Before we know about Forex investment and how to invest in the Forex market, we need to understand the market. Forex or Foreign Exchange is the process of buying one currency in exchange for another for a variety of reasons ranging from commerce, trading, and tourism. This market trades in an average of $5.1 trillion a day, attracting millions of traders worldwide.
A unique aspect of this market is that there is no central marketplace; instead, it is conducted electronically over-the-counter. This means that all transactions occur through computer networks between traders all around the world instead of in one central area.
The market is open 24 hours a day, five and a half days a week, with currency being exchanged by major financial centers such as London, New York, Tokyo, Zurich, etc. So if for example, the U.S. ends its trading day, the Forex market begins anew in Tokyo and Hong Kong. As such, the Forex market can be extremely active at any time of the day, with exchange rates continually changing.
As Forex traders, your profits are based on the value of assets bought as it moves within the market.
What is Forex Investing?
As mentioned above, Forex is the buying and selling of the currency. But before you can participate in the Forex market, you would have to choose from many Forex investment brokers. These brokers are mostly the traders’ gateway into the market, so it is essential to consider the broker’s strengths and weaknesses and what offers they have. Once done, you will be able to trade on the broker’s trading platform in which the following would be how to invest Forex market:
- When entering the Forex market, it is crucial to have a currency pair in mind that they would wish to trade. It is recommended that before deciding on the choice of currency pair, traders should have a reasonably good understanding of the associated risk that comes along with it.
- Traders should then decide on the type of trading, which can be forex trading, CFD, or spread betting. Forex trading allows traders to buy lots in the unit of the base currency, which is the currency on the left side of a pair. As for CFDs, it’s when you trade with a quantity in the unit of the base currency. Spread betting is the trading currency per point movement.
- Once chosen and depending on the direction of a trade, traders then decide to buy or sell. Logically, Forex traders should be aware of the price of the currency pair, with the currency on the left designated as the base currency and the one on the right being the quote currency.
- When traders buy a currency pair, it implies they have made a forecast that the base currency will strengthen against the quote currency. For every point rise in the exchange price relative to a trader’s open level, a profit is made, while a drop would net in the loss.
- When a trader sells, it suggests that a trader would expect the weakening of the quote currency. In this case, a loss is made with every 1-point increase in the exchange rate — and a profit is made if the reverse occurs.
- Once an order is placed (which is an instruction to buy/sell at a future point when a predetermined price level is reached) the order’s status would be ‘open.’ With each move in the pair that’s being traded, the profit/loss will fluctuate. Traders can keep track of the market price, profit, and loss in real-time. New orders can be placed, and more rules can be attached to open positions, and exiting trades can be closed out.
- Finally, when the trade is considered closed, it means that the trader had done the reverse of what they did at the time of the opening. If a buy order was placed, the trader now sells. An example would be if a trader bought (or opened) with 3 CFDs, closing it would mean selling (or closing) 3 CFDs. When a trade is closed, the net profit/loss now shows in a trader’s account balance.
- Another option is trading the CFD, or contract for difference. A CFD is a derivative instrument, and it is a contract executed between a buyer and a seller. The difference in the value of the underlying instrument between the time at which the contract was opened and the time it was closed is paid. There is no physical exchange of the asset class.
The steps given above are how traders conduct trade and how to invest in the Forex market. Hopefully, this gives a better idea of how Forex works and how to invest and trade in it.