Of all of the different types of investment vehicles, online trading of Forex is potentially one of the most exciting options available. Forex trading is very fast-paced and has the potential for people to significantly increase their wealth while not having to start with a large investment amount. Before jumping in, it is important for people to understand exactly what Forex trading is, the associated terminology, how to understand quotes and calculate profits and how to make effective, profitable currency trades.
What Forex Is
The forex market is a market consisting of foreign currencies. Before the internet, trading in currencies was primarily the province of large commercial banks, hedge funds, corporations and very wealthy individuals. The internet with its availability for online trading has changed that dynamic, however. Average individual investors are now able to trade currencies online conveniently and easily. UltraTrade offers an online platform and guidance for investors making trades in order to assist in the process.
The Terminology of Forex
Before beginning, it’s important for people to understand the terminology of the forex trading marketplace. To help people get started, here is a list of the most important terms investors commonly encounter and use:
- Base currency vs. quote currency – A base currency is the first currency quoted in a currency pair on forex. It is also typically considered the domestic currency. The second currency listed in the currency pair is referred to as the quote, or sometimes counter currency.
- Exchange rate – this is a term that refers to the amount of quote currency needed to purchase the base currency.
- Short position – Taking a short position is when an investor chooses to sell base currency in order to purchase quote currency.
- Long position – A long position refers to when an investor wants to sell quote currency in order to purchase base currency.
- Ask price – the price point at which the forex market is willing to sell the base currency to buyers in the market.
- Bid price – in the forex market is a rate at which the forex market is willing to buy the base currency.
- Spread- the difference between the bid and ask prices.
Understanding Forex Quotes
After an investor understands the basic terminology, it is next important for them to understand how to read Forex quotes. When looking at a quote, the bid price is the one listed on the left, while the ask price is listed on the right.
Choosing the Trading Currency
Choosing a currency for trading involves an analysis of several different factors. Investors should look at the country’s current political status. In the event they will be going through an election, the currency is likely to increase in value if a fiscally conservative winner emerges. The next consideration should be what the country’s trading position is. If a country has a trading advantage with many in-demand goods, exports are likely to occur, also increasing the value of the country’s currency. Economic predictions are also important. For example, if an investor believes that the dollar will continue to become weaker, purchasing a strong foreign currency with which to trade may be a good idea. Finally, reading the economic data for a country is important. Investors should look at things like the country’s gross domestic product, employment and inflation rates, as all of these can have an effect on the currency’s value.
Opening an Online Account
When preparing to open an account, it is a good idea for individual investors to request information about what is offered. They should then determine whether they prefer a managed account or a personal account. With a managed account, an UltraTrade broker will execute an investor’s trades on their behalf. A personal account allows individual investors to make their own trades.
After the required paperwork is completed and the account is activated, investors can begin trading. They should begin by analyzing the market, using a technical, fundamental or sentiment analysis. The next step is for the investor to determine what their margin is and then to deposit the requisite amount of corresponding money. Finally, the investor can place orders, which may include stop, limit or market orders. The only thing left is for the investor to monitor their losses and profits, making changes as needed.
Online Forex trading can provide a terrific vehicle for individual investors to enter into the foreign currencies market. By conducting careful research and not taking shortcuts with analysis, investors have the potential for making significant gains in a fast-paced $5 billion marketplace.