Starter’s Guide to Forex
Are you new to the field of trading? You may be here for the financial freedom, or you may be planning on practicing to get a trading job at an institution. Either way, it is necessary to start the education process somewhere.
Learning how to trade in Forex, regardless of purpose, requires dedication and practice on your behalf. You would be hard-pressed to succeed for yourself or anyone else with knowing where, why, how, and what is forex.
You may be trying to figure out which markets to trade and invest in. This may be a confusing choice to make, especially with the many options lying around. Yet, many people today will generally start with Forex markets. This is the type of market that we will be discussing today.
Here, we will be providing information on what is the forex market, who trades, where and when it is traded, and why. Additionally, we’re going to introduce you to a few terms related to the field, for basic familiarity.
What is Forex?
Forex is known by the initials FX, or as currency trading. Simply put, it is the worldwide free market where you can exchange one currency for another.
Being a worldwide global market, price changes aren’t governed by strict regulations enforced by governments. You cannot regulate a currency market, except to ensure fair trading practices with honest brokers. Thus, if you are a seeker of a free market to trade, FX markets are one of the best.
Buying, selling, and exchanging currencies anywhere and at any time is determined by the changing global market prices for the currency. Wherever you swap one currency for another, whether at a bank, through swaps, or through trading online, exchange rates will always be affected by the globally accepted FX pricings.
It should be considered that any country in the world with a currency, adds to what you can trade in the forex market. With over 100 currency pairs in the markets, a trade usually can trade what they see fit.
Regardless, there tends to be some popular currencies which are traded by the majority in the FX market, mainly due to liquidity. Those would be the US Dollar, British Pound, Euro, Japanese Yen, Australian Dollar, Swiss Franc, and Canadian Dollar.
It is also necessary to consider the factors shaping the global forex market. In addition to trader activity, there are also economic and political conditions of a country to consider. After all, currencies are what is being traded. The state of a country’s affairs, in terms of security and productivity, has a huge impact on the traded markets. From there, it becomes paramount to understand market fundamental forces (which may not be a necessity for other markets).
Who Trades Forex?
Being a global market, anyone can trade here. This is of course provided that you are of legal age to do so.
Both individuals and investors alike trade forex markets. Individuals who trade the forex market tend to constitute a low percentage of volume during daily trades. This is because effective currency trading tends to require a mass of capital to profit. Institutions alternatively will trade a market with millions, and possible billions in capital, depending on the set strategies of such investors.
Individual traders can range from an average trader who bases their income off trading, to a rich investor with years in currency trading as a veteran. Institutions who join the FX market are also a variety. Those include banks and central banks, which comprise the majority of volume in FX trading. Those may also include trading companies such as corporations, or investment and hedge fund managers.
When and Where Can I start Trading Forex?
Being a global market, the FX market is accessible 24 hours a day. The markets are available 5 days a week, providing a normal workers routine for those who decide to trade for a living!
To trade forex, you can either go for regular currency swaps (slow and inefficient), or setup an FX account with a licensed broker. Brokers may be found easily, especially online, when you do consider the popularity of trading in our current day and age. We highly recommend you can contact a broker for this process.
Why Trade Forex?
It’s always about the bottom-line. For institutions and individuals, it is about profit. Yet, there are exceptions, an example being the role of central banks in the market.
It is necessary to understand that central banks have a vital role in the valuing of a currency in the markets. As such, central banks may participate in owning and trading forex markets, in addition to shaping them through their policies. The reason for this is because central banks act as a stabilizing influence to any currency.
How Do I Know What to Buy or What to Sell?
Learning market timing in the forex markets is an issue of practice and knowledge. It is simply not enough to know “what is forex”. You must also know what is profitable in forex, and at what times.
Research and calculation for trading choices are done through online platforms and trading software. A good software for this would be MetaTrader4, commonly used by many traders around the world. Trading forex can be quite an individual endeavor, especially since the strategy and reasons for trading may differ from one person to another.
When making a trade, most traders make a decision using a combination of fundamental and technical indicators. Fundamental indicators are generally used by larger traders such as institutions to make long-term decisions. Individual traders on the other hand tend to favor a more technical approach, trading markets in short swing.
Basics to Learn About the Forex Market
Starting an account and learning to buy and sell isn’t all there is to Forex. Understanding some core rules about the market is necessary to trade properly.
1 of those rules would be the high liquidity and low natural volatility of the market. Currencies do not change by rapid percentages the same way that stocks and options do. In fact, when trading currencies, you are always forced to trade with leverage.
So what is leverage? Basically, leverage is regular trading terms means money borrowed from the broker. This manifests in multiples, where adding $1 to your account may increase leverage, depending on the settings of your account.
For example, let’s say you’re doing a 50:1 leverage. This ratio means that for every $1 you put into your account, you can purchase up to $50 worth of currencies. This leveraging allows you to profit considerably off the tight movements in the FX market. This ability to leverage is what spawned the ability to trade the market on shorter timeframes.
Of course, the ability to leverage does not come without a cost…
Understanding the concept of margin. Your margin is the amount of money required in your account to open a certain trade, especially on margin. If you’re trading on leverage, which is a must in FX, then you’re borrowing broker’s money. This means that any form of error you do, may cost the broker too.
In addition to the concept of margin, you also have something called margin calls. This is when your account runs below the limit required to trade effectively. This tends to occur a lot with high margin traders, especially those who low experience in the markets.
Margin calls are best understood when we look at the flipside of leverage. You see, leverage can be a double-edged sword. When you borrow money for a trade, you stand to make more money, basically for free. If you’re on a 50:1 margin, you invest $1, while your broker invests $49. You then get to profit off the $1, and the $49!
But what if you lose money on that trade? While your gains multiply, so do your losses. And because brokers need to safeguard their borrowed money, you must understand that any losses the broker would sustain, are subtracted from your account.
This means that if you lose money on the $49, the losses get subtracted from the $1…
A simple and tiny mistake in such circumstances can put your account in the red. Thus, you should be extremely calculated when making an investment.
That’s all! With Enough Practice, You Will Reach Perfection!
The previous information may be hard to digest for you, especially if this is your first time. We’d highly recommend you take a step back to take in all the information. This especially applies with regards to the margin and leverage portions. Getting those right when understanding their implications, can be the difference between a successful FX career and a failed one.
Also remember that practice makes perfect! Like with any field, you definitely will not rocket off to mass success right at the start, but you can slowly sharpen your skills to get there. Thus, it becomes to paramount to find those who have the skills and knowledge to help you do so!