The acronym Forex stands for “FOReign EXchange” and is used to describe trading in foreign exchange markets between investors and speculators.
It is good to remember that more than investment when we talk about forex we should talk about speculation, and I think that the explanation below explains why.
How FOREX works
The operation is quite simple and to facilitate understanding let’s take an example.
In a situation where you expect a loss of value of a currency, the EURO for example against the DOLLARO, the trader FOREX will sell euro buying dollars.
If the dollar, as predicted, will increase in value against the euro, thus increasing the purchasing power, he can then buy euro with the dollars purchased by concluding the financial transaction with a margin of profit. With profit.
Just like in the world of equity trading, you buy shares if you believe that the value will increase and you sell them if you expect a decrease in value.
The process is the same for those involved in FOREX.
What makes FOREX interesting and unique is that there is no central market for currency exchange.
The forex market is open 24 hours a day, five days a week and currencies are traded worldwide between major financial centers in London, New York, Tokyo, Hong Kong, Singapore, Zurich, Frankfurt, Paris and Sydney.
In the foreign exchange market there is no privileged information, fluctuations in exchange rates, in fact, are usually caused by real money flows as an anticipation of global macroeconomic conditions.
News is released publicly so, at least in theory, everyone in the world is receiving the same news at the same time.
The subjects that operate in FOREX
Large trading companies operate in the FOREX market to control revenues and expenses incurred in different currencies while trying to minimize losses.
You invest in FOREX to make a profit, and you can make that profit by analyzing the market as the novelty of the policy by carrying out technical studies.
Unlike other markets, it is interesting that with forex you can profit from currencies that are losing value as well as those that are gaining it.
The advantages of Forex
- Forex offers some of the best gain/risk opportunities compared to other financial markets
- The hours to invest in Forex are incredibly flexible
- The volume of trade is massive, resulting in a high level of liquidity
- No one can monopolise the market
- Forex has one of the lowest start-up costs in terms of money/time ratio, compared to any other financial market.
- Traders can profit from smaller exchange rate movements through the use of leverage
- Traders can earn steady income on open positions through rollover/swap
- Brokers offer free DEMO accounts, charts and analysis tools
If it is good to analyze the pros it is also necessary to analyze the cons of FOREX.
Increasing the amount of leverage means that traders can lose all or most of their capital if the market moves significantly and against all odds.
The FX is therefore a high risk financial product and may not be suitable for all investors, given the chances of losing the entire capital.
Currencies traded in FOREX
There are many currencies and currency pair combinations traded on the market. The following is a list of the main currency pairs: Dollar, Pound, Yen, Franc, Canadian Dollar (CAN), Australian Dollar (AUD), New Zealand Dollar (NZD), Euro.
The dollar is in principle the most traded currency with about 86% of transactions. In second place we find the Euro and the Yen in third position.
How can I earn money with FOREX?
Buying low and selling high or, vice versa, selling high and buying low is the basis for earning on Forex.
For example, if you buy GBP, pounds, against USD, and 1 GBP is $1,9554USD and then you sell when the same Pound is $2,0235USD, we made a profit.
Simple then, the real question is: how do I recognize the best time to sell and buy? How can I predict currency fluctuations?
There are two main methods: Technical Analysis and Fundamental Analysis.
In technical analysis, price fluctuations can be predicted by using the price chart and some tools called indicators.
The fundamental analysis, on the other hand, aims to predict future movements in the prices of currencies in relation to the economic and political situation in the world, with particular reference to the most important and developed countries, such as America, Japan, Germany, etc..