The foreign exchange, or forex, markets are interesting and sometimes difficult beasts to break into. They can be affected by all sorts of changes in economic policies and politics, for example, while their unique “paired” nature marks them out from other assets in that they need to be considered in tandem with each other rather than on their own.
Due to these diverse considerations, it’s important to familiarize yourself with the basic principles of forex market trading – and to answer some important questions too. Is it best to buy real currency or to use CFDs? How do the pairs work – and what key market-moving events should you monitor for? This post will answer these questions and more.
Pairs of currencies
The first thing that newbies to the online forex trading world need to remember is that currencies here are traded in pairs rather than by themselves. This differs from most other asset classes. If you buy a stock, for example, you’re only wagering on the movement of it in one direction or the other, but if you invest in forex, you’ll need to wager on the rise of a currency relative to another. Buying the USD/EUR pair, for example, means that you’re hoping for a rise of the US dollar against the euro.
These pairs are organized into three groups. Major pairs, as they are known, are those which involve the US dollar and some of a series of other important ones, such as the Canadian dollar, the British pound and more. Minor pairs contain the other non-dollar currencies from the major group, while exotic pairs contain currencies from economies which aren’t major players on the world stage. Each of these groups are available to trade online, and there’s no shortage of brokers to pick from.
The role of news
Depending on your approach to forex trading, you’ll ascribe a lesser or greater level of importance to the financial, economic and political news. To some people, known as fundamental traders, the news is an important cause of forex market movements and is therefore vital. For others, known as technical traders, historic and current price charts are all that matter as they are perceived to contain all of the market-moving, sentiment-related information that is required.
The vast majority of forex traders probably have used the news from time to time though, and that’s because there’s a deep relationship between the announcement of financial events and changes in the currency markets. For online forex traders, this sort of information is widely available for free on the web through services like economic calendars. Wider help, including broker reviews and community forums, is available at Ask Traders. Once you have your sources in place, it’s also important to know what to look for. When central banks announce interest rate changes, for example, this can push the currency markets up or down to the tune of half a percentage point or more – which, for large volume traders, could represent a real change in value.
CFDs?
As anyone who has ever visited a bureau de change will know, buying up foreign currency is actually quite a difficult thing to do. There’s a time barrier involved, and there’s also a limited amount of particular currencies in circulation – meaning that it’s hard to always know that you’ll be able to get it in time to place a trade. These days, many traders are now choosing to trade forex using contracts for difference, or CFDs.
These derivative products are designed to follow the trends in a market without actually conveying any ownership rights. So, if you buy the EUR/USD pair as a CFD, you won’t actually own any euros, and you won’t be able to spend what you’ve bought as you would a real euro, but you will be able to profit from its rise and fall. These tools use leverage, which give you the opportunity to increase your potential returns – or, sadly, losses.
The forex markets offer a good opportunity to invest in a dynamic and fast-moving asset class. While some aspects of forex trading are unusual and may pose a challenge at first even to an experienced investor in other fields, they are still potentially lucrative. Once you’ve got your mind around some of the peculiarities, such as the enhanced and specific role of financial news and the unusual paired approach, you’ll be able to dive in and stand a good chance of making a return.