Your quest for a quick and easy guide to forex investment ends here. It’s the buying and selling of currencies from other countries and making a profit out of them by buying low and/or selling high. If the words seem familiar, it’s because forex share some similarities with the stock exchange. However, it’s knowing what’s similar and different than the two can help you become a successful forex trader.
The first thing you have to do is have a currency that you are willing to invest into the exchange. Now why a currency, why not just say dollars. That’s because other people may have a foreign currency they’ve stored, and it can be used in the exchange. But for purposes of simplicity, let’s stick with US dollars for now.
Foreign Exchange currencies is a game of prediction and in some cases, such as cornering the exchange market, a game of bluff. Here’s a hypothetical transaction for purposes of learning.
CAD/USD Foreign Exchange Example
- You purchase 100,000 Canadian dollars at a rate of 1.33 in which you exchanged 75,187 US dollars.
- After a week, you find that the rate is now 1.20 which would make the exchange into USD into 83,333 USD which would mean if you sell, you’d get about 8,146 USD. The risk involved is that in the next week it might go down, or possible rise even more.
- After 2 weeks, your patience paid off as the new rate is now 1.12 at which the rate of selling back 100,000 Canadian dollars to 89,285 USD. You can ride out the rate or sell so you can earn 14,098 USD.
Understanding Forex Quotes
If you’ve noticed, the hypothetical trade used CAD/USD in forex trading. This is a forex quote. The quotes are a pair of currencies because when you exchange one currency, it is always to another currency. Some people ask if they can exchange a currency against itself and wait for the value to go up, yes you can, and it’s called the Stock Exchange wherein you’re in the wrong article.
Moving on, in the example the forex quote CAD/USD = 1.33 then 1.20 then 1.12. This is because the first quoted currency is the base currency and the second one is quote currency.
Base currency / quote currency = rate
The base currency is what you buy and sell to earn a profit in the quote currency.
You buy a forex quote CAD/USD if you think that in the future there will be a gain in value.
You sell a forex quote CAD/USD if you think the value has peaked and might go down in the future.
Quick Terminologies on Forex
Most traders use terminologies to describe their trading actions.
Means to buy. Other terms “going long”. A trader saying he’s going to take a “long position” means he’s going to buy.
Going short or taking a short position then means selling.