You can gain value in the exchange rate. For an inexperienced trader, yes, it's gambling.
Forex as a Hedge
Read and analyze international economic reports, then choose a currency you feel is economically sound to trade with, like the US dollar or Euro. Start placing orders through your broker based on your research findings, then watch your account to monitor your profits and losses. In vreemde valuta handelen. Understand basic forex terminology. The type of currency you are spending, or getting rid of, is the base currency.
The currency that you are purchasing is called quote currency. In forex trading, you sell one currency to purchase another. The exchange rate tells you how much you have to spend in quote currency to purchase base currency. A long position means that you want to buy the base currency and sell the quote currency.
In our example above, you would want to sell U. A short position means that you want to buy quote currency and sell base currency. In other words, you would sell British pounds and purchase U.
The bid price is the price at which your broker is willing to buy base currency in exchange for quote currency. The bid is the best price at which you are willing to sell your quote currency on the market. The ask price, or the offer price, is the price at which your broker will sell base currency in exchange for quote currency. The ask price is the best available price at which you are willing to buy from the market.
A spread is the difference between the bid price and the ask price. Read a forex quote. You'll see two numbers on a forex quote: Decide what currency you want to buy and sell.
Make predictions about the economy. If you believe that the U. Look at a country's trading position. If a country has many goods that are in demand, then the country will likely export many goods to make money.
This trading advantage will boost the country's economy, thus boosting the value of its currency. If a country is having an election, then the country's currency will appreciate if the winner of the election has a fiscally responsible agenda.
Also, if the government of a country loosens regulations for economic growth, the currency is likely to increase in value. Reports on a country's GDP, for instance, or reports about other economic factors like employment and inflation, will have an effect on the value of the country's currency.
Learn how to calculate profits. A pip measures the change in value between two currencies. Usually, one pip equals 0.
Multiply the number of pips that your account has changed by the exchange rate. This calculation will tell you how much your account has increased or decreased in value. Take these factors into consideration when choosing your brokerage: Look for someone who has been in the industry for ten years or more. Experience indicates that the company knows what it's doing and knows how to take care of clients. Check to see that the brokerage is regulated by a major oversight body.
If your broker voluntarily submits to government oversight, then you can feel reassured about your broker's honesty and transparency. Some oversight bodies include: If the broker also trades securities and commodities, for instance, then you know that the broker has a bigger client base and a wider business reach.
Read reviews but be careful. Sometimes unscrupulous brokers will go into review sites and write reviews to boost their own reputations. Reviews can give you a flavor for a broker, but you should always take them with a grain of salt. Visit the broker's website. It should look professional, and links should be active. If the website says something like "Coming Soon! Check on transaction costs for each trade. You should also check to see how much your bank will charge to wire money into your forex account.
Focus on the essentials. You need good customer support, easy transactions and transparency. You should also gravitate toward brokers who have a good reputation. Request information about opening an account.
You can open a personal account or you can choose a managed account. With a personal account, you can execute your own trades.
With a managed account, your broker will execute trades for you. Fill out the appropriate paperwork. You can ask for the paperwork by mail or download it, usually in the form of a PDF file. Make sure to check the costs of transferring cash from your bank account into your brokerage account.
The fees will cut into your profits. Usually the broker will send you an email containing a link to activate your account. Click the link and follow the instructions to get started with trading. You can try several different methods: Technical analysis involves reviewing charts or historical data to predict how the currency will move based on past events. In the example above, you have to pay 1. When selling, the exchange rate tells you how many units of the quote currency you get for selling one unit of the base currency.
If you want to buy which actually means buy the base currency and sell the quote currency , you want the base currency to rise in value and then you would sell it back at a higher price. If you want to sell which actually means sell the base currency and buy the quote currency , you want the base currency to fall in value and then you would buy it back at a lower price.
All forex quotes are quoted with two prices: For the most part, the bid is lower than the ask price. The bid is the price at which your broker is willing to buy the base currency in exchange for the quote currency. Leverage in the range of Of course, a trader must understand the use of leverage and the risks that leverage can impose on an account.
Leverage has to be used judiciously and cautiously if it is to provide any benefits. A lack of understanding or wisdom in this regard can easily wipe out a trader's account.
For more on leverage, check out " Forex Leverage: Another advantage of the forex markets is the fact that they trade 24 hours around the clock, starting each day in Australia and ending in New York. Trading currencies is a "macroeconomic" endeavor. A currency trader needs to have a big-picture understanding of the economies of the various countries and their inter-connectedness in order to grasp the fundamentals that drive currency values.
For some, it is easier to focus on economic activity to make trading decisions than to understand the nuances and often closed environments that exist in the stock and futures markets where microeconomic activities need to be understood. However, an understanding of a company's management skills, financial strengths, market opportunities and industry-specific knowledge are not necessary in forex trading.
One of the underlying tenets of technical analysis is that historical price action predicts future price action. This makes it the perfect market for traders that use technical tools. If you want to learn more about technical analysis from one of the world's most widely followed technical analysts, check out Investopedia Academy's Technical Analysis course.
For most investors or traders with stock market experience, there has to be a shift in attitude to transition into or add currencies as a further opportunity for diversification. Currency trading has been promoted as an " active trader's " opportunity.
This type of opportunity suits brokers because it means they earn more due to the nimbleness that accompanies active trading. Currency trading is also promoted as leveraged trading, and therefore, it is easier for a trader to open an account with a small amount of money than is necessary for trading in the stock market.
Besides trading for a profit or yield, currency trading can be used to hedge a stock portfolio. In this way, the portfolio value will increase, and the negative effect of the declining dollar will be offset. This is true for those investors outside the U.
For a better understanding of risk, read " Understanding Forex Risk Management. A second approach to trading currencies is to understand the fundamentals and the long-term benefits.