Forex - An Introduction

 

Investing in the forex markets is just like investing in any other business. The key to succeeding in any business venture is adequate preparation. The gathering of knowledge about the endeavour to be embarked on is such preparation and without this exercise, any attempt at making a profitable financial decision can only end in disaster and failure, regardless of your level of motivation and determination or the amount of money you plan to invest.

Knowledge of the financial markets before investing in them is absolutely essential since poor preparation increases the risk of you losing your money. In order to preserve or improve your investments, you need at the least a general background knowledge of how the markets you are going to invest in function. The more detailed your knowledge, the better the chances you will succeed in that market. This eBook will discuss aspects of forex markets necessary to increase your chances of success and therefore profits.

There are many analogies to trading but the most pertinent one is that of driving: even complete novices, above the legal driving age, can get behind the wheel of a car, though they are supposed to have basic knowledge of traffic laws and violations, which have been obtained through a specific study and coursework or real-life exposure such as the years spent riding with parents and others who have driven for years.

Furthermore, a novice will also have an idea about using the basic tools of driving a car such as the steering wheel, the clutch pedal, the brake pedal, the accelerator and also how to use the rear-view mirror even if he or she has never touched a steering wheel before.

The same is also true in entering the world of the forex markets. Whilst you do not have to know all the terminology when entering the market, you should certainly know the basic terminology and functionality of trading currencies.

And just like the novice who is behind the wheel of a car for the first time and getting ready to touch the accelerator pedal, you should start out cautiously and work your way up gradually. A first-time driver just like an experienced driver will first set the mirrors to his or her own liking, then put the car in gear, look for any interfering traffic, and ease onto the accelerator pedal. However, unlike the experienced driver, the novice will never floor the accelerator when coming out of the gate on the first attempt!

Likewise, as a novice, when you first invest in the forex market choose a currency pair that is relatively stable with little fluctuation and do not invest a large sum of money on this first venture.

Turning to the driving analogy, a person learning to drive or who has just qualified to drive should be accompanied by an experienced individual who can assist the novice in making better driving decisions. For instance, by correcting driving errors and providing advice on how to handle the car most efficiently. In the forex market, there are technical experts who can provide advice to help you build your knowledge of the currencies in which you are interested, essentially steering you towards buying and selling decisions on currencies.

The participants in the forex market are banks, commercial companies, central banks, investment management firms, hedge funds, retail forex brokers and investors. The forex market is the biggest and the most liquid market in the world. Currently, the volume on the forex market stands at $4 trillion which is an increase of 20% from $3.21trillion in 2007.

One of the reasons in the increase in forex activity year-on-year is the increase in global trade between international companies throughout the world. When companies do business across boundaries where countries operate different currencies, the company buying the goods needs to exchange its currency to the currency of the country it will be buying the goods from. This is the basic reason why exporting countries, in general, prefer a lower currency exchange rate as that makes their exports cheaper. Revenue from exports can sustain or grow their economy. Occasionally, central banks in those countries will interfere in the forex market to weaken their currency if they deem its strength to weaken their exports.

On the other hand, if the economy of a country is doing well, it may breed inflation. Inflation is basically the increase in the value of goods sold in that country. The higher the level of inflation, the more expensive the goods are. Higher prices are brought about if the imports into the country are more expensive (for instance the price of oil) or if the population of the country has more money to spend; thus creating demand for the goods available in the country leading to increase in inflation i.e. prices.

The forex market is a complex intertwinement of economics, finance, politics and human psychology. In forex trading, all these influences combine into binary trades of 'buy' and 'sell'. In such a complex environment, it is highly advisable for new traders or those contemplating trading to read well-researched material.

Once grasped, forex trading can make an excellent income online.