HOW TO INVEST IN FOREIGN EXCHANGE?

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Investing in foreign exchange is a tremendous way to diversify your investment portfolio. Foreign exchange trading is, however, a little bit more complicated than trading stocks, commodities, cryptocurrencies, etc. With a daily turnover of $5 trillion, the foreign exchange market is one of the most liquid markets. Predominately dominated by banks and institutional investors, the foreign exchange market has become more accessible to everyone with the rise of online brokerages and readily available margin-trading accounts.

In this article, we will discuss what forex trading is and how to invest in the foreign exchange market.

WHAT IS FOREX TRADING?

Forex, short for foreign exchange, is the process of changing one currency into another currency. This process can be performed for a variety of reasons including commercial, tourism, and to enable international trade. The forex market is open to buy and sell currencies 24 hours day, five days a week.

The currencies are traded in pairs, with one currency exchanged for another. These currency pairings can be classified into:

  • Major pairings: The most traded currency pairs are called ‘majors’ and they compose about 85% of the entire foreign exchange market. Note that they all include the USD. These major pairs are EUR/USD, GBP/USD, USD/CHF, USD/CAD. USD/JPY, AUD/USD, NZD/USD
  • Cross pairs: Currency pairs that do not include the US Dollar are commonly known as ‘cross currency pairs. A few examples are GBP/JPY, JPY/CAD, etc.
  • Exotic pairs: Exotic currency pairs are made up of one major currency and a currency of an emerging economy. USD/ZAR and USD/HKD are some examples.

HOW TO INVEST IN FOREIGN EXCHANGE?

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