Foreign Exchange is a business that deals with the buying and selling currency in the entire world.
The process of the trade is simple, and those who are in the financial market find it a lucrative business to engage themselves in. All that one needs is to have some knowledge about forex market, currency pairs used in forex and the rest will be an enjoyable job.
The most important thing is that when one wishes to engage in the forex market, then you must have enough finances to give you a stepping stone.
Dealing with the financial market is a matter of speculation in the hope that prices will increase when one intends to sell off the currencies.
Explanation with the help of a currency pairs
Say we are dealing with USD and Euros.
If today you buy 500 euros with the exchange rate of 1.1800 US dollar, then the amount you will pay is 500*1.1800=590
If in the next two weeks you decide to exchange the 500 euros back into U.S. dollar and the rate will be 1.25, then the amount will be 625.00
The profit you will have made at this time is $35.
One must understand how to read a forex quote, and since currencies are usually quoted in pairs, for instance, USD/JPY, it’s essential to know how the pairs are done.
This is because every foreign exchange must involve a simultaneous transaction which is buying of one currency and selling the other currency that is quoted with.
On the same note, there must be a base currency, and this means that if you are buying EUR/USD, then you will be buying the base currency and concurrently selling the quote currency.
One buys the base currency with the hope that it will gain value comparative to the quote currency. Still, you have the option of selling the pair if you anticipate that the quote currency will lose value shortly.
Buying and Selling Currency Concept
There is no specific procedure that must be followed when buying or selling currency. One can use any approach so long as it is a successful one. The reason behind this is because of the liquidity of the monetary value, and as such, there is no defined way towards the trade.
However, several factors help determine when to buy or sell forex currency pairs.
Depending on the volatility and the risk involved during the levels of entry and exit, some of these factors include;
-
Economic Policy.
Forex traders will need to know the GDP levels, number of unemployed people, fiscal and monetary policies because they influence the value of the currency at all times.
Whenever there is instability in the government, for instance, during the campaigns for a change of government, corruption all contribute to change in the value of the currency. At this time, the forex traders are wary of when to close the business.
2. Technical analysis.
This refers to the patterns used by marketers to predict how the value of a currency will be at a certain period, and determine if it will be favorable to buy now in anticipation for future rise in prices.
3. Interest and Inflation Rates.
Interest rates depend on the changes in the bank charges over time, which affect the borrowing capacity of both individuals and. On the other hand, inflation has all to do with the difference in the cost of goods and services over time, which can either raise the rate of foreign exchange or lower it at any given period. This depends on the economic performance of a country during the year.
4. Government debt.
Government debt refers to the national and public debt that is owed by the central government.
If a country has substantial debt, then foreign investors tend to keep away from such countries.
This is because of the fear of inflation, and as such, the value of the currency in such a country will diminish over time.
Strategies used to buy and sell currency.
When you plan to buy and sell currency, some strategies are a must for one to be a successful forex trader, and some of these are;
-
Learning about how trade takes place
This involves determining the exchange rate of the currency you intend to buy about the one you are willing to sell. In this case, any currency exchange rate is quoted in pairs of currency. Besides, there are online currency trading courses which are offered online, and most importantly, they are updated with the current eventualities of the forex business.
-
Have a laid down plan regarding the money you wish to sell.
For instance, when you want to to buy a particular currency, be sure that it will be profitable in the future. The main aim of a strategy is to forecast on the future eventualities of the trade.
-
Assess the risks.
Any business has its risks, and forex is not an exemption to risks. Understand the risks involved and how to mitigate them if it takes place. The best method which is currently used by many investors is the leverage method, which is based on borrowing more currency before placing into the business.
-
Before starting the actual trade, have a demo account to train yourself on how to go about the trade.
This is an eye-opener to help you understand the buying and selling of currencies before engaging in real business.The mock trial will help you know when you have made a profit so that as you start trading, you will be in a position to keep off from a non- profitable trade.
Concept of the short/long position in currency trading
The first and foremost fact is to determine if you are willing to buy and sell.Once you ascertain that all is well, then it’s time to decide on the base currency value so that you are sure of selling it later at a profit.
This is the meaning of the short/long position, buying at a specific price in anticipation of selling at a higher price. This means that long=buy
Related: What is long and short positions in forex trading?
Conclusion
Finally, when you start trading, be sure that you have a focus to run with the forecasting trends to avoid disappointments. You can be sure that forex is an enjoyable and lucrative business to be in at any given period.
