Forex exchange for beginners
Have you ever thought of trading or diversifying your capital in the foreign exchange market? If yes then this article is for you. Here we will discuss the top ways to trade in the forex market with examples. So stay tuned.
Here's a quick look at what you'll read
Foreign exchange is the largest decentralized market for trading in the currencies of different nations and making a profit from their price fluctuation.
- Sports Forex
- Forex Futures
- Fore Options
- Forex ETFs
Spot forex is the marketplace for buying or selling a currency pair at the current market price.
Forex futures are a popular financial derivative where two parties of trade enter into a trade for exchanging currency pairs at a specific exchange rate at a specific time.
A forex option is a financial contract that gives the buyer the right, not the obligation to buy or sell a currency pair at the predetermined date at a predetermined price.
What is Foreign Exchange?
Foreign exchange is the largest decentralized market for trading in the currencies of different nations and making a profit from their price fluctuation.
Like the stock, the value of currencies also rises and falls due to different geopolitical, economic, social, technological, and other factors. And, traders with the aim to make a profit from currency exchange enter the forex market.
The process of buying or selling one currency against another currency to earn a profit is known as forex trading. EUR/USD, USD/JPY, and GBP/CAD are some of the popular currency pairs to trade in.
How to start forex trading
In the forex market, there are numerous currency pairs, trading strategies, and methods. One of the biggest problems a newcomer faces is selecting the right way for forex trading.
However, worry not. Here we will discuss the top ways to trade in forex exchange for beginners with examples.
Spot Forex
Spot forex is the first in our list of ways to trade in foreign exchange for beginners. It is the process of buying or selling a currency pair at the current market price. Under this method, currencies are bought and sold on the over-the-counter market through a forex broker platform.
Spot traders make a profit from the difference between the buying and selling price. The key advantage of spot forex trading is you can trade anytime from anywhere.
Also, one can take advantage of leverage facilities in the spot market and open a large position with a small capital. Forex CFD trading, Spread Betting, and retail trading are the popular ways for spot trading.
Currency Spot Example
Suppose a trader believes that this is a right to open a long position in a GBP/EUR pair as per his analysis. The current exchange rate of the pair is 1.15. It means 1 GBP is equal to 1.15 USD.
He opens a long position of 10,000 GBP at the current rate. Now his prediction became true and the exchange rate rose to 1.18 USD. So he made a profit of 300 USD {10,000(1.18-1.15)} from the trade.
Forex Futures
Forex futures are the popular financial derivative contracts for trading in currency pairs. Under this, the parties of trade enter into a trade for exchanging currency pairs at a specific exchange rate at a specific time.
Futures are widely used for currency hedging, speculations, and risk diversification. It is a way to lock the price for buying or selling currency pairs so that in the future when the price rises or falls it will not affect the trader.
Currency futures are traded on different exchanges including the Intercontinental Exchange (ICE), the Chicago Mercantile Exchange (CME), the Intercontinental Exchange (ICE), Euronext exchanges, and many others.
Currency Futures Example
Suppose a person enters into an agreement with a US company to buy goods worth $100,000 and the payment will be made after three months at the time of delivery.
In order to hedge the risk of foreign exchange he decided to enter into a forex futures contract at the rate of 1.08. It means 1EUR is equal to 1.08 USD.
Forex Options
Love adventures, if yes then forex options are best for you. A forex option is a financial contract that gives the buyer the right, not the obligation to buy or sell a currency pair at the predetermined date at a predetermined price.
Forex options are mainly of two types: Call options and put options. A call option gives the holder the right but not the obligation to buy a currency pair at a specified rate at a specific time.
Meanwhile, a put option gives the holder the right but not the obligation to sell a currency pair at a specified time at a specified rate. The holders of the forex options contract need to pay a premium amount to get the right.
Currency Option Example
Suppose a trader feels that the value of USD is all set to rise against GBP. The current exchange rate of the USD/GBP pair is 0.78. The trader purchases an options contract with a strike rate of 0.80.
Now suppose the trader’s prediction becomes true and on the date of expiry the exchange rate becomes 0.85. It means he made a profit of 0.05 USD (0.85-0.80) on every Dollar.
Exchange Traded Funds
ETFs are amongst the most popular ways to trade forex exchange for beginners. Under this method, traders or investors get exposure to trade in a single basket of currencies. Simply, one can make a profit from the price fluctuation of a single or a group of currencies.
Exchange-traded funds are trade-in popular exchanges, it is quite simple to mutual funds. ETFs are comparatively less risky financial instruments, as here you are investing in a group or basket of financial assets including currencies, commodities, stocks, and others.
Instead of placing individual trades, one can trade in a group of financial assets using ETFs and take a step toward a more managed investment.
Invesco DB U.S. Dollar Index Bullish Fund, WisdomTree Bloomberg U.S. Dollar Bullish Fund, iShares MSCI Emerging Markets Currency Hedged ETF, 6. WisdomTree Emerging Currency Strategy Fund (CEW), CurrencyShares Euro Trust (FXE), and CurrencyShares Japanese Yen Trust (FXY) are some popular currency ETFs to start trading.
Currency ETF Trading Example
Suppose a person from Japan believes that his native currency has a huge potential to rise against the USD in the upcoming time. So he decided to buy currency shares of the Japanese Yen Trust (FXY) ETF.
He enters a long trade at 54 USD per share, the market turns in his favor and the price reaches 56 USD per share. So the trader made a profit of 2 USD per share.
Wrapping Up
Forex exchange for beginners is a great option to start trading in a global instrument. One can trade in a range of currency pairs with a range of strategies and make a good amount of return.
Also, there are different ways to trade in forex so one can choose the best after considering factors like time, risk management, leverage, currency pair, accessibility, interest, and knowledge.
However, one thing a forex beginner needs to remember is that with a profit potential, the risk of losing is also associated there. Whether you are trading in spot, future, options, or ETFs risk is a part of the game.
So choose the right method as per your risk-taking ability and embrace knowledge to ensure profitability in the market with limited risk.