A Beginner’s Guide To Forex Trading
Forex trading is essentially a system of exchanging currencies through the sale and purchase of these currencies. Forex – which is short for foreign exchange – takes place in the Forex market. It is worthy of note that the Forex market is an open market, hence, it can be used by individual traders as well as corporations, institutional investors, banks, etc.
According to financial experts, the Forex market is, perhaps, the largest financial market in the world with a daily transaction of about $5 trillion. To become a part of – and also become successful in – the world of Forex trading, you, first, need to understand why you should engage in Forex trading among other things.
Features of Forex Trading
Perhaps you’ve heard of the grand benefits Forex trading holds, and you feel apprehensive because several such promises made by other corporations remain unfulfilled The following are reasons why you may want to consider engaging in Forex trading.
Volatility
This is one of the basic principles of online trading. It describes the persistent changes in the value of a currency, a currency pair, or the entire Forex market. In Forex, the value of a currency pair changes suddenly, thereby allowing traders to make profits from their investments. Note that the tendency of making high profits from Forex trading is highly dependent on the extent of the volatility of the Forex market.
In essence, the more volatile a Forex market is like planet forex.com, the higher the probability of making huge profits and vice versa.
Legitimate/Regulated
The Forex market is regulated by several authorized bodies that aim to ensure no individual controls the market. They also ensure that the market is safe for investment.
Abundant growth opportunities
One of the most challenging things about Forex trading is the beginning. As soon as you overcome these initial challenges, opportunities for you to grow will begin to appear. If you are dedicated and persistent, you may eventually grow to become an account manager, which is more profitable and has more growth opportunities.
Social networking
Social networks provide individuals with a range of opportunities that can help them improve their business connections. Since the Forex market is the largest trading market around, participating in it would provide you with the opportunity to interact with both new and veteran investors, expert contributors, critics, and several others whose experience and expertise may rub off on you.
Demo accounts
The majority of Forex traders didn’t start trading with real money, instead, they used a demo account offered by the platform. The demo account allows you to learn more about the trading at a gradual and steady pace. When you practice trading using the demo account, your chances of making profits when you start trading with real money increases.
There are several other reasons why you may want to consider being involved in Forex trading, however, the aforementioned is sufficient for this article.
Currency Pairs
Every Forex trade involves two currencies which are commonly referred to as a pair. The relationship between these two currencies is described as the relative value of one currency against the relative value of the other currency.
When you want to write a currency pair, you first write the abbreviations of the two currencies, and then the values of the currencies. Both the currencies and their values are separated using a forward-slash. As an example: EUR/USD 1.4745/46.
Note that currency pairs are not written randomly. The first written currency is referred to as the base currency, while the second currency that makes it a pair us referred to as the quote currency.
In the example given above, EUR is the base currency, while USD is the quota currency.
Examples of common currency pair include:
- EUR/USD (Euro / US Dollar)
- GBP/USD (British Pounds / US Dollar)
- USD/CAD (US Dollar / Canadian Dollar)
- USD/CHF (US Dollar / Swiss Franc)
- USD/JPY (US Dollar / Japanese Yen)
- AUS/USD (Australian Dollar / US Dollar)
Bid/Ask
Bid/Ask is a Forex trade concept that is vital to trading success. A quotation in Forex trading is comprised of two prices: the bid price and the asking price. The bid price is the amount a trader is willing to pay for a currency in the Forex market, while the asking price is the amount a trader is willing to sell a currency pair.
The difference between the bid and ask is the spread. This is the profit the seller makes from the transaction. For example, if a trader buys EUR 1.0 for $1.3 and then sells the same EUR 1.0 for $1.4. The $1.3 is the “bid” price, while the $1.4 is the “ask” price. The difference between the $1.3 and the $1.4 which is $0.1 is the spread, the profit of the trader.
Best Currency Pairs
There are several currency pairs available for Forex traders to choose from. These pairs are divided into two major types: major and minor.
Major pairs
Major currency pairs are traded more than the minor ones. They are the recommended currency pairs for beginning traders because they are the most liquid pairs in the Forex industry.
The best major pairs are:
- USD/CAD
- GBP/USD
- USD/CHF
- USD/JPY
- EUR/USD
- AUD/USD
Minor pairs
Also known as exotics, minor pairs have less trading volume as compared to the major pairs. Examples of these currencies are Turkey’s TRY, Singapore’s SGD, Sweden’s SEK, and several other currencies.
Forex Trading Order Types
Order, in this context, refers to the manner with which a trader enters or exits a trade. It is worthy of note that being able to enter and exit a trade at the right time enhances not only your ability to trade but also your potential to make huge profits.
While there are several order types, the following are essential towards being successful as a Forex trader.
#1 Market Order: This is the most basic type of order, and it means that you want to enter the market at its current price at the time.
#2 Entry Order: There are two types of entry orders: stop-entry and stop-loss orders.
- Stop-entry order: This allows you to place an order to sell at a price that is below the current market price. You then buy above the current market price.
- Stoploss Order: This order helps to prevent further loss when the price drops beyond your expectation.
#3 Limit entry order: This order enables you to trade in a favorable market condition. It allows you to sell at a price above the current market price or buy below the current market price.
To further understand how the Forex market works, you need to learn about the different methods of analysis – the fundamental and the technical methods of analysis – as well as how a Forex trade is operated among others. The knowledge and understanding of these concepts will further facilitate your journey towards becoming a successful Forex trader.
