5 Things They Don’t Tell You When You First Dabble in Forex

forex_market

Forex, or the foreign exchange market, is an asset trading market where you can trade currencies and make a profit. Much like the stock markets, Forex is your chance to generate a side income using your currency as assets. In the Forex markets, profit is generated from the differences between currency pairs.

In the past only large corporations, wealthy individuals, hedge funds, large financial institutions and banks traded in the Forex market. However, the market is now open to anyone who wishes to dabble in it. This is due to the availability of online brokerage platforms which are fairly easy to understand and navigate. If you’re planning to start trading in the Forex market, here are some things you’ll want to know:keepitsimple

Jargons  It wouldn’t be easy to start trading unless you understand all the common terms that are usually used.These terms will allow you to communicate with your broker, or with fellow Forex traders. Knowing terms like ‘base currency’, ‘quote currency’, ‘long position’, ‘short position’ , ‘bid price’ and ‘ask price’ will definitely help you.

Different Methods of Predicting Market Behaviour  There are several ways to analyse the Forex market and one way is to examine how a currency has been performing over the past year or more. This is called a Technical analysis where you go over the history of that currency and predict how it will perform in the future. Additionally, you can use the fundamental analysis method where you study the economic activities and policies of a certain country to know whether their currency will appreciate or depreciate. Lastly, there is Sentiment analysis, which is highly speculative and risky as it depends on guessing the mood of the marketplace. Whichever method you employ, always take into consideration the risks involved.

download-2Volatility  The Forex market is one of the most unpredictable places and most likely will experience incidences of loss. Don’t give up easily as profits and losses are common in the Forex market. Do your best not to take things personally or be hard on yourself as the patterns of the Forex market are usually beyond the common person’s control. However, the more experience you gain, the more you’ll be able to see patterns in the market and thereby make wiser decisions.

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Leverage  Forex traders usually depend on trading large amounts of money to generate a significant profit from currency fluctuations. Currency pairs usually fluctuate less than 1% from day to day. Therefore, a sizable volume of currency movement is necessary to make a substantial profit. As such, most Forex investors accept a loan from the broker handling their accounts and this is called a leverage. In order to do this, investors have to sign up for a margin account. This leverage can come in various ratios, like 100:1, 200:1 or 50:1 depending on the brokerage company and size of position you’re trading. What the ratios mean is that if you’re trading RM 200,000 at a leverage ratio of 100:1, then you’ll only have to invest RM 2,000 and the rest actually comes from your broker. Leverage ratios are usually very high as this is necessary to produce profit. However, the higher the leverage, the bigger the risks involved, especially when a currency value falls.

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The Pros of Forex Trading  One aspect of Forex trading that is extremely appealing to investors is the liquidity of the currency assets involved. There isn’t any fixed commitment period and you can invest or withdraw your money fast and easily from banks and brokers. This means that you can pull out from the market within seconds if you feel the need to.

An alternative way to generate an income through foreign currencies is to maintain a foreign currency fixed deposit account. If you choose a fairly stable foreign currency with a higher exchange rate than our own Ringgit, you’ll be able to generate a higher amount of returns from the interests earned.


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