Forex trading is one of the most popular investment options for newer traders and more experienced ones. It’s an active market where there is always something happening, which keeps traders hooked and interested.
The Forex market also allows for a few tools that make Forex trading more exciting and fun, taking advantage of the particularities of the Forex market. Have you ever heard of leverage?
However, the potential to make a profit comes hand in hand with equivalent risk. This should not put off those looking into maybe becoming forex traders. On the contrary, it should motivate them to learn as much as possible, earn experience, and make sure they choose and develop the proper strategies to keep the risk under control.
Today we will walk beginner traders, those thinking about it, and even those that have gotten started and maybe feel stuck, through the ins and outs of Forex trading.
In order to be a successful Forex trader, you must be familiar with the basic concepts, understand how the tools at your disposal work, and make sure you have chosen an investing strategy that matches your trading style.
Table of contents:
- What is Forex?
- The Forex market.
- How does Forex trading work?
- Why become a Forex trader?
- How to earn to Trade Forex?
- Forex trading. The basics.
- How to be a successful Forex trader
What is Forex?
Forex refers to the exchange of one currency for another. Currencies are always presented in pairs.
How is a profit made in Forex?
Each currency has a price that is quite dynamic and always fluctuating. The profit in the case of Forex is made by exploiting those fluctuations in the traders’ favor.
But, why does a currency price change? There are many different reasons influencing the bid and sell price of a currency pair. First, the rules of supply and demand apply to currency as well and may have an impact on their value.
But when it comes to currency there are so many other factors involved in determining their price. Local current events, international conflicts, global pandemics. Even smaller events may have huge consequences depending on how they are perceived.
A stable currency price usually represents a country’s economic stability, and also the strength of its government, low inflation, and general financial well-being.
The Forex market
Forex is all done over-the-counter (OTC), which means there is no physical place for this market, with all the action happening online or over the phone.
This may sound a bit irrelevant in a time where computers are all around us, but there are huge consequences of the market being 100 percent digital.
The first effect is that the Forex market is open 5 and a half days a week, 24 hours a day.
With the market open constantly, there is always trade happening. While on one side of the world is day on the other is night, and vice-versa. In 2019, it was registered a peak of more than 6 trillion dollars in exchange in just one day in the Forex market.
All of this means that the Forex market is the most active and most liquid in the world, which means it’s extremely accessible. Consequently, it attracts traders looking to exploit the huge chances there are to make a profit. Be warned though, all profit opportunity comes with a risk.
How does Forex trading work?
There are many strategies to trade Forex, but they all are based on the same principle: buying one currency and selling another at the same time.
Currencies are presented in pairs and traders speculate on the movements and fluctuations these currencies will experience, trading to take advantage of the difference between them.
Why become a Forex trader?
So far we have talked about the chances the Forex market gives traders to make a decent income. However, anyone with a foot into the trading world knows that there is always risk involved, and the currency exchange market is no exception.
We have listed a few good reasons. If they match your lifestyle and financial goals, then this may be very applicable to you.
Trading offers the chance for financial freedom, it can be done from the comfort of your own home, and it is an activity that traders can do for the rest of their lives.
If done smartly and traders take seriously the learning process, Forex trading can become a career. Eventually, this allows for more family time, less stress, and the possibility of being your own boss.
New traders should know that those that are not committed to it don’t usually last long. To be a successful Forex trader you have to dedicate time, be patient with your learning process, and start gaining experience, and the best way is to start small.
How to learn to Trade Forex?
There are many ways to learn the basics of Forex training and also the more advanced concept, strategies, and how to make risk manageable.
The online world has made available several seminars, as well as blogs, and financial advice for free.
There are also numerous courses that traders can follow to learn and improve.
Finally, the best way to learn about Forex trading and what ways can be used to be successful is to research more experienced traders and see what they are doing right.
Forex trading. The basics
As mentioned before, there are a few things prospect Forex traders need to learn before getting serious about exchanging currency.
Either there are concepts they have to master or tools that could help them avoid losing too much money or, in fact, maximizing their earnings.
The following are some of the most important without which Forex trading won’t work.
All currencies come in pairs in the Forex market. In order to buy one currency, traders must sell another one.
You may think that with so many currencies around the world things are about to get confusing. However, 85% of the whole Forex trading is done in the major currencies.
Some currency pairs are more common or popular in the Forex market. These are called major currency pairs and include some like EUR/USD, USD/JPY, USD/CAD, AUD/USD. As you can see the US dollars are present in all these pairs.
Other currency pairs are considered minor, and therefore less common. Among them, we can find EUR/GBP, GBP/JPY, NZD/JPY. As you can see, it still includes pretty strong and common currencies like pounds, yen, and Canadian dollars, but these pairs are minor because they have a much smaller trade volume.
Finally, there are other pairs that are known as “exotic”. They include one of the major currencies, paired to the currency of a developing country. These are rare in the world of Forex, and while you may find them, they come with wide spreads that represent less profit.
In fact, the currency most traded will come with easier options and lower spreads.
Spreads and pips
But wait a minute, what is a spread? And why do you want a low spread?
This is one of the most fundamental concepts in Forex that all traders want to learn and manipulate for their own benefit.
The spread is the difference between the bid price and the ask price. If the first one (also known as buying price) is 1.5456 and the second (also known as selling price) is 1.545, the spread is 0.0001, which is also called one pip.
The spread is in a way the cost of that transaction, and the lowest it is, the lowest you allow of your benefit to the broker.
The concept of pips is also very useful instead of using so many zeroes. 1 pip is 0.0001, 2 pips 0.0002, etc. It makes trading faster, easier, and more understandable.
Different brokers may offer different spreads. Usually, on the major currency pairs, the spreads are extremely low. Traders must learn how to manipulate spreads in order to maximize their profit and take advantage of particular deals and low spreads.
Leverage and margin
Another pair of concepts that come together in Forex is leverage and margin. These two tools, while not indispensable for a Forex transaction, definitely make a difference when trading currency.
Without using leverage, traders can only make small trades which leave a very insignificant profit. Remember we are talking about lots of decimals. The way to make a profit out of Forex transactions is to use large amounts of money. But no investor will allocate such huge capital. And then again, in Forex we don’t actually have the money we buy, but just the difference.
So, leverage is the amount of money that a broker will lend a trader to maximize their chances of making a decent profit.
Sounds great, but be warned, it also maximized the risk. That’s why learning how to use it is a must for anyone looking to succeed as a Forex broker.
Leverage is connected to margin, which refers to the deposit that the trader has to invest in order to get leverage. These are presented in ratio, so for example 100:1 means the broker has to deposit 1% of the total amount of leverage. So, 1,000 dollars represent 100,000 dollars of available money for trading.
The risk here is that traders may get excited at the sight of such a deal, but not everything that shines is gold. The potential loss here is so dangerous that traders must learn to use stop-loss tools to avoid seeing their capital disappear and be active enough to get themselves out of deals that may sink them.
Traders should not use all their margin and all their leverage. Learning how to use leverage smartly and when really useful is a skill that will make a difference between a real Forex trader and a wannabe.
Different Forex trading strategies
If we asked a famous Forex trader for the best tip they can give a beginner, without a doubt it will be to learn and experiment with different trading strategies, but overall, to develop their own Forex trading strategy.
A strategy is a system used by traders to decide when to buy and sell currency. Strategies are more or less successful based on the market conditions and the complementary risk management tools.
Traders should keep in mind that a single strategy doesn’t work for all, and should find the one that suits their investing style and trading level of expertise. Especially important is to keep in mind how much time traders have to be active in the market, as well as the frequency of trading opportunities.
The following is a list of the most common strategies for Forex.
- Range Trading Strategy
- Trend Trading Strategy
- Position Trading
- Day Trading Strategy
- Forex Scalping Strategy
- Swing Trading
- Carry Trade Strategy
Each strategy has its advantages and drawbacks. But they can all work well in different market conditions, and traders should learn about them, and experiment to find the one they are going to stick to.
How to be a successful Forex trader
As you may have already guessed, Forex trading can be exciting and rewarding, but it comes with a lot to learn and an inescapable risk that needs to be kept under control.
If you want to be a successful Forex trader, there are a few more things to keep in mind.
These are some of the best tips you can find to achieve your investing goals in the currency exchange market.
As easy as Forex trading can be to make a profit, it comes with the unavoidable risk of losing money. While losing can be a stone in any person’s shoe, they must be used as learning experiences and take advantage in order to avoid any losses in the future.
If traders want to reduce the risk of Forex transactions, or at least keep it manageable, dedicating time to learn and educate themselves is a must.
Other strategies include limiting the use of leverage, risking only what they can afford, have a trading plan, using stop-loss tools, and have realistic expectations when trading in Forex.
Understand the market
Another tip that is of vital importance is to understand the market. Recognizing patterns and signs of changes will help traders to exchange currency at the right time, making a profit or avoiding a drastic loss.
The best way to learn how to do this and be familiar with how the Forex market works is to use a demo account.
Demo accounts are pretty common in Forex trading and brokers to know how much they can have an impact on Forex traders being successful in the long-term or not.
Practice makes perfect, and a demo account is the perfect way to get the practice you need to be a successful Forex trader.
Develop an investing strategy
A final tip is to develop a strategy that will help you decide when to buy and when to sell.
But apart from that, your strategy has to be followed at all times. Random and spontaneous market decisions will take traders nowhere in the Forex market.
Having a plan of action means keeping risk under control and will eventually be beneficial in terms of producing a profit.
We have already mentioned several strategies that are pretty common in the Forex trading world. Traders should experiment with them while using a demo account and see which one adapts better to their available time and trading style.