What is Forex? | If you have traveled abroad, it is likely that you have visited a bureau de change or a money changer to buy local currency by exchanging it with the currency brought from home; this basic foreign currency (or forex) transaction model simply involves exchanging one national currency for another.
As old as money itself, the foreign exchange market allows for foreign trade, which in turn increases the prosperity of a nation or region. While forex trading is essential for international business, it is also a potentially profitable market to speculate on. Read on to learn the basics of forex trading – you’ll understand why, how and where to start.
What is Forex?
Forex is a global, decentralized and largely unregulated market for currency trading; this market operates through a network of financial institutions generally located in the world’s major currency centers.
This allows the forex market to operate 24 hours a day, from 5pm ET on Sunday, when the Australian forex market opens the trading week, until 5pm ET on Friday, when the forex trading week closes in the US.
In the forex market, currencies are not traded at an absolute price or value, but against other currencies and at various exchange rates. This means that currencies are traded in pairs – for example, the US Dollar against the Canadian Dollar. This pair is abbreviated to USD/CAD when using the three-letter ISO codes associated with each national currency.
The modern foreign exchange market, which features floating exchange rates, was formed during the 1970s after the end of the Bretton Woods fixed exchange rate system and its benchmark.
Due to increasing globalization, the forex market has quickly become the largest financial market in the world, with average daily trading volumes reaching $6.6 trillion in April 2019, according to the Bank for International Settlements.
The rise of information technology in the 1990s led to the birth of the retail foreign exchange market, which operates online; in addition, software development has resulted in better chart services, faster feeds and execution times, mobile trading and lower overall costs.
Some estimates show that retail traders currently account for 5.5% of the daily trading volume in the forex market, which is approximately $363 billion.
Also Read: The 10 best forex brokers
How to make money with Forex
While forex trading is relatively simple, making money consistently requires practice, discipline, and an understanding of the currency market. Among the most important aspects to consider in forex trading are the following:
- Trade moderately volatile currency pairs. It’s hard to make money trading forex if the exchange rate isn’t moving – look for pairs that move frequently so you can catch some of that movement, but avoid pairs that move excessively as this can create a lot of risk. You can use the Average True Range (ATR) indicator, which shows the average volatility over a certain number of periods (usually 14), to assess the volatility of a currency pair.
- Use a stop loss level. Trading without stop loss is like playing matches at the gas station – many things can go wrong. Even before making a trade, you should have a general idea of where to exit or place a stop loss order in case it goes wrong; the stop loss level usually depends on how much you can lose or technical factors such as support and resistance levels. You can also use 10% of the ATR reading as a rule of thumb to set your stop loss level.
- Set realistic profit expectations. You make a profit (or loss) only after closing a transaction, so don’t start spending unrealized gains; Also, your profit expectations should be realistic, especially since most retail forex traders lose money. Situations where twice the average daily range is acquired are unlikely to occur; even if your trading profit target depends on technical analysis, your actual results will likely not exceed 25-30% of ATR.
- Don’t abuse leverage. Leverage is a double-edged sword: it can make you money, but it can also wipe out months of profitable trades in seconds. Leverage does not change the odds, but it amplifies them. While some offshore brokers allow leverage ratios of up to 1,000:1, US regulators insist that brokerages must only allow US clients to use leverage ratios of up to 50:1.
- Track the fundamentals. Like stock market earnings announcements, the forex market has its own economic calendar; Top recurring news includes central bank decisions on benchmark interest rates, employment data, inflation reports and gross domestic product figures. Following this data for any of the currencies you intend to trade in will help you avoid market shocks and understand the overall economic picture.
- Avoid trading on high impact news. High impact news can cause market volatility that can determine the success or failure of a trade. Even if your research is correct, the market can still overreact; initially a trade may go in the “wrong” direction before reversing when market participants take profits. The only thing worse than simply being wrong is being right too soon but being stopped before the market moves in your favor.
- Trade what you see, not what you think. It may seem counterintuitive, but avoid anticipating exchange rate movements. At any given time, the exchange rate can do one of three things: go up, stop, or go down. Each time a candle closes on a chart, this is new information that can point in the future direction of the exchange rate: interpreting this information correctly and acting accordingly when it occurs (neither before nor too long after) is one of the pillars. . of profitable trading.
- Find a negotiation style that suits you. There are many ways to trade, from scalping trades that last a few seconds to trending trades that can stay open for months; There is no one-size-fits-all approach, so you will need to find out which style best fits your personality for the best trading results.
- Develop and test your ideas. Losses are inevitable when trading; understanding them is essential to the learning process. Keeping a trading journal in which you write down the reasons behind each trade and an analysis of why it worked or did not serve to provide useful feedback when you learn to trade. Test a new trading strategy on historical data and use a virtual money account before you start trading with a real account.
Also Read: The best Forex trading strategies
Why trade currencies?
- Easy to understand: currency trading is as old as money itself; you simply buy one currency and sell another because you believe the exchange rate will go up or down.
- High liquidity: The forex market is the largest financial market in the world, with an average daily trading volume of USD 6.6 trillion (as of April 2019). Thanks to its high liquidity, this market can absorb substantial trades without significant movements, which is an advantage over a relatively illiquid asset class such as penny stocks. If you develop a good trading strategy that can generate consistent profits, you can replicate your results on a larger scale.
- Cheapest to trade: Forex is one of the most convenient markets to trade. With such a high level of liquidity, trading spreads are tighter and trades are generally commission-free. This cost reduction has an exponentially positive effect over time, especially if you are an active trader or if you are looking to increase the size of your trades.
- Available 24 hours a day: the foreign exchange market is open from Sunday to Friday afternoon; during this period, there is always an open trading session somewhere in the world. This is an advantage over stock markets, which operate in a series of shorter daily sessions.
The Best Forex Trading Platforms According
Finding a reliable broker is the first step in achieving success in foreign exchange trading. Take a look recommended brokers in the comparison table below and open a demo account to test their trading platforms.
CedarFX. Best for: Investors interested in 0% commissions or eco-friendly trading. Available currency pairs: 55 || Note: CedarFX is not regulated by any of the major global financial agencies. The broker is owned by Cedar LLC and is based in Saint Vincent and the Grenadines.
IG. Ideal for: forex trading. Available currency pairs: 87
Forex. with. Ideal for: investing in forex. Available currency pairs: more than 80
AvaTrade. Best for: forex trading outside the US. Available currency pairs: more than 50
One market to dominate them all
Often overlooked by retail traders, the huge forex market has become accessible to anyone; all you need to start trading currencies is an internet-connected device and a modest deposit to use as margin.
Once you have achieved consistent profitability in forex trading even trading on a small trading account, your strategy can be scaled up to be able to produce even more profits on a larger trading account; however, this seems easier said than done. The forex market requires patience, planning and discipline. You will have to resist the temptation to trade by being on the market.
While the forex market is generally characterized by a slower pace than other asset classes such as stocks or commodities, trading currencies is not without its dangers: violent movements (such as the Swiss franc shock in January 2015) can always occur.
Then you should always be vigilant. Using a regulated broker is the first step in the right direction, but ultimately succeeding in forex trading depends on your level of knowledge, discipline and dedication.