one while selling the other. The trade measures how one currency performs against the other. In order to make a profit it is essential for the currency you have chosen to buy to increase in value compared to the other currency in the pairing.
Forex trades can either be dealt with very quickly (an extreme version of this is known as scalping) or a position can be left open for long periods of time. In order to trade, an investor must register with a broker who will be the person to actually execute the deal. Unlike many other forms of investment, forex brokers do not charge commission for their services; they earn their money from the terms they offer.
Every broker offers two prices for each currency, namely the buying price and the selling price. The buying price is also known as the ask price while the investor`s selling price is also known as the bid price.
A broker will allow an investor to purchase a currency at the ask price, but the bid price will be set slightly lower and the two prices will maintain the same distance as the currency fluctuates. Therefore, in order for the investor to make a profit, the market will have to move sufficiently for the bid price to be higher than the original ask price.
The difference between the ask and bid prices is known as the spread and is how the broker generates a profit. Brokers will offer different spreads, with some offering better rates on particular currencies than others while others will offer preferential spreads to those investing larger sums.
The vast majority of brokers offer many different currency pairs, but the most commonly traded pairs involve the US dollar and either the euro, Canadian dollar, sterling, Swiss franc, the yen or the Australian dollar. These currency combinations are known as the majors.
It is possible to trade with currencies from emerging economies such as Brazil with many brokers, but the spreads are likely to be far larger, thereby offering a lesser chance of returning a profit. It can also be more difficult to find sufficient information to get a jump on the market. Currency combinations such as these are known as the exotics.
Once a position has been opened, the investor can specify when they want their broker to close the deal but in times of extreme market volatility, there may be some change between the price when the order is given and the actual close of trade. This difference is known as slippage.
One way to help minimize slippage, although it may not eradicate it completely, is by using stop loss orders. These are pre-set instructions that mean the deal is automatically closed once the market touches a certain price and helps to control potential losses.
Forex currency trading is a venture that can return a profit for everyone but in order to be successful it is essential to do practice runs before launching into the live market. Accept that it will be a constant education and understand that losses will occur and it will take time and patience before any real gains can be expected.
