There are two key things you need when it comes to making an investment: a thorough understanding of the market you are putting your money into and a sense of the right timing to make your investment. That’s as true when it comes to currency as it is with any other asset. So, before you go rushing into forex trading, it’s important that you brush up on the basics. That way, you’ll be clear on what to do and when best to do it.
What is forex trading?
The foreign exchange market, known as forex or FX, sees more than $5 trillion of currency converted every single day. It’s the biggest financial market in the world and, in many ways, it’s also the most volatile.
Individuals, companies and banks convert money from one currency to another in a bid to make money. This is done in pairs, with a ‘base’ and ‘quote’ currency. The price of the pair relates to the value of one unit of the base currency in the quote currency. So, GBP/USD is the pound/dollar ‘pair’ with the pound as the base and the dollar as the quote. If this pair trades at 1.32, for example, it means that the pound is worth 1.32 dollars. If the pound rises, this pair will increase in value.
If you think that the pound is going to increase in value against the dollar, then you buy the pair, known as ‘going long’. If you fear the opposite will happen, then you can ‘go short’ and sell. Timing, therefore, is clearly key – as is learning when to predict this movement.
London, New York, Sydney and Tokyo are global centres for forex trading – but this isn’t limited to the opening hours of exchanges and can take place round the clock through a forex broker.
Factors to watch out for
The strength of this market for a would-be investor is that it fluctuates. Movements in either direction present an opportunity to make some serious money. On the day of the EU referendum, for example, the USD/GBP shot from 0.67 to 0.77. That jump is the equivalent of £50 for every $500 – a not-significant difference for an investor with the right amount of money – and sense of timing – with this pair.
So, what factors should you be looking out for? It largely falls down to the relative economic strength of the country in question. The Brexit example above came about because the markets were shocked by the result – and investors felt uncertain about the nature of the UK’s future relationship with the European Union, its biggest trading partner.
Not all news needs to be as seismic as this to have an effect. The rise and fall of interest rates, for example, is a good indication of the changing mood – and value – of a currency. Showpiece budget announcements – such as the annual budget statement delivered by the Chancellor of the Exchequer – are worth keeping an eye on for such financial policies. The health of major companies or sectors can also play its part – with the falling fortunes of major employers having a big knock-on effect across the rest of the economy. That can mean oil prices affecting the value of currencies of Middle East countries, for example.
Political unrest, fiscal twists and turns, natural disasters and changes to consumer taste and behaviour can all be key. They’re not always easy to predict, of course, but learning to do so is important and having a calendar of events that you can predict – elections, trading announcements of big companies, fiscal events – is important.