Forex is a global market where currencies are traded. Forex is a widely traded market and mostly preferred round the globe. Its daily trade of about $5 trillion also highlights its significance. It is a huge network and properly organized system of traders who buy or sell a currency at a certain price. The most reliable source of converting a currency into another.
It is not just a conversion of currency at all. Although it is done for other purposes such as traveling abroad, commerce, etc., yet a trader trades to earn a profit, and earning profit is obviously the sole cause of Forex trading as well. There is no physical trade in Forex. Thus, the conversion of a currency into another currency is called Forex trading. If you believe that there will be an increase in the price of a currency, then you buy it. Similarly, if you think that a certain currency is going to face a drop in its value, then you sell it.
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Time demanding profession
Forex trading is a new type of trade. It is not a child’s play. It requires time, patience, and expertise to understand the essence of Forex trading. You should not take it lightly. If you invest time in understanding Forex trading, you can make huge profits. Proper analysis of the movement in the values of currencies can change the financial condition of a trader.
If you wish to become a successful forex trader, then your process of learning forex trading strategies should never stop. A hasty decision, a lack of understanding of basic concepts of Forex or an improper methodology can result in huge losses. As the saying reflects that practice makes a man perfect. The same is the case with forex trading. Starting your day with a positive attitude encourages a trader. Therefore, just keep on observing and analyzing opportunities, and market conditions can do wonders for you.
Forex Trading a skill
Forex trading is not a method of getting wealth overnight. It is a skill and you need discipline and patience to learn it. At the same time, like all other skills, it requires experience to master it. Lack of planning, discipline, or poor strategies is the reason for the loss of 90% traders in forex trading.
Millions of trader’s trades in forex on a daily basis but the profitability and success do not become the fate of all the traders. It is limited to just hard-working and keenly observing traders. Similarly, the attention and focus of some traders are diverted by their emotions such as greed, anxiety, overconfidence, etc. you need to handle your emotions while forex trading. Therefore, you need to patiently learn it in order to be a successful forex trader.
Highly Liquid Market
Forex is undoubtedly the most highly liquid financial market. Liquidity makes it the most appealing financial market. The ability to quickly converting an asset into cash is called liquidity. In forex, it means that you can easily move in or out of the investment without much effort.
It is the most attractive feature of forex as you can easily convert your investment into cash at any time. You don’t have to wait for cash in the case of forex. Whenever you want to sell, there is always a buyer to buy it. With the passage of time, the latest technology, most of the hectic analysis is done by machines and gadgets. Different applications are also there to help the traders.
Center location and timing
There are basically several Forex exchanges in the world. However, four of them are considered major trading centers. These trading centers are located in four major cities of the world i.e. New York, Sydney, Tokyo, and Sydney. These exchanges work in different time zones.
Therefore, you can trade in every time zone and the market continues to remain active throughout the day. As there is no central center for Forex trading, so you can conduct this electronically trade at any time you like in 24 hours a day. Its 24 hours feature also attracts traders all over the world. Its salient features are gaining the trust of traders. It remains open five days a week. Thus, it gives you an opportunity to enjoy the weekend without any work-related stress.
Any person who trades currencies on forex is called a Forex trader. A forex trader can be an inexperienced trader or a financial firm or a group of large budget clients or a central bank as well.
Similarly, all the corporations, financial institutions, and individuals that trade currencies on forex are Forex traders. Thus, if you buy or sell a currency at a certain price on forex then you are a forex trader. A forex trader is also called as a Currency trader as well.
In order to be successful in the forex market, you need to select and chose a trustworthy broker. A forex broker or an agent is a medium or an intermediary between the traders and the network of the banks that like to trade. The network of banks is called the interbank system.
The interbank quotes the price of currency and the broker offers the same price to you. A credible broker helps in trade in various possible ways. A good broker should have high-security measures. A broker facilitates and provides a smooth and easy to follow withdrawal as well as deposit in forex trading. The stable trading platform and free of cost analysis or charts of historical data of the currencies also play a vital role in understanding forex. The after-sale services of a broker can also help a trader to understand his shortcomings.
It is very easy to open a forex trading account. It is just like opening and maintaining a bank account. Just like in case of a bank account, you are required some paperwork, same is the case with a forex account. This process of opening a forex account takes just a few days.
In your account, two balances are displayed. One is the current amount while the other one shows the amount that you will have after closing the trades. The second balance is considered as your net amount.
If you want to know beforehand, what are the requirements and procedures for opening a forex account, a broker can prove very helpful in this regard? The broker will provide you with a demo account. For a demo account, you just provide some basic information and can have the experience of a real forex trading account.
What is leverage in forex?
Leverage is another feature of forex that grabs the attention of traders. Forex brokers allow you to make a large volume of trade with a little money by using leverage.
You can trade with a greater amount of money then what you have in your account because of leverage. A trader should understand the significance and usage of leverage as it also introduces certain risks such as too much leverage that may result in making the trader insolvent.
If your broker provides 40:1 leverage, then you can trade with $40 with just having $1 in your account. Similarly, you can trade $40000 with the capital of just $1000.
Currency in Forex
First, you need to understand that the Forex market mainly deals with currencies. you need to grasp al the basic concepts relating to currencies in order to earn profit in forex. Some major concepts relating to currency are:
Rate of currency
The rate or value of a currency reflects the stability and progress of a country. If a country is making progress and enjoying a stable economy then the rate of the currency of that country will enjoy rise while on the other hand, if a country is having financial issues and dealing with a crisis then the rate of the currency will drop.
Categories of currencies
In order to facilitate you, currencies are categorized in different groups. Different types and categories of currency are:
Although almost all currencies are traded on forex, yet all currencies are not traded equally actively. Some are traded worldwide while others are not. The currencies that are preferred by traders are called major currencies. Some major currencies include USD (Dollar of U.S.A), EUR (Euro of European Nations), GBP (British Pound), JPY (Japanese yen) and AUD (Australian dollar). These are widely traded currencies. About 70 % of the trade-in forex is done in these major currencies. The USD is the most actively traded currency on forex. About 42% trade of forex is done in dollars.
On the other hand, other currencies that are not that much traded on forex as compared to major currencies are called Minor Currencies. Some prominent minor currencies are EUR/CHF, EUR/GBP, GBP/JPY, etc.
Exotic pairs of Currencies
The pair of currencies which have one major and one minor currency is termed as Exotic Currency Pair. Prominent and preferred exotic currency pairs include USD/HKD, USD/ BRL, USD/ SAR, etc.
In Forex market currencies are bought and sold in pairs. Three-letter abbreviations are used to represent a currency. For example, the Japanese Yen is represented as JPY, and Dollar of the United States of America is represented as USD.
Although all the currencies are traded on forex yet there are some currency pairs that are preferred by the traders. Thus, these currency pairs are most actively traded throughout the world. Such widely traded and preferred pairs of currency are termed as Major currency pairs. Some major currency pairs are EUR/USD, AUD/USD, USD/JPY, USD/CAD etc.
Base and quote currency
The two currencies in a pair of currency have a different status. The currency you are interested to trade is called the base currency; your trade is based in this base currency while the other currency in the pair is called the quote currency. The base currency is mentioned on the left side of the currency pair and quotes currency is mentioned on the right of the currency pair. In the case of EUR/USD, the euro is the base currency while USD is the quote currency.
If you are interested in trading euro then you just don’t trade in euro, you deal with a pair of euro such as EUR/USD. In this pair, if you think the value of the base currency (the currency you are interested to trade i.e. euro in this example) will rise, then you buy euros and sell dollars. Similarly, if you judge that the value of the euro is going to drop then you sell the euro and buy dollars.
As currencies are traded in pairs in Forex Trading, the value and price of currency affect the price of other currency of the pair. At the same time, these pairs are also not independent of other pairs. If you understand and make technical analysis of this interdependence and correlation of currency pairs then you can do well in Forex Trading. Fundamental Analysis always plays an important role in understanding. For example, in a currency pair of GBP/USD, a positive shift in the price of GBP (British pound) not only affects the value of USD, but it also affects the value of other currency pairs involving GBP and USD such as USD/JPY, etc.
What is Day Trading?
Forex is open all day, but it does not mean that traders need to be available 24 hours a day. Obviously, it is not possible. At the same time, it does not require you to be a full-time trader. Thus, you do not need to devote your whole 24 hours for forex trading. there are certain support and resistance level which the trader should watch. And consistency in trading is very important.
If you want to devote just a part of your day for Forex Trading, then you can even become a day trader. A day trader is a trader who just trades during the daytime. But even a day trader must go through the same procedure of trade just like the full-time trader. Keeping an eye on the current situations and market analysis is still going to be part of your daily routine.
There are basically three major ways of forex trading.
- Spot market
- Forwards market
- Futures market
1) The Spot Market
The largest market of these three is the ‘Spot Market’. It is just like the foundation on which the forwards and futures financial markets are based. Modern technology has increased the popularity of electronic trade. Nowadays when we say forex trading, we are referring to the spot market. The major difference between spot and other markets is that it is solely concerned with the present and deals with the current rate while the other two markets deal with a future date for settlement. When a trade is done, it is called a ‘spot deal’. It is an organized transaction where you sell a certain amount of a currency at a certain fixed price to another trader and in return, get a certain amount of another currency at the fixed exchange value. After the deal, it is settled in cash. Spot deals usually take only two for conversion into cash.
2) Forwards Market
The forwards market is different from the spot market. It does not deal with actual currencies. They deal with contracts. You buy and sell contracts over the counter. The trade is done between traders at a specific price and a future date is fixed for settlement. The interesting feature of the forwards market is that the traders decide the terms and conditions of the trade. Likewise, they trade with those who fulfill their requirements and meet their conditions of trade.
3) The Futures market
In the Futures market, you buy and sell futures contracts with the settlement date on the exchange market. It deals with certain information like the units per trade, settlement date, etc. The Futures Market works as risk management when dealing with currencies. Big financial institutions prefer the Futures market to hedge against the change in the price movement of currencies. At the same time, it also attracts speculators.
Hedging in forex
In Forex trading, traders remain in constant fear about the fluctuations in the exchange rate of currencies while dealing with trade with other countries. Forex is now being used as a hedge against the risk of loss as it fixes a certain value or rate of exchange for trade. It is less liquid as compared to the spot market. you should have a clear understanding of the economic indicators of the country whose currency you want to trade.
Forex and Speculation
In forex trading, when you think that the value of a certain currency is going to rise, it also means that the other currency of the same pair is going to suffer. For example, you are trading AUD/USD at 0.80. If you forecast that the interest rates in the United States are going to rise which eventually results in making the value of USD strong and it will drop the exchange rate of AUD/USD. Let’s imagine, your speculation proves correct and the exchange rate drops at 0.60. If you had made USD long (bought more USD) and sold the AUD, you would have earned profit.
Major factors that influence the price of a currency and ultimately affect forex trading are:
Central Banks announce such measures that affect the price of currencies. For example, if the Central Banks inject more than enough money into the country’s economy, then the price of the currency of that country will drop.
Media is the strongest mode of communication nowadays. Positive or negative news can make a great difference. Positive and hopeful news about the stability of the economy of a country can result in an increase in the price of the currency of that economy. Similarly, negative and discouraging news about a country can become the sole reason for the drop in the price of the currency of that country.
Economic data and Credit ratings
Similarly, the economic data and Credit ratings also affect the price of a currency. The economic data such as the interest rate, inflation rate, productivity, and the employment rate reflect the stability of a country. Similarly, if a country has high credit ratings, then the trader feels confident in investing the currency of that country.
Employing risk management techniques makes a trader, a successful trader. By employing risk management techniques, you can handle the avoidable losses. You need to fully analyze the price movements of the currency before holding a trade overnight or at the weekend.
The most widely employed risk management technique is:
By employing this risk managing technique, you set a limit of stop losses if the market goes against you. Traders become anxious when the market goes against them then they do not know what to do? They worry how to exit a trade but stop losses allow a trader an automatic exit of trade-in dire situation. A beneficial stop loss is one that considers the change in the price movement of the currency pair. Stop losses should consider two factors
Risk-reward Ratio Forex
You need to understand the difference between forex trading and gambling. The ratio of risk and reward must be analyzed by the trader. As forex trading all about a series of ups and downs.
You need to set such position sizes that allow you to survive even in the worst circumstances. A setting position with maximum drawback limits the profitability of the trade but it manages the avoidable losses very well.
Why do we trade currencies?
Last but not the least, let’s sum up the discussion by answering a simple question “why do we trade currencies?” There are many advantages of Forex Trading. Some major advantages are:
1) Forex Market is the most liquid financial market in the world. You can easily buy or sell a currency at any time.
2) It is very easy to enter or exit a trade. You can start Forex trading with an account of just a few dollars. It does not require tons of dollars to enter the arena of the Forex trading.
3) There is no exchange fee, government fee, or a clearing fee. The broker manages the transaction cost in terms of Spread.
4) Quick execution of trade is another prominent feature of Forex Trading.
5) Brokers often provide free stuff like charts to aid in decision making.
6) You can trade 24 hours a day. You can conduct trade whenever you like and wherever you like.
7) There is no restriction on the size of the lot in forex. You can trade in whatever size of the lot you like. You can select a lot of your own choice.
8) It is an error-free form of trade in which you can set your own strategy and exit or exit conditions for trade.
9) Its transparency and flexible conditions also attract traders.
Forex Trading Risk
Forex trading also has some risks, but the most devastating risk of Forex Trading is the selection of an incapable Forex broker.
Choice of Broker
The most crucial and dangerous risk associated with forex trading is the wrong selection of a broker. New traders unknowingly trade with semi-regulated brokers. In such a case they must face some problems such as the broker may re-quote the price or even trade against the trader.
Obviously, it affects the investment of the trader and the trader may become insolvent. Verifying the reputation and credibility of the broker is essential for profitable and successful trade in Forex. Thus, you need to check the credibility and validity of the broker, it can be easily by regulatory bodies.
You need to know whether he is registered with which regulatory body in order to understand the protection you would have if the broker becomes insolvent. You should prefer the broker regulated by U.S regulatory authority. The confident broker willfully displays such information on his website.
To sum up we can say that Forex trading is not a trick of becoming rich overnight. You need to thoroughly analyze the market conditions before entering a trade. You need to learn the art of forex trading before blindly jumping into it. But the silver lining of the matter is that if you devote your time for understanding forex trading then the time will be considered as an investment and that investment will pay off in the form of Profit.