When you change one currency with another currency, the exchange rates will come into play. The exchange rate between the currencies also impacts the economies, commerce, and tourism of countries worldwide.
Forex trading is all about buying currency pairs, and speculating their exchange rate values for the future time. The fluctuation in the value of currencies also impacts the businesses, which operate across international borders. At the same time, foreign exchange also provides an opportunity to hedge the risks, and make returns by speculating the future exchange rate.
Speculation of exchange rates:
Currency values will be subjected to high fluctuation due to demand and supply factors. Additionally, they are also impacted by various other factors like the economic strength of the country, tourism, trade growth, interest rates, geopolitical risks, etc.
So, what is online Forex trading? - The fluctuation of exchange rates also allows you the opportunity to speculate the future value of the currency that you buy, by selling another currency. You stand to make money if the currency that you buy gains in strength, or
The most attractive thing about Forex trading is that you can get started with low investments, as low as $50, but like any other business, you should always consider expanding your trading portfolio.
If the currency that you sold loses its value.
Once you start getting a hang of trading techniques, then you will need to invest more to generate better profits. You can even diversify your investments on other trading assets provided by your broker. Your trade account manager might suggest you to increase the investments, if your portfolio is not showing substantial gains.
You will have to place your trade orders by signing up with any of the brokers online. To retail investors, they generally they offer 3 types of accounts, namely Micro, Mini, and Standard.
There are a few terms that you will need to familiarize yourself with, before putting in your money on the first trade. Let's now look at them briefly.
PIP: The exchange rate is generally measured with 4 decimal points, and the last decimal is called as PIP. The only expectation is while trading with Japanese Yen, because only 2 decimals are used, where the 2nd decimal will be the PIP.
Base Currency: Since you are trading in pairs of currencies, the first currency, or the currency that you buy, is called as the base currency.
Quote Currency: The 2nd currency, or the currency you are comparing with your base currency, to get the exchange rate, is called as the Quote Currency. Basically the exchange rate means, how much of quote currency will you spend in order to buy 1unit of base currency. I will look something like 1.4537. Here, 7 being the 4th decimal value will be the PIP.
Spread: You will now ask, what do brokers make? Well, these brokers get their commissions in the form of spread. When you bid for a certain price to open the trade, the trade will not start at that precise bid value. There will be a small difference in the bid price and the price that you get (called as ask price). This is where the brokers make their money.
It would be in your best interests to find the brokers who offer trading platforms for low spreads. The spread will also depend on the time of the day, when you plan to get into a new trade. You will need to do some technical analysis and find the best times to make money on low spreads.
You will need to do some homework to understand the intricacies of Forex trading, before putting your money on a real account. That will help you in developing long term income generating strategies.