forex trading

Forex in simple terms

Forex simply stands for ‘foreign exchange’. It provides a way for organisations and individuals to trade in currencies in the hope of making a profit. Forex isn’t complicated to understand, but it is a higher risk way to make or save money.

How does Forex work?

Traders buy a currency and then sell it at a higher price. Or, they sell a currency and then buy it back at a lower price. If they are successful, both of these things can make them a profit. However, currency prices move up and down in a moment, so profits are not always made.

How much is a currency worth?

Forex trading currencies are put into pairs in order to list their values against each other. For instance, if the British pound in your pocket is calculated as being worth two US dollars, it means the exchange rate between GBP and USD is two. Forex then represents the British pound as 2.00000 against the US dollar. If you have ever exchanged money for a trip abroad, you will be familiar with dealing with foreign exchange rates at your local bank or post office.

Why do exchange rates change?

If individuals or organisations buy two dollars with one GB pound and then the pound rises further in value against the dollar, they can turn their pounds back into dollars and make a profit. However, if lots of traders start to think that the US dollar is strengthening against the pound, they may ‘ditch’ or sell their pounds before they make a loss. This means the pound will fall in value and anyone left wanting to sell their pounds will stand to lose money.

How much money could I make?

No one can answer that. Forex trading falls into the higher end of investment risk. Professional traders spend their lives trying to understand and predict changes in the currency market and they only get it right some of the time. For many individuals, attracted to invest personal finance by the 24-hour currency market streaming into their homes via the internet, Forex is a bit of fun but a gamble. Taking a chance is fine, as long as would-be traders don’t invest money they don’t have!

Find out more about Forex

No simple introduction to Forex is enough to explain everything about currency trading and the risks involved. Anyone thinking of dabbling in online trading should take time out to read more about it, talk to others who are investing in currency and get some honest advice.

Written by Wendy Davey

Copyright Io4 UK Limited

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