To make things simple, forex trading is the same as the currency exchange that you do when you travel to another country. A person sells one currency and purchases another. The exchange rate for these currencies regularly fluctuates based on demand and supply.
A lot of different types of forex traders trade currencies in the foreign exchange market. It’s an international marketplace available Monday to Friday and open for 24 hours.
Every forex trade is performed over the counter. This means that there is no physical exchange. Financial institutions, such as a global network of banks, supervise the market.
A Brief History of Forex
You might hear of forex as the market that is always available. Every day, people trade trillions of dollars. However, exchanging currencies has been around for a long time.
For centuries, people have always bartered or exchanged currencies to buy services and goods. However, the forex market that we know today is quite a modern invention.
After the collapse of the Bretton Woods accord in 1971, more currencies were enabled to freely float against each other. The value of each currency differs based on demand. Circulation is overseen by foreign exchange trading services.
Investment and commercial banks perform most of the trading in forex markets on behalf of their clients. However, there are also speculative opportunities for trading one currency against another for individual and professional investors. You can skip the challenging part of learning by getting into the Online Trading Academy.
How to Start Trading Forex
If you’re planning to enter the world of forex trading, you probably have one question in mind. How do you start trading forex? Well, don’t worry. You are not alone. Almost all beginners ask the same question.
Forex trading is almost the same as equity trading. There are a couple of steps you should take to start your journey. This includes:
Finding a Reliable Forex Broker
Selecting a forex broker shouldn’t be an immediate decision. You should do your research and take your time. There is a good possibility that you will eventually start spending tons of money through the platform of your chosen brokerage.
While assessing and searching for potential providers, there are a couple of things you need to consider. These things include:
- Additional services
- Customer service
- Ease of use
- Easy withdrawals and deposits
- Transaction expenses
- Legitimacy and security
Start Trading Using Demo Accounts
A lot of broker platforms will offer you the option to practice with a demo account, also known as a currency trader for dummies. This means that you can trade currencies without spending your real money. This helps eliminate the risk while enabling you to access everything you need to learn how to trade.
When exploring your demo account, you should always take note of how you react whenever you gain or lose money. It’s crucial to practice discipline to avoid losing too much money. This experience will teach you how to use risk management.
You should not rush through your demo period. Make sure you use your time to try out different methods and learn strategies. Also, you can experiment with currency pairs and get more comfortable with various types and tools of the trade.
You might be tempted to immediately start trading real money. However, you should wait until you can create a steady profit on your demo account. Or you can take a shortcut via Daniel Parker’s True Trader learning platform.
Utilize Micro Accounts
If you want to learn more about trading forex, a demo account can help. However, using fake money on the line is not the same as risking real money.
Once you are comfortable enough to stop using your demo account, you should begin with a micro account. This is an account that restricts you to smaller trades.
Once you begin putting your hard-earned money on the line, each loss you take makes a huge impact on your finances. This will help you become a responsible trader compared to using self-help guides, books, or demo accounts.
During this stage, you should not take too many risks. It is vital to gain a practical and deeper understanding of forex trading before you choose extremely volatile currency pairs.
Establish a Trading Strategy
Though it isn’t always possible to time and predict market movement, having a trading strategy will help you set a road map and broad guidelines for trading. An excellent trading strategy is based on the truth about your finances and situation.
It considers the amount of money that you’re willing to trade and, correspondingly, the amount of risk you can tolerate without losing your sanity.
Keep in mind that forex trading is typically a high-leverage environment. However, it also provides more rewards to people who are willing to take huge risks.
Take Your Time to Learn
As a beginner, forex trading can be very complicated. Thus, you should take your time to learn the different strategies, probabilities, markets, and terms.
Your broker might provide free training materials. However, you can also search for online guides, forex trading examples, and video tutorials.
Basic Forex Trading Strategies
A short trade and a long trade are the most basic forms of forex trading types. A short trade consists of a bet that the price of a currency pair will decrease down the line. On the other hand, in a long trade, the trader is betting that the currency price will increase down the line.
Here are some of the most basic forex trading strategies that can help you with your journey.
Momentum trading and momentum indicators are based on the concept that huge price movements in a certain direction are an excellent indication that a price trend will keep going in that direction for some time.
Likewise, weakening movements show that a trend has lost strength and can be heading to a reversal.
Range trading is a popular and simple strategy based on the concept that prices frequently hold within a predictable and constant range for a particular period. This strategy is very effective in markets with predictable and stable economies. It’s also great for currencies that are not frequently subject to surprise news events.
As range traders, people will depend on being able to often sell and buy at predictable lows and highs of support and resistance. They often do it repeatedly over one or more trading sessions.
Another common and well-known forex trading strategy is trend trading. It is also easy for beginners to follow and understand.
The strategy involves determining a downward or upward trend in a currency price movement. Then, the trader has to pick trade entry and exit points. These points will vary on the positioning of the price of the currency within the trend, as well as the relative strength of the trend.
In this trading strategy, traders look at the economic fundamentals of a country to know whether a currency is overvalued or undervalued. Also, they utilize the information to try to get a view of how its value is probably going to move relative to another currency down the line.
Fundamental analysis can be extremely complicated. It involves a lot of elements of the economic data of a country that can indicate future investment trends.
This is a form of forex trading strategy where traders look to profit by taking advantage of the differentials in interest rates between countries. One thing to keep in mind is that even though it’s a common strategy, it can also be very risky.
Carry trade works since currencies purchased and held overnight will pay a trader the interbank interest rate. A trader using this strategy borrows from a currency with a low-interest rate to fund the purchase of a higher rate currency.
A trader using carry trade wants to profit from the difference between the rates. This can often be huge, depending on the amount of leverage utilized.
Moving Average Crossover
For those who don’t know, MA (Moving Average) is a simple technical analysis tool that smooths out price data by producing a continuously updated average price. The average can be obtained over various periods. This can include 30 minutes, 4 days, 8 months, or any other time period a trader prefers.
MA strategies are extremely common. You can personalize it to any time frame. This strategy suits both short-term and long-term traders.
One of the easiest forex trading strategies is breakout trading. This makes it one of the ideal beginner forex trading strategies.
To make things simple, a “breakout” is any movement of price outside a defined resistance or support area. Breakouts can occur whenever prices decrease below the support area. These are called “bearish” breakout patterns. They can also happen when prices increase above resistance areas. These are called “bullish” breakout patterns.
Pros of Trading Forex
Though there are a couple of risks to trading forex and the foreign exchange market, there are also a lot of benefits that can make it an appealing and profitable activity. This includes:
Ease of Entry
For short-term traders, there are a lot of forex technical indicators to draw on. There are also a couple of fundamental analysis tools and theories for long-term forex investments.
This produces a huge choice for traders with different levels of experience to make a swift entry into the industry.
Possibility for Fast Returns
The forex market has deep liquidity. It is also fast-moving. These properties merged with the typically higher leverage available to forex traders, meaning there might be a possibility for faster returns in the forex market. This is particularly true when compared to other markets where traders might have to wait for a long period for returns and growth.
This is a huge advantage of the forex market since the quick pace helps lower opportunity cost for the traders.
Access to leverage could make the difference between sizeable gains and small gains in trading. Compared to other markets, the availability of resources for leverage in the forex market is better.
Traders can get access to a margin that enables leverage of 100:1. However, this depends on where they’re operating from.
One of the most accessible markets for individual traders is the forex market. A new foreign exchange trader can create a forex account within 1-3 days and start trading for as low as $100.
Trading through almost every brokerage can be completed online, and traders have access to strategies, tools, price charts, news, and real-time market pricing through online trading platforms.
In addition to that, the forex market is available Monday to Friday and is open 24 hours a day. This means trading forex can easily fit into the schedule of any person compared to other forms of trading.
Cons of Forex Trading
Traders in the forex market can encounter a couple of unpleasant conditions and factors that might make successful trading more difficult than it might appear.
Here are a couple of cons of forex trading that you have to consider before you start.
When it comes to the stock market, a trader can ask for professional help from relationship managers, trade advisors, and portfolio managers.
Unfortunately, that isn’t the case with forex trading. You will be on your own with no help at all. Constant self-directed learning and discipline are a must throughout your career. You might also have to read a lot of forex trading for dummies books.
Lack of Transparency
Since the forex market has a deregulated nature and is dominated by brokers, beginners can be trading against experts.
Being broker-driven means that the forex market might not be completely transparent. A trader might not have any control over how they will fulfill his trade order. He might not get the ideal price or might get limited views on trading quotes as offered only by his chosen broker.
The best solution is to only deal with reliable brokers who fall within the horizon of broker regulators. The market might not be regulated. However, the activities of the brokers are.
Fewer Residual Returns
Bonds and stocks sometimes regularly make scheduled dividend and interest payments that can improve the long-term value of purchasing an asset.
However, forex trading mainly focuses on getting capital gains from the appreciation of different currencies in a particular pair.
Meanwhile, forex positions held overnight can pay or yield interest. This varies on the difference in interest rates practiced in the countries issuing the currencies sold and purchased. Sometimes, this interest is referred to as “carry” or “rollover” interest.
Every market can show volatility at one time or another. Of course, this is also the same with the forex market. Traders that are trading forex hoping for short-term profits might encounter unexpected severe volatility at times. This can make their forex trading strategy unreliable.
Are Forex Markets Volatile?
For those who don’t know, the measure of how excessive the prices of a market change is known as volatility. The liquidity of a market has a major influence on how volatile the market’s prices are.
Typically, lower liquidity leads to a more volatile market and causes prices to greatly change. On the other hand, high liquidity typically produces a less volatile market in which prices do not dramatically fluctuate.
Liquid markets, such as forex, usually move in smaller increments since their high liquidity leads to lower volatility. More traders trading at the same time normally leads to the price making minor movements down and up.
However, sudden and dramatic movements are also likely in the forex market. Because currencies are influenced by a lot of social, economic, and political events, there are a lot of situations that cause prices to become volatile.
Traders need to be cautious of current events and keep up on financial news to avoid possible losses.
Are Forex Markets Regulated?
When it comes to the forex trading market, there isn’t any centralized body governing it. Instead, a couple of independent and governmental bodies oversee forex trading across the globe.
The global supervisory bodies control forex by setting rules that every broker needs to follow. These rules include communicating particular changes of services to their clients and undergoing routine audits. These rules are licensed and registered with the regulatory body.
This helps guarantee that forex trading is fair and ethical for every person.