Essential Aspects to Understand about Investing in Forex
Forex or The Foreign Exchange Market is the largest most liquid market in the world. It has an average daily trading volume of 5 trillion. This decentralised market makes other markets look small by comparison. With this in mind, you may feel that investing in Forex is a good idea. If so, there are some essential aspects of trading in the market to understand.
Learn Forex Trading Patterns
To get to grips with Forex trading, it is important you learn Forex trading patterns which are essential to making a profit. Many traders spend time analysing the patterns and deciding whether to go long or short. In many respects, the patterns together with other aspects such as the fundamentals will influence how you trade.
Understand Currency Pairs
In Forex trading you are buying and selling one currency against the other. So USD/GBP, for example, represents either selling the American dollar and buying British sterling or vice versa. This is broken down into three types of currency pair trading. They are:
This is where the American dollar is partnered with one of the most traded currencies in the world. This includes:
- USD – American dollar.
- GBP – British sterling.
- EUR – Euro, the currency of the European Union.
- JPY – Japanese yen.
- AUD – Australian dollar.
- NZD – New Zealand dollar.
- CAD – Canadian dollar.
- CHF – Swiss Franc.
- Cross – Currency Pairs
This is where Major currencies are partnered with each other but does not include the American dollar. These are known as Minors.
This is where a Major currency is partnered with an emerging market economy.
When you trade, you are effectively betting that one country or region will prosper over another. So if your currency pair is EUR/USD, and you believe that the American economy is going to outperform the EU economy, you would sell Euros and buy American dollars. If you believed the EU economy was going to outperform the American economy, you would sell American dollars and buy Euros.
Influential Factors on the Currency Market
As you can imagine, by its very nature, world events and economic performance factors come into play in your decisions on what currencies to buy and sell. This includes:
World events often make an impact on Forex trader decisions. Anything from earthquakes to political events influencewhat currencies traders buy or sell. Brexit is an excellent current example of a political event that is impacting decisions. It doesn’t have to be this dramatic, however, as electing perceived business-friendly or unfriendly governments will make an impact as well.
Other factors that are taken into account include trade deals and geopolitical tensions.
A rise or fall in Goss Domestic Product (GDP) is an influence on the trading market. If the GDP of a country falls, currency traders tend to sell the currency until the fall levels off. This is where the trading patterns come into play as they make it easier to track the performance of the market.
If you are serious about currency trading, learn the essentials to how it works. Use tools to help oversee the real time market data.