One of the biggest misconceptions when it comes to the foreign currency exchange (Forex) is that you have to have to extremely wealthy or be ‘in the biz’ to really make money. That is a myth propelled by those who want you to pay them to do it for you (a fund) and those who simply do not understand how forex trading works.
It is true that you need set aside a certain amount of money to play the market with. It is also true that you must have a firm grasp on the underlying concepts that will allow you to be successful. However, it is not true that you need to be rich or a financial guru to give it a shot (although you do need to have some experience and knowledge)
In this article, we will cover the basics of forex concepts, its history, and how you can start trading today.
Forex: How it works, the risks involved, and the concepts behind trading foreign currencies
In the days before the internet, forex was unregulated and only traded among banks. Slowly but surely, banks began to open up their own forex accounts to customers willing to work with an appointed agent within the bank. This gave rise to large companies, multimillion dollar hedge funds, and the ultra wealthy who were looking for a way to diversify their portfolios. Once the internet came along, it became easy for anyone who was interested in trading to do so through online bankers and brokers.
At its most basic level, forex is buying, selling, and exchanging currencies. It is the largest trading market in the world. Although some claim that it is risky to invest in forex because there is no centralized regulation system, this is inaccurate due to the risks for the banks themselves. The interbank system that powers forex seems scary until you realize that the banks have checks and balances and continuous audits to ensure that everything is as it should be.
Most forex transactions are simply buying one nation’s currency using another. For example, buying British pounds with United States dollars. You receive a foreign currency in exchange for another with the belief that one is misvalued and with good timing you will be able to make money. Good timing, after all, is essential in forex. The values of currency are constantly fluctuating due to several different factors: news, politics, economic situations, inflation, and supply & demand. Where some see turbulence, forex traders see opportunity.
Forex is what is called a liquid market. It is easy to buy and sell foreign currencies due to a large number of people trading. In addition, the volatility is lower than one would think because of the volume of transactions.
For those who are new to forex and want to test their abilities without losing cash, this can be done through a forex demo account offered by many institutions.
Please remember that similar to other forms of investments, you should only use money that you are not afraid to lose. In other words, don’t take out a mortgage on grandma’s house to invest in forex! You do not have to be rich, but you have to be able to cope with losing money.