Forex trading is a legit business that is known all over the world where young, old, rich, and famous individuals venture into the foreign exchange market. However, there is more to forex trading that is needed to be known as a beginner.
Read along as I put you through the nitty-gritty of forex trading so you as an individual can start yours.
Key Insights
- Forex trading is the largest market across the globe, by this, it gives opportunity to individuals to spread their wings into trading without hindrances or restrictions.
- Unlike other financial markets that require large amounts of money to trade, forex trading is more accessible and doesn’t have the same high capital demands.
- Forex trading operates 24 hours a day for 5 days a week. This is an advantage to everyone across the globe where the time frame differs.
- Forex trading is flexible in that by operating your computer from the comfort of your home, you can buy and sell at your own pace.
What is Forex Trading?
Forex trading entails the ability to trade different currencies via the forex trading market across the globe just to make a profit. It is a very lucrative business that requires utmost concentration and monitoring. It is operated through numerous trading terminals as well as computer networks, hence there’s no physical building which serves as a trading location, which is why the monitoring aspect is very essential.
How Does Forex Trading Work?
Forex trading works by demand and supply of currencies. It depicts buying a particular currency and selling it so that profit can be realized, that is, if you have the notion that a particular currency will rise, one can purchase and keep it till it appreciates before selling likewise when you envisage that currency will fall, one can sell such a currency off.
Here is a practical example, Mr A is of the notion that the value of pounds sterling will increase against dollars, he can decide to buy pounds sterling with dollars and when the value increases as speculated, Mr A can sell his pounds sterling back to gain more dollars. By doing so, Mr A has gained profit.
Every forex trader knows about each currency of various countries, these currencies are represented by three-letter Codes i.e. CAD (Canadian dollar), USD (US dollar), EUR (Euro), and AUD (Australian dollar) to mention a few.
Is Forex Trading Hard?
Forex Trading is tasking but quite easy. Tasking in the sense that it requires utmost alertness at all times. The rationale for monitoring is that currencies rise and fall at intervals, which is why one needs to be alert in the forex market. It also requires a high level of risk management.
Types of Forex Market
What is the forex market, you may ask? The Forex market is where Forex trade is done. There are about three (3) types of Forex market, which are stated below.
1. Spot Market: This is considered the market of them all because of its large nature. It is the biggest of all three forex markets, which is why other forex markets build on it.
However, in the spot market, demand and supply are based on Price speculation, interest rate, and performance of economic and Geopolitical events. When a transaction is successful in the spot market, it is referred to as a spot deal.
2. Forwards Market: This is a kind of forex market that requires buying currencies at a predetermined price and future date. This type of market trades on the over-the-counter market.
3. Future Market: While the forex market trades on the counter (OTC) market, future markets do not. Rather, it trades on exchange. Future markets are mostly used by financial firms and companies. Their contracts come with several units being traded, settlements and delivery.
Is Forex Trading Profitable?
Yes, forex trading is very profitable. Ever wondered why commercial banks, investment banks, institutions, people with high net worth, multinational companies and retail investors venture into forex trading? This is because of the large amount of money they realize from forex trading.
However, as an individual or retail trader, making a profit in Forex trading can be difficult without the right skills. Success requires owning a personal Forex account, exercising discipline, obtaining the right education, and following proven strategies and rules, as Forex trading comes with significant risks.
Some Forex Trading Strategies
Just like every other business, forex trading has some strategies and styles which are mentioned below.
- Scalping: The goal is to realize a small profit, for this, trading is opened for a short period and closed almost immediately.
- Day trading: Just as the name connotes, trading occurs within just a day, it closes at the end of the day.
- Swing trading: Prices are weighed by traders until they settle for when the price is reversed.
- Trend trading: Trades are based on trends, just as its name connotes.
- Position trading: Trades are opened for the long term. It ranges from weeks to months and transcends to years.
Some Common Forex Trading Terms
As a greenhorn in forex trading, it is sacrosanct to know some of the terms used in the field to fit in and understand how it works. These terminologies are essential for a beginner, some of them are listed and explained below for easy understanding.
- Bid: This refers to the highest amount of currency to be bought by an individual. Some other people call it the highest bidder.
- Ask: This is known as the minimal or smallest amount an individual wants to sell a particular currency
- Bid/Ask spread: This refers to the distinction between the bid and ask price of a currency
- Base currency: This is also known as the first currency that is listed in a currency
- Contract for difference: This means the process of allowing traders to envisage price movement despite not owing an asset
- Leverage: Here, traders only own very little amount, the rest they use to trade is borrowed. That is to say, they use borrowed capital to realize returns
- Long: This comes with lots of risk, as traders are of the notion that currencies bought will appreciate. It stands on hypothesis/Guesses
- Margin: This refers to the stipulated amount of currency that is needed to hold a leverage position
- Lot: A standardized amount of currency traded in forex
- Short: This depicts selling a currency with the intuition that its value will fall
- Quote currency: This is known as the second currency in a pair
How To Start Forex Trading
Below are some of the steps on how to start forex trading;
1. Prepare your mind and decide
Start with an open mind by understanding the currencies one wants to stick to. Do research about the two currencies, the highs and lows as well as their effects on the economy. Also, pick a trading partner.
2. Have a plan
When a trader sticks to a laid down plan, his or her strategies will work well because as a forex trader, one’s emotions need not come into play. Adhering strictly to a plan eradicates emotional feelings in the trade market.
3. Know everything about forex
It is paramount that everything forex entails needs to be known before venturing into the field. If it entails enrolling in a forex trading academy to be rooted in this field, then so be it.
4. Start with a demo account
A trial is not a crime because it is better to first try with paper trade than putting in a huge amount of money as a beginner. With paper trading, a beginner can know his or her strengths and weaknesses.
5. Open a brokerage account
This is essential because it is through the account that trades are ascertained. However, it is to be noted that research must be done to know the best broker for easy accessibility and affordable fees.
6. Begin at a slow pace
When a greenhorn begins at a slow pace, his or her confidence level and experience grow by the day.
7. Be on your toes at all times
This entails knowing about everything that happens in the trade market. Monitoring of every news that goes around in the trade market is sacrosanct as well.
Tips To Avoid Scam In Forex Trading
Every business experiences scammers, but the ability to know them is essential to avoid them. Some of the tips that can be used to avoid scams in forex trading are listed below.
1. Be sure of your forex brokers’ authenticity, make sure that they are registered regulatory bodies like the Commodity Futures Trading Commission (CFTC). All of the six forex dealers in the United States of America are:
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- Charles Schwab Futures and Forex LLC
- Gain Capital Group LLC (Forex.com)
- tastyfx LLC
- Interactive Brokers LLC
- Oanda Corporation (Oanda, FXTrade.com)
- Trading.com Markets Inc. (Trading.com).
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2. Utilize security tools by using antivirus software to protect your information and trading accounts. Make do with VPNs as well. This will safely guide your account, so scammers can not come to play.
3. Avoid investments that come with high returns, it could be a way of luring you into fake forex trade. Most of these kinds of investments do not come with risks, so be alert.
4. Be open to researching companies you want to trade with before settling for them. Make enquiries from other people who have traded with them to get reviews.
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Conclusion
Forex trading is a very lucrative field that is worth venturing into with no regrets, though it has lots of risks, in the end, it’s worth it. This beginner guide sheds light on how to start your journey as a forex trader which ranges from having a plan, doing research about the two pairs of currencies one wants to trade with, starting with a demo account as well as opening a brokerage account.
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