What Exactly is Forex?
Forex refers to the foreign exchange market in which all the world's currencies are traded in a decentralized market. It is the largest and most liquid trading market in the world, with over $5 trillion dollars traded daily; 24 hrs a day, 5 days a week. The market can stay open 24 hrs a day due to the decentralized marketplace which includes cities from all over the world with different time zones. So, when one trading day ends, another is just beginning on the opposite side of the world.
To understand just how large this market actually is, think of the US stock market which grosses over $2 billion a day. It doesn’t even come close to the extent of the Forex market. The extent of this market is directly related to the need for exchanging currencies. For example, when international businesses do business with each other, such as the purchasing and trading of goods, the importers must exchange the currency being paid to their local currency. As well, anyone travelling to another country needs to exchange their currency for local currency too. You see, currencies are constantly being exchanged, even outside of online trading exchanges.
Although the forex market is essential to individuals and businesses, it is especially important to financial institutions, central banks, and governments. Forex enables countries to participate in international trade and allows for large investments between nations for their goods and services.
Forex is an internationally traded market and the biggest financial market in the world, with the largest volume. However, out of the countless traders on the market, only a few become financially [...] Forex trading has garnered the attention of aspiring traders and investors from around the world as it is an easily accessible and global tradeable financial market. With a daily turnover of over $ [...]
Forex is an internationally traded market and the biggest financial market in the world, with the largest volume. However, out of the countless traders on the market, only a few become financially [...]
Forex trading has garnered the attention of aspiring traders and investors from around the world as it is an easily accessible and global tradeable financial market. With a daily turnover of over $ [...]
How Forex Trading Works
To a beginner, forex trading might seem quite complicated. However, in reality, it is very simple and easy to understand. First off, in the most basic sense, the trading of forex involves the buying of one currency, while at the same time selling another currency. Therefore, forex currencies are always quoted in pairs, with the most commonly traded currency pairs being; EUR/USD, USD/JPY, GBP/USD, and AUD/USD. The goal is to profit from trading currencies by actively speculating on whether the price of a currency will increase or decrease in value. Various factors such as economics and geopolitics influence how exchange rates fluctuate. So, currencies rise and fall against each other.
Therefore, by forecasting the direction currencies are likely to take, you have the opportunity to make profit. So, let’s think of it like this- You might decide to buy the EUR, and sell the USD, anticipating that the Euro will rise versus the Dollar. You then buy a number of units of Euros for your Dollars, and your forecast proves correct. If that’s so, the Euro does rise, you close your trade and make a profit. Remember though, if your forecast is wrong and the Euro falls against the dollar, you will lose money. All in all, this is the most basic understanding of Forex trading for beginners. Now, let’s delve into the basics of actually trading forex. The more you know and understand, the better you will learn forex trading for beginners.
Selecting the Best Forex Trading Platform for Beginners
The forex market is a global financial market with participants all around the world, the same is true when it comes to online forex trading platforms. Traders literally have hundreds if not thousands of online forex trading platforms to choose from. However, a beginner forex trader must ask themselves what exactly it is they’re looking for in a trading platform.
The first thing every forex trader should look for in a trading platform is whether or not the forex broker providing the platform is a reputable broker that is licensed and regulated by a competent regulatory authority. Secondly, it is vital to ensure the trading platform supports all of the forex currency pairs you wish to trade. Another thing to look for is whether or not the trading platform is intuitively designed to provide a simple and easy trading experience for beginners. Many trading platforms are far too advanced for the average forex trader let alone a beginner forex trader and as a beginner, you will prefer something simpler. Finally, once you believe you have found the best forex trading platform for beginners, be sure to test out the trading platform via a live demo account with virtual money.
First Steps to Forex Trading for Beginners
The first thing you need to do when trading forex is to familiarize and educate yourself on the matter. This includes definitions, strategies, analysis, etc. Since you are reading this right now, you are already going in the right direction.
Second, you must open a trading account with a trustworthy and competent broker. Most brokers offer a live demo account which allows you to get familiar with the platform and practice trading with virtual money. Once your account is set up and fully verified, you can deposit funds into your account and begin trading for real. This whole process generally doesn’t take long at all and you can be set up and running from a few minutes to within a few days for most brokers. Check out our forex broker comparison page to find the best forex broker to open a live demo account with.
Essentially, you are now ready to begin trading. So, say you are logged in your platform and want to make a trade. You must decide which currency you want to trade based on your knowledge of the markets. Then, it’s important to analyse the market. This can be done through various methods such as technical, fundamental, and sentimental analysis. There you have it, the first steps to trading forex.
Forex Trading- Your First Trade
Once you have chosen a forex currency pair to trade, have analysed the market and price, decided on a trading strategy, and have chosen the best forex trading platform for beginners, it is time to place your first trade.
To begin a trade, first you must determine your margin, which is the amount of money you intend on investing on a trade, whereby the amount is borrowed from the broker. Trading with margin is common among beginner traders because it doesn’t require as much trading capital in your account. Once you’ve decided whether to trade with margin and if so by how much, you can place an order. There are three main types of orders that beginner forex traders generally place. See them listed and overviewed below.
- Market Orders: A buy/sell order that is executed at the current market rate. These are the simplest of order types.
- Limit Orders: This type of order executes the trade at a specific price. For example, you can place an order to buy when the currency reaches a certain price, or the order can be placed to sell a currency if it lowers to a particular price.
- Stop Orders: Stop orders are utilized when you anticipate the price of a currency to go above its current market price. This is done by placing a buy order at an above market value price, or in the case of cutting losses, placing a sell order below the current market price.
Risks to Consider When Trading Forex
While trading on leverage can be quite profitable, it can also be quite devastating during volatile market conditions. In forex trading, leverage comes from a small investment that is used for larger trades in foreign currency. With these larger trades, traders are susceptible to a greater loss.
Interest Rate Risks
Currency values can dramatically change when a country introduces new interest rates. Again, this can be both a good and bad thing, depending on where you stand with your buy and sell orders of a currency. If interest rates rise so does the currency, conversely when interest rates fall, the currency does as well. This is all due to investors withdrawing or investing in the certain currency.
These risks are associated with time differences between the beginning of a contract and when it settles. Depending on how long a trade is open, the exchange rates may have changed before it is closed. Transaction costs can increase because of this, so this is something to be aware of.
Country Currency Risk
Due to the speculative nature of investing and trading forex, if investors believe a currency will decrease in value they pull out their assets, which further devalues the currency. This can cause some big problems, leaving traders who continue trading the currency with illiquid assets or insolvency from dealers. For this reason, it is important to be fully aware of the country’s financial situation when trading their currency.
Benefits of Trading Forex
The high liquidity in forex provides ample opportunity for forex traders to benefit from the market without disrupting it. For example, a trader can move large sums of money into and out of foreign currency without affecting the price too much. This provides a healthy and stable market for traders to execute their trades quickly and at their desirable price.
Another benefit relating to the markets size is the 24-hour trading availability. This is a benefit for traders who take advantage of peak trading hours when multiple big exchanges are open. During these hours market spreads are minimal and the volatility is increased. As well, traders can take advantage of big market changing news at any time and begin trading.
Another benefit unique to forex trading is the typically low transaction cost. In forex, the cost of a transaction is built into the price. This is known as the spread, which is calculated based on the difference between the buying and selling price. The spread in forex trading is generally quite low due to the high liquidity of the market and is lowest during highly traded hours.
When trading forex, there is no directional trading. Meaning traders can benefit from both rising and falling prices in the markets. So, if a trader anticipates the price will go up, they can buy it, and go long. On the contrary, if they believe the price will decrease, they can sell it, or go short.
Forex trading for beginners does not have to be a scary or difficult process. It really is simple and easy to get started by taking the information presented above into account before choosing a trading platform and making your first trade. As a forex trader you must always remember to do your due diligence and inform yourself on the best forex trading platforms for you, as well as the most lucrative trading strategies to implement and most comprehensive forex trading tutorials to follow.
Also, beginner forex traders should take advantage of the easy to use order types for trading and utilize them to their advantage to mitigate the trading risks involved. All in all, there are many benefits to trading forex and while 90% of forex traders may lose money and give up, by following the information presented here, as a beginner trader you will flourish in this very lucrative financial market.