The forex market is the largest and most liquid financial market in the world with a record of an average traded volume of over 5 trillion dollars per every trading day. This market provides a good number of opportunities and financial advantages for forex traders, investors, individuals, industries and banks. Traders from around the world come together to trade financial instruments like commodities, currencies, indices, stocks, precious metals, cryptocurrencies, CFDs and ETFs.
Forex trading otherwise known as foreign exchange trading is basically the buying and selling of currencies. It is simply the exchange of one country’s currency for another country’s currency. The principal behind forex trading is buying a particular currency when the price is at its lowest rate with the intention and expectation of selling the currency when the price increases. Forex trading has its major determinant as the exchange rate of currencies. For instance, from the United States to Europe, you need to exchange your dollars to euros. The exact amount of euros you will receive for an underlying dollar is totally dependent on the exchange rates between both currencies based on their supply and demand. This exchange rate is characterized by a dynamic nature, it fluctuates constantly. A dollar could have an exchange rate of 1.2 euros on Monday morning and on Tuesday, the same amount of dollars could be worth more euros.
THE CONCEPT OF FOREX TRADING
The exchange rate between currencies is based on their values. Forex traders and investors who trade financial instruments in the forex market can decide to trade up or down. Here, traders can decide to buy a particular currency when they think the currency will increase in value and sell the instrument/currency when they think it will decrease in value. For example, an investor/trader owns a Japanese currency and a Japanese news release comes up and states that the Japanese government wants to devalue its currency in other to enlarge their coast for more foreign business into its economy. The trader can execute a trade and open a trade position with the intention of selling his/her Japanese currency for the euro once he has the conviction that the trend will continue. As far as the yen keeps decreasing against the euro, the trader keeps procuring profits. On the other hand, if the value of yen increases while the trader still has open trade positions, losses become the case.
The dynamic nature of the forex market and existing exchange rates have a way of exposing traders and investors to trading risks when faced with buying financial instruments that are beyond their borders. The major advantage of the forex market is that it acts as a hedge against the identified risks. It does this by fixing an exchange rate at which the trade can be performed in the future. This provides a platform where forex traders can trade instruments based on market speculations and thereby gain profits.
HOW TO BUY AND SELL FINANCIAL INSTRUMENTS IN THE FOREX MARKET
Every aspect of forex trading has to do with two currencies. Forex trading is performed on the basics of betting on the value of a currency against another currency. For instance, the EUR/USD currency pair. The first currency in this pair (EUR) is called the base currency while the second currency in the pair (USD) is called the counter currency. This currency pair quote entails how much a single euro is worth in USD. When trading with a trading platform, there are two prices on the screen of your computer. These are the ask price and the bid price which have their differences as the spread. When you make decisions to either buy or sell the currency pair, you are specifically buying or selling the base currency which is the EUR. The purchase of the currency pair is placed on the increase in the value of the base currency while selling the currency pair based on the decrease in the value of the base currency. If the procuring power of the above-mentioned currency pair is 0.7644 and the selling price is 0.70640, it gives a spread of 0.4 pips. Once a trader executes a trade and it falls in his favor, he makes profits when the spread is covered. However, if the trade moves against him, he loses his money.
STEPS ON HOW TO TRADE FOREX MORE EFFECTIVELY
- EDUCATION, LEARN BEFORE YOU BURN
In forex trading, education is always the primary key to success. In other to maximize profits while trading forex, the first step is acquiring adequate knowledge of basic forex terminologies through research. Forex trading goes beyond clicking the buy or sell button. Success is achieved by understanding how to read and interpret various levels of indicators on a price action chart, gaining effective knowledge on the use of forex trading tools, and knowing how to use various news releases on making standard decisions on when to enter or exit a trade position. These parameters can be acquired through online and offline trading researches, books, materials, and tutorials. It is also advised that traders join trading forums where trading ideas can be exchanged.
- DEFINE YOUR TRADING GOALS AND TRADE WITH A CONVENIENT TRADING STYLE
When trading forex, traders should have expectations and goals. Before trading any instruments in the forex market, a trader needs to set a trade height where he/she wants to reach and bring up possible ideas on how to reach that height. As a trader, you need to state your trading goals and generate functional strategies which will lead to achieving the set goals. First of all, you need to have a trading style. Each trading style comes with a certain percentage of risk, therefore, work with a trading style that fits your convenience. For example, if as a trader you don’t feel comfortable at leaving open trade positions at night, you can decide to be a day trader. The same thing goes for being a swing trader, position trader, or a scalper. The point here is, work with what best suits your set goals.
- TRADE WITH A GOOD FOREX BROKER
A forex broker is an online brokerage company that specializes at providing effective financial trading service for traders and investors at large. They perform this function by providing forex trading platforms, trading tools and a comfortable trading environment for the trade of different instruments in the forex market. The success of a trade depends highly on the type of forex broker you work with. Before choosing a broker, it is important that forex traders perform active research on available brokers online. This will help you sort out those that are reliable and transparent. Effective research should be conducted in other to know the functionality of the available platforms, their regulatory status (work only with regulated brokers), and effectiveness of the available trading tools.
- DEMO BEFORE YOU TRADE LIVE
In forex trading, practice makes perfect. A demo trading platforms is a practice platform that gives forex traders the ability to trade forex using fake money while gaining real money. This platform gives traders the ability to polish their trading skills while acquiring new trading skills. It gives them the possibility of knowing how to use trading tools effectively, gives them a general knowledge on how to use and interpret trading indicators on price action charts and gives them a general understanding of what the forex market and its environment entail. Aside from these, a demo gives a trader the ability to test the functionality of all trading parameters made available by a forex broker from the platform down to their customer care service.
- CHOOSE AN EFFECTIVE TRADING STRATEGY AND STICK TO IT
Forex trading entails making the right decision on when to enter and exit a trade position. It involves knowing the right time to trade and buy a security based on predictions and speculations. There are basically two strategies used to make appropriate trade decisions. Some traders use fundamental analysis and indicators as a trading strategy. This technique involves making trade decisions based on news release from the state of a country’s economy, economic stability, inflation rate, and charts. Other technical traders use indicators to analyze the market based on past trends. Any technique or strategy you chose should be able to function with the dynamic nature of the forex market.
- USE EFFECTIVE RISK MANAGEMENT TOOLS
When trading forex, risks are inevitable. All trades come with a specific amount of risk and the key to making profits involves managing those risks. Risk management in forex trading is the identification, evaluation and adequate examination of possible financial/forex trading risk when making trade decisions on when to enter or exit the market and the coordinated application of resourceful risk management tools to reduce and control identified risk. Examples of forex trading risk management tools include stop-loss order and a take profit order. These tools help to maximize profits while limiting the chances of losses. It should be included in every trade.
- PATIENCE AND DISCIPLINE
Forex trading has to do with patience, discipline, and consistency. Every trader with the utmost goal of achieving a mind-blowing success and profit should have these basic principles in mind. Trading forex based on human emotion have been the story behind every downfall. As a trader, you should learn how to keep emotions like fear and greed out of the trading environment.
ADVANTAGES OF FOREX TRADING
LITTLE COST: Forex trading has a limited trading cost attached to it. It doesn’t involve any form of commissions form brokerage firms since profits generated by trading forex is based on spreads, the difference between the ask and bid price. This makes trading forex with brokerage firms cost effective with no additional charges.
APPROPRIATE FOR ALL TRADING STYLES: The forex market is filled with varying forex traders. This is due to the fact that the forex market functions at all hours of the day. This alone creates room for day traders, swing traders, position traders, and scalpers. More especially, short-term forex traders take advantage of this characteristic to make more profits from small trade moves under a short period of time. Other traders trade forex at off hours in other to acquire high trading volumes and make small profits. The forex market is a trading environment for all traders who make profits on steady low market volatility that results in high volume trades.
OFFERS HIGH LIQUIDITY: The forex market is made of a high number of traders, individuals, investors, private industry owners, and banks who come together to trade financial instruments. With this, the forex market produces a large rate of liquidity on every trading bases where huge trade orders are easily achieved without any form of forex market price variations. High liquidity specifically acts as a hedge over price fluctuations thereby yielding a higher volume of trades.
NO CENTRAL EXCHANGE FOR TRADING: Forex trading is performed over the counter. Because of this, the forex market is not disturbed by central exchange nor trading regulations. The only possible trading regulation found in this trading environment is the central bank. However, this bank only intervenes when it is deemed necessary.
A GOOD NUMBER OF ASSETS AND PAIRS TO TRADE ON: The forex market provides a medium through which traders can trade more than 70 financial instruments and assets as well as the 28 major currency pairs. Unlike other markets who base on trading one security at a time, the forex market avails traders the opportunity to trade with diversification thereby maximizing profits and returns.
TRADE ANYWHERE AND AT ANY TIME: The forex market is open at all hours of a trading day meaning 24/5. This gives forex traders the ability to place trades from Sunday around 5 pm EST to Friday at 4 pm EST.
In conclusion, forex trading in the forex market entails more than just buying and selling currencies. It involves tactical trading based on knowledge, skills, practice, patience, discipline, and consistency. Successful forex trading has to do with an effective performance of self-market analysis in order to determine what drives trades in the forex market.