Today the main focus of our article is: “an Introduction to Investments in Forex Trading” (Forex stands for Foreign Exchange market, also known as currency exchange market).
On Friday there will be a follow-up on this introduction called “The Ultimate Guide To Forex Trading Investments” which will examine the discussed material even more thoroughly. Make sure to keep an eye out for that important article.
To some of our readers, this type of investments might sounds strange, unfamiliar and risky. Some of the questions that might arise are the following:
1) Why should I “invest” in a Forex “trading” business?
2) What is so great about this business?
3) Why not just buy shares of a company and “wait and hold”?
Well, you may not realize it, but many people are Forex Traders. You might be wondering how that is so let me explain.
Almost Everyone is a Forex trader
The idea of Forex trading is an entirely foreign concept to most of you, but that doesn’t mean you have not done it.
Most people on earth have all participated in the Forex market in some form or another. Any time you step across a border there is a need to exchange one currency for another.
Any of the following activities could lead to your participation on the Forex market:
- Going abroad for a vacation at your favorite destination;
- Conducting business with a foreign company by buying their products or selling yours (could be an online store or through Ebay)
- Investing in assets or buying property in another country.
All of these activities will lead to you having to sell your “home based” currency in exchange for the currency of the country of your destination.
Let’s give a practical example:
- John owns a small tractor company with his brother in the United States;
- The U.S. Dollar has been weakening in recent months;
- There is a potential foreign customer from the European Union;
- The U.S. Dollar decline has made John’s products become increasingly competitive to foreign customers. Why? The customers need to pay less for every U.S. Dollar, which makes their purchasing price lower;
- The foreign customer decides to purchase John’s tractor. To complete the purchase, the customer will sell the European Union currency of the Euro and buy U.S. Dollars and transfer the U.S. Dollars to John. The foreign customer has conducted business in the Forex.
The opposite would be true if John’s company would be buying products, parts or services from a foreign country. In that case John would sell the U.S. Dollars and buy the Euro.
As shown in the example above the Forex market always has two sides to the story. Contrary to a single market, such as a stock for example, the Forex market is always a story of two tails: the performance of one country versus another.
The main factor for movement is not the performance or lack of performance of one nation-state, but actually the relationship of one performance to another. That is why they are called currency pairs.
It is the equivalent of comparing score cards of each country and letting the currency pair decides who the winner is. The measurement, of course, is price and there is only relatively strength of one currency vis-à-vis another.
What influences the Forex?
Your next question might be: what is driving the Forex market and how big is it?
The Forex market is the biggest and largest market on earth. In the entire world? Yes!
The daily volume is in the trillions and trillions. According to some estimates the daily volume is $5 trillion and it is growing at faster rates than ever before. These figures literally dwarf any numbers of the stock market, bond market or commodities market. To give a comparison, the average daily volume on the New York stock exchange is in the hundreds of billions, less than a tenth of the Forex volume
What makes the Forex market tick / move?
As we have established above the currency market is a comparison of relative strength. What kinds of factors are important for the Forex market? Why does the market move and how?
First of all, at its very core the market moves because there are buyers and sellers. That is no different in the Forex market. Simply put an agreement is made when a seller and buyer agree on price, but disagree on value or direction. Once there is higher supply or demand for one of the two currencies, the price moves accordingly.
Secondly, there are key economic factors which are used to judge the economies of the currency pair countries to judge the likelihood of their relative score. Interest rates, trade balance, GDP numbers, unemployment numbers, employment growth, investment numbers, quantitive easing numbers, stock market performance, etc all have their influence on the country’s scorecard.
Thirdly, due to the market being so vast and large, the Forex makes a tremendous amount of price fluctuations in any given day or week. Not all these moments can be explained by major economic data.
The Forex market is made out of a huge (and non comprehendible) number of participants (nobody has a monopoly on its movements).
The price is a reflection of the sum and average interpretation of all those participants on the Forex market.
Therefore, price in effect is a measurement of opinion and human behavior. Emotions drive price and cause traders to buy at irrational highs and sell at irrational lows. By capitalizing on these mistakes Forex traders are profitable.
To summarize: there are many factors which influence the Forex participant’s interpretation of the Forex –> the average sum of their interpretation in turn influences the currency pair with changing demand and supply dynamics –> which in turn ultimately influences price.
Price is the true reflection of the currency pair.
Technical analysts can analyze price movements and find places of great opportunity by mastering the art of price interpretation.
Why are they successful?
These Forex traders use major levels, which have high predictability, to capitalize on price swings and lock in profit potential found in the market.
Via price movements they are able to interpret the psychology of the market, which in turn is the ultimate mover of the market.
What if you had a choice?
In the example mentioned above John and his customer both needed to exchange one currency for another. They had no choice as they agreed to conduct business with each other.
But what if you had a choice? What if you yourself could determine when you wanted to exchange or not? Then logically speaking you would choice the best price and time wouldn’t you?
Yes you would. And that is what Forex is all about.
That is the freedom of choice Forex traders have every single trading day!
Forex trading is all about the best price entry and timing. Contrary to John and his foreign customer, the Forex trader actually has the freedom to make those decisions at (almost) any point time, allowing for great freedom.
Conducting Foreign Exchange trading in its own right is a straight forward and simple activity: you take one lot of currency and exchange it for the next. This however does not make it an easy business to conduct.
A well know saying in the Forex business is this: “Trading Forex is the most difficult way to earn money easily”.
Although many people are attracted by the grandness of the Forex market and by its promises of riches, just as many are appalled by it and turn their backs to the market. The main factor is because these Forex participants find out after a few weeks trial that the Forex market and Forex trading are simple concepts, yet not easy to master.
As with everything in life, mastering an art takes time, effort, devotion of the highest degree. Trading Forex is an art and cannot be learned in two hours or less. To succeed in Forex trading requires that they treat their business with the same conduct and behavior as the best professional athletes, managers, entrepreneurs, etc: with iron discipline and great management. Not everyone has the time for that dedication. But Forex professionals do. More on that in our next article “the Ultimate Guide on Investments in Forex Trading.”
Benefits from Forex trading
Forex trading is the best market in the world and better than any other trading endeavors. Why is that?
1) The market is the most liquid and has massive liquidity;
2) The market has $4 trillion + daily volume;
3) The market has the best trading hours and is open 24 hours a day, 5 days a week;
4) During working days (because the market is open 24-5) there are no gaps;
5) Due to liquidity and market being open 24-5, stop losses are virtually guaranteed and respected;
6) Due to the market size, there are massive price movements during the day;
7) Due to the market size, there are massive price movements almost every trading day;
8) There are plenty of trading opportunities when only following a couple of currency pairs;
9) There is no need to monitor dozens and hundreds of companies with all of their own charts, news releases, company profiles, etc;
10) The market is tremendous in size;
11) The market cannot be manipulated or “cornered” by any one player;
12) The market has great leverage opportunities;
13) The market has tremendously small transaction costs for trading (usually $2 or less on $100k);
Did we catch your attention?
As you can see from the above summary, Forex trading has very lucrative advantages. By investing in a Forex trading business, you can reap the rewards.
BUT this does not mean anyone can start earning from Forex immediately!!
Forex trading is a great business opportunity, when it is properly treated as a business opportunity.
Forex is not a quick get rich race.
Forex is rather a slow and consistent wealth builder and multiplier. IF you know what you are doing and can walk the ropes of the Forex trading. Forex is a marathon rare. And you better be well prepared for it before starting.
In Friday’s article we will closely examine why investing in a Forex trading company is beneficial for the every investor, including the average investor. Investing in Forex trading is a great opportunity. Make sure to read Friday’s post!
In the meantime, thank you for taking time to read this article. Please let us know what you think of Forex trading investments down below in the comment section!
Good Trading everyone!
Read the 2nd part here: “The Ultimate Guide to Forex Trading in Investments.”
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