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Layman’s guide to getting started with Forex (foreign exchange trading)?

I have heard that people are investing in currency trading, but i don't have any idea about it. Some of my friends are earning a lot investing in currency trading. How does it work?

  • 2
    Don't jump into currency trading just because your friends are making money. There is no guarantee that you too will make money; you may lose big also. – DumbCoder May 29 '12 at 7:52

The currency market, more often referred as Forex or FX, is the decentralized market through which the currencies are exchanged.

To trade currencies, you have to go through a broker or an ECN. There are a lot's of them, you can find a (small) list of brokers here on Forex Factory.

They will allow you to take very simple position on currencies.

For example, you can buy EUR/USD. By doing so, you will make money if the EUR/USD rate goes up (ie: Euro getting stronger against the US dollar) and lose money if the EUR/USD rate goes down (ie: US dollar getting stronger against the Euro).

In reality, when you are doing such transaction the broker: borrows USD, sell it to buy EUR, and place it into an Euro account. They will charge you the interest rate on the borrowed currency (USD) and gives you the interest and the bought currency (EUR). So, if you bought a currency with high interest rate against one with low interest rate, you will gain the interest rate differential. But if you sold, you will lose the differential.

The fees from the brokers are likely to be included in the prices at which you buy and sell currencies and in the interest rates that they will charge/give you. They are also likely to gives you big leverage to invest far more than the money that you deposited in their accounts.

Now, about how to make money out of this market... that's speculation, there are no sure gains about it. And telling you what you should do is purely subjective.

But, the Forex market, as any market, is directed by the law of supply and demand. Amongst what impacts supply and demands there are:

  • Centrals banks (they are the one regulating the money supply and setting interest rates).
  • Governments (with their policies).
  • Inflation (centrals banks uses inflation to decides the interest rates).
  • Gross domestic products (government and central banks are likely to use some kind of policies to enhance the Gross domestic products).
  • Unemployment (more workers means more consumption, more consumption means more inflation).
  • Trade balance
  • And many others....

Also, and I don't want to judge your friends, but from experience, peoples are likely to tell you about their winning transaction and not about their loosing ones.

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