How to Invest in Forex
How to Invest in Forex – a Newcomer’s Guide
Investing in the foreign exchange market, also known as forex trading, can be a simple solution for those who wish to have an extra income or make investments that pay off well. The forex industry is huge. How huge? $5 trillion a day worth of trades huge. With so much money running back and forth, isn’t it about time you had a piece of that pie?
If you want to know how to invest in Forex, you need to start with the basics. There is a lot of lingo to learn, but it’s quite simple, so strap in and let’s get started! Forex trading is selling one currency to purchase another, and these are the terms you absolutely must know:
- Base Currency – the base currency is the currency you’re spending and using.
- Quote Currency – the quote currency is the currency you’re purchasing.
- Exchange Rate – the exchange rate lets you know how much quote currency you must spend to purchase base currency.
- Long Position – a long position means you wish to buy base currency and sell the quote currency.
- Short Position – the opposite of a long position, a short position means that you want to buy quote currency and sell base currency.
- Bid Price – the price your broker is willing to buy base currency in in exchange for quote currency. The bid the best price you are willing to sell your quote currency at on the market.
- Ask Price – also known as the offer price, this is the price your broker will sell you base currency at in exchange for your quote currency. The ask price is the best available price at which you would be willing to buy from the market.
- Spread – a spread is the difference between the bid price and the ask price.
Now that you know the basic terms, it’s time to look at the quotes. Two numbers are on a forex quote; the bid price on the left, and the ask price on the right. These are the numbers that appear in green (when they’re positive) and red (when they’re negative).
Market research is very important here. You will have to make predictions about the economy based on what turns up in your research. For instance, if you believe the UK economy will continue to weaken, which will make the Sterling Pound drop (as we have seen with Brexit), you’ll be better off selling pounds in exchange for a currency from a country with a stronger economy. Consider politics as well; elections, for example, tend to bring currencies down temporarily. Is a currency’s country having lots of export? That would often indicate a good economy. And of course, don’t forget about economic reports, such as the GDP, inflation reports, and more, all of which show potential effects as well.
Learning how to invest in forex is more than just knowing about economic forecasts though. The next step would be learning how to calculate your profit using pips. A pip is the measure of the change in value between two currencies. One pip usually equals 0.0001 change in value. Let’s review this example; if your EUR/USD trade moves from 1.546 to 1.547, your currency value has increased by ten pips. Multiply the number of pips your account has changed by the exchange rate, discussed earlier in this article. This will let you know how much your account has increased or decreased in value.
And this is the bare essence of how to invest in Forex. If you want to know more, you can check out our articles on our websites. Fund your account and start trading forex on GSI Markets!