In Forex trading, one currency is exchanged for another. Investors should carefully research the price of the currency pair that they want to trade. Most brokers have free charts available for this. The currency rate can be influenced by several factors:
- Change in Dollar exchange rate
- Political decisions in the respective countries
- Economic growth in the respective countries
- World politics and the world economy.
How does forex work?
If the currency pair EUR/USD is to be traded, the price depends on how the Dollar exchange rate has developed recently. With a Dollar exchange rate of $ 1.1350, the trader receives $ 1.1350 for one Euro. If the exchange rate is $1.1310 in three weeks, it means the Dollar has increased in value. The trader gets less Dollar for one Euro than three weeks ago.
The traders make profit if they buy a currency at the right moment and sell it again at the right moment. This requires a certain level of experience. It is essential to observe the market. Successful traders use trading plan and some strategy.
Analysis in forex
Another approach is the fundamental analysis, in which charts play a subordinate role. Fundamental analysis takes into account the political situation in the countries whose currency is being traded and the economic aspects as well. Labor market numbers in the United States can also play a role. If the number of unemployed in the United States increases, this can be linked to weakening of the Dollar exchange rate.
Making money in rise and fall
Forex trading provides opportunities to make money in both rising and falling markets. The only thing that matters is that you are in the right direction. Choosing a long or short position at the right moment is essential. It is not necessary to have a high exchange rate but to buy or sell the relevant currency at the right moment. If the trader assumes that the Dollar will weaken against the Euro in the future, he takes a long position. He has to sell the Dollar and buy the Euro.
Conversely, if the trader thinks that the Euro will lose value against the US Dollar, he has to sell the Euro and buy the Dollar. He then takes a short position. It is not easy for beginners to make the right decision.
Profitability depends on the volume and the leverage. High leverage can generate high profits, but you should not forget that leverage can also lead to remarkably high losses as well. As a beginner, you shouldn’t set the leverage too high. This is associated with a higher margin. To avoid losses, you should place a stop-loss order.
If you want to trade successfully, you should be familiar with the different order types in forex trading. Not all order types are suitable for beginners.