Although achieving consistent profitability through forex trading can prove quite challenging, it’s certainly not as difficult as most would have you think. If you invest the time to create a trading plan and make sure you stick to it; you will have already taken the first step in joining the millions of successful and profitable forex traders around the world.

What is forex and currency trading?

The foreign exchange (forex) market is a global network of financial institutions, major banks and retail traders that speculate and facilitate trading on the exchange rates between the various national currencies of the world.

Simply put, forex traders invest in currencies in a similar manner to how a stock trader invests in stocks. If a stock is expected to increase in value, it’s reasonable to say that it would be in your favor to buy that stock and sell when the increase reaches its peak - in order to profit from the upward movement. 

The same is true for currencies, or in this case, currency pairs. However, instead of buying a stock of well-performing company, you can buy a currency pair. Currency trading takes place in pairs as the exchange rate between two pairs is how we gauge a currency’s strength.

For example, exchanging dollars into South African rand won’t offer the same buying power as the euro, because the latter is a powerful economy with much higher demand on the global stage. The theory of supply and demand plays a major part in the exchange rate of two currencies as currencies that are in high demand usually command a higher price on the market.

Therefore, if you want to invest in the U.S dollar as it’s arguably one of the best performing currencies, you should also consider the counterpart currency you are going to trade against. In general, the U.S dollar is the most popular currency in forex and commands the highest trading volume.

Currency pairs

Currencies of major economies that are traded against the USD are referred to as the major currency pairs, of which there are seven: EUR/USD, GBP/USD, AUD/USD, USD/JPY, NZD/USD, USD/CHF and USD/CAD.

Each currency pair consists of the base currency, which is the first currency of the pair and the basis of the transaction, and the counter currency.

Also, currency pairs are quoted with their exchange rate in the market. For example, EUR/USD = 1.3300. In this case, the euro (EUR) is the base currency and the U.S dollar (USD) is the counter currency. The exchange rate between them is currently at 1.3300, which means 1 EUR is worth 1.33 dollars.

How currency pairs are traded

Regardless if you are buying or selling a currency pair on the trading platform, you are always dealing with the base currency of the pair. Therefore, if you are buying the EUR/USD pair, you are hoping that the EUR will rise in value compared to the USD. Whereas if you were selling the EUR/USD pair, you are hoping that the EUR will drop in value compared to the USD.

This is important because, with forex trading, you can both buy and sell currency pairs and profit regardless if the exchange rate is rising or falling. The objective of the trader is simply to make accurate predictions. As long as the market moves according to your trade, you will make a profit and said profit will depend on the movement amount. Larger exchange rate movements translate to higher profits and this is why aggressive traders prefer volatile currencies with greater rate fluctuations during the day.

How to get started

If you are wondering if currency tradingis a viable investment, you first need to consider the following:

• Do you have enough disposable income to invest?
• What are your financial goals?

In truth, getting started with forex trading has become quite accessible of the years, and you can fund a trading account with a forex broker and start trading with just $250. However, if you can’t commit to a conservative trading plan, you may end up over trading or even lose most of your investment due to the inherent volatility of the market.

Depending on how aggressive, or conservatively, you should trade will depend on your expected targets and your trading strategy. You should also carefully consider which currency pairs you should trade (remember that some are volatile/risky than others) as well as if your forex broker of choice is licensed and trusted.