The Foreign Exchange Market is the largest market in the world. It plays a valuable role in the global economy.
Every day, trillions of dollars exchange on the forex market. Currency exchange is important for international business.
We’ll explain the basics of forex trading and how to make money.
Who Invests In Forex Trading?
Governments, businesses, and investors all trade on the forex market. The standard trading day lasts 24 hours from 4 PM on one day until 4 PM the next day. Time is a crucial factor for success in forex currency trading.
You can learn more about how timing affects currency trading. Check out this forex market hours chart.
What Is Forex Trading?
When you trade Forex, you’re not trading one product. Currencies trade against each other.
These two currencies are a currency pair. The quote for a Forex pair defines the value of one currency relative to the other. The easiest way to understand a currency pair is to use an example.
Imagine the EUR/USD is 1.20. What does that mean?
- 1 Euro is equal to $1.20 in US dollars
Let’s use another example.
Imagine the USD/CAD is 1.25. What does that mean?
- 1 US dollar is equal to $1.25 Canadian dollars
Starting to make sense? Even though there are two currencies involved, the pair acts as a single entity.
How Do Investors Make Money?
Investors can earn money on the forex market in two ways:
- Investors profit when they buy a pair, and its price increases.
- Investors can also profit if they sell a currency pair and the price decreases.
A Story About Joe the Investor
Joe likes to hedge bets on currency pairs based on what he knows about different markets. Joe is feeling lucky, so he decides to invest in the forex market.
Here are the steps that take place:
- Joe purchases a EUR/US pair at $1.20. Why?
- Joe believes that the European market is stronger than the US market.
Two Likely Scenarios
Scenario A: The European market strengthens. Joe, the investor makes money.
Scenario B: The US market becomes stronger than the European market. Joe, the investor loses money.
In this example, Joe the investor is betting the Euro is stronger than the US dollar during the time he is trading. If the Euro price rises, that Euro that was worth $1.20 in American dollars may now be worth $2.20 American dollars. Get it?
You may be asking, this is all great, but how do I know which market will do well against another?
That is the goal of every forex trader.
Figure that out, and you’re on your way to making a TON of money investing in foreign exchanges.
Are You Interested in Forex Trading?
Forex trading takes skill and effort to do well. With a little more research and practice, you could be on your way.
Interested in learning more? Look around our blog for more information. We’re always adding more content to help you trade smarter.