What is FOREX for beginners?

The main question that beginners have in mind in is always ‘what is forex?’
The word FOREX itself is a combination of two words, that is, foreign exchange. History of the foreign exchange can be traced back as far as the existence of currency used as a denominator for value of items. The currencies were introduced as replacement of the Barter trade (goods exchange with goods) which was used back then. Since each goods have differences in value due to the fact that each goods are produced with costs, currency system was introduced by means of determining a fairly accurate value of each goods in accordance with the costs incurred. From then on, the foreign exchange has evolved into a more sophisticated market. The rapid development of forex has made it more accessible to those who have the passion in making big bucks from the market. To put in laymen term, forex refers to currency trading. It is famously (or perhaps notoriously) known as the trading platform of which traders can either win big or lose big over the market.

Understanding the history of forex is not a must for forex beginners but for the sake of knowledge, it is worth a read. Forex for beginners is a platform for those who seek opportunity to make money be it on permanent basis or taking it as a residual income other than fix income earned from the 9 to 5 job.

After the brief history is understood, the next question that popped up is how do one benefit from the forex market? In other words, how to make money from forex?
The answer is found by understanding the mechanism of the market. Generally, the main concern for a trader is on the movement of the price of currency in focus. Since currencies are traded in pairs, the trader will monitor the trend of movement for the currency that he or she is interested in. So how does a trader determine the general trend of the currencies that he or she is trading at?
This is done by doing the necessary research on the price movements. The process of so-called technical analysis is more concern on studying the trends using various types of charts in order to forecast the upcoming trend of the currency. For example, by using the Relative Strength Index (RSI) indicator, the trader may foresee the momentum of the price movement of the currency, whether it is moving further on its upward or downward trend or there would be a turn from its current trend. This topic on the RSI shall be covered in details on the upcoming post.

By anticipating the next moves of the currencies using the technical indicators, the trader may then place position, buy or sell on the currencies that he or she wish to trade in. The movement will be monitored in certain time frames for the trader to exit the market, say hourly basis. Should the price moves in favor of the trader’s anticipation, they would then exit the market by performing the opposite transaction that he or she placed earlier. Let us put this in a simple example, say we anticipate a rise on the trend for the Japanese Yen (JPY), he or she would then place a buy at a particular price. Monitoring the movement in hourly basis, should the price moved in favor of the anticipated trend; that is moving up, the trader then exits the market by placing sell to close the buying position which was placed earlier. So, the different of the selling (higher price) & the buying (lower price) is the profit made over the transaction.

The above example is the simplest way of explaining how money is made on the forex market. The three simple steps that can be digested from the above example is; research-position-exit. If this simple principle is followed accordingly, the trader is said has benefited from the market. But there is always a catch on it. How the research is done to anticipate the upcoming trends? What price that positions should be placed to gain from forex? What price to exit in forex? This is where advance studies in forex trend are required. The traders may need to go further by looking at the micro studies on forex trend. This is done by studying the price movement at a more narrowed time frame. Instead of studying the trend on the monthly or weekly or daily basis, the trader may opt to hourly basis or 30 minutes movement basis. As this may seem to be more practical for the daily traders, it is also depending on the capital availability and trading objectives. By definition, daily traders are referred to those who enter and exit the market the same day at any market session. The positions placed shall not be held or carried forward to the next trading sessions. By doing this, the portfolio is more manageable and thus, profits forecast are more foreseeable. Forex trading management shall be discussed further over the next few posts.

Hope the above helps in giving the basic ideas on how money is made from forex. It is a very interesting market though but it may not be everyone cup of tea. Certainly, it will take time for forex beginners to learn & gain better understanding on what forex is all about. Forex is a very huge portfolio for a trader to manage. One important point that all traders must bear in mind is that, there is always risks in forex trading. It is unavoidable. It is there since day one of its existence but still, money can be made out of forex if one knows how to manage and minimize the risk. It is not about evading the risks completely but rather managing it wisely to balance out the profits. There is no secret about it but the successful traders always focus more on the risk management rather than emphasizing more on the profits.