I like to cover all sorts of personal finance and investing on this site, and have talked a lot about: stocks, mutual funds, real estate, and bitcoin. One that I haven’t touched on but feel like young professionals should be aware of is foreign exchange trading, commonly referred to as forex. If you’ve ever exchanged money to go overseas on a trip and did so on the way back and wondered why there’s a different (aside from money changer fees), then you’re probably aware that many major currencies fluctuate in value. Currencies change in value over time, and may be slow and steady, or may be more drastic. I would like to call out that trading currency is quite risk, much riskier in my opinion than trading stocks, but in the interest of making you aware of how things that you might encounter work, I wanted to explain a little on forex trading.

Terminology 

If you want to trade on the forex market, the very first thing you need to do is educate yourself on what you are getting into. As with most things, you can spend a lot of time and money educating yourself in them, or you can understand the basics and start getting your feet wet. Here’s a quick YouTube video explaining some of them:

The first term you need to get familiar with is forex, itself. It means foreign exchange and refers to the market when foreign currencies are traded. 

The next term you will need to be able to use is base currency: That is the currency you are holding or using. Therefore if you are from China, your base currency will be Yuan, While if you come from the UK, your base currency will be GBP. For readers in the US, it’ll be the US Dollar. The base currency is where ultimately you’d like your money to end up – hopefully with more of it!

The opposite of base currency is quote currency. That is the currency that you will be purchasing on the forex market. So, if you’re thinking the US dollar with perform well against the British Pound, the British Pound is your quote currency.

Then there is the term pip. To remember this, think of the pip of an apple tree being the smallest part. The pip in Forex is the smallest amount of the currency that it can go up by or down by. This figure is usually set at 1% of the currency you are trading. It’s a phrase that traders will use to quickly express how much a currency has moved compared to another one.

You will also need to know what the term bid price refers to. Put simply, this is the cost that your broker will buy the base currency you have at. Remember that brokers – the people doing the exchange need to make a little money too, they’re not doing this for free!

Once again, conversely, the ask price is the cost that your broker will request from you when buying your quote currency. The ask price will always be higher than the bid price. The difference between them is known as the spread. This is what your broker will make on the trade. So, when you’re going from your base US Dollar to British pounds you’ll find the bid price, and then on the way back you’ll look at the ask price.

Risks

In addition to the critical terms in forex trading, you have to understand the risks involved before you begin as well. After all, any form of investing or trading carries uncertainty with it. In fact, it is this jeopardy that provides the potential for you to make money because it is caused when markets rise and fall. 

Unfortunately, you can be on the wrong end of this risk, too, something that means you lose money rather than gain it. With this in mind, you must understand the specific risks, as well as strategies for mitigating these. If you want to make sure that your investment is well protected, that is. 

Get yourself set up to trade

The next thing you need to get your head around when trading forex is getting set up. In fact, there are two critical things you need to do here. The first is to find a broker that you want to work with. You have to be able to trade the currency somewhere – it’s just not practical to do with actual hard cash!

Of course, this means doing your homework and researching brokers before you sign up to work with them is absolutely critical here. In fact, not all brokerage firms offer forex trading, so you must pick one that does! As always, compare prices, fees, and reputation before you hand over your money!

Foreign currency accounts 

Additionally, because you will be trading in foreign currency, opening a foreign currency bank account can be a good idea. The reason is that doing so can help you to trade globally without getting caught up in bureaucracy. It can also help you minimize any conversion fees as well (fees can add up and take away from your gains). Something that should ensure you make the most profits on your trades possible. 

Get trading 

Finally, when you have done your research and set up the practical side of things, the only action left will be to begin trading. Something that you can probably do reasonably quickly and with the aid of the information above relatively simply as well. 

Final note

Trading and investing is always risky, and foreign exchange trading is on the riskier side for sure. I like to recommend trying your hand with ‘play money’ before getting started – same applies to trading individual stock, or something as farfetched as cryptocurrency. There are a lot of scammers out there in the market too, and with foreign currency there risks are only multiplied!

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