The world has many financial markets, such as the bond, stock, and commodities markets, but very few of them can be compared to the forex market in terms of daily turnover, trading hours, and vast opportunities.
Forex market has proven to be the largest financial market in the world and it is always open, with an average turnover of around $5 trillion on a daily basis. It does not matter whether you are a beginner in Forex trading or you have already done a few trades, this article will offer you useful information on how Forex trading works, and everything you need to know to start your trading career.
This article will also serve as a tutorial on Forex trading for new traders and anyone interested in joining this lucrative market.
WHAT IS FOREX TRADING?
Forex is simply the market of the world’s currencies. Unlike the stock market, there are no centralized exchanges in Forex. There are several trading sessions from Sydney in Australia, to New York in the United States.
In addition, Forex traders can buy a currency if they suspect that its price will rise, and then short-sell a currency if they believe its price could fall, making a profit from the difference in the entry and exit price.
Before now, the big players in the market were commercial banks, large investment, hedge funds, governments and central banks, multinational companies and high net-worth investors.
The Forex market wasn’t accessible for small traders a few decades ago, but advancements in technology and the internet now gives small traders the opportunity to trade on the Forex market.
Research has it that retail Forex traders account for over 5% the total daily trading volume, which shows around $250 billion. Yet, the size of the market makes it impossible to move exchange rates to a notable event with a single order. Even big investment banks with their multi-billion-dollar orders are able to relatively find buyers and sellers, which makes the Forex market not only the largest, but also the most liquid financial market in the world.
These are all other currencies which are not actively traded on Forex market that are usually linked to the price of commodities. They are more volatile because there are less buyers and sellers. While these currencies show great profit potential, they should be avoided by anyone who is new to trading to prevent large losses.
- Turkish lira
- Mexican peso
- South African Rand
- Russian ruble
- Czech krone.
To have a good trade setup, Forex traders need to analyze the market. Lack of proper analysis puts you on the edge of betting on the outcome of a trade.
There are two ways to analyze the market, they include: fundamental analysis and technical analysis.
Fundamental analysis helps to determine the fair value of a currency. A lot of factors affect the exchange rate of a currency pair, such as: economic growth, inflation rates, retail sales value, monetary policies and so on.
HOW CURRENCIES ARE QUOTED IN FOREX TRADING
All currencies in Forex trading are quoted in pairs. This implies that, you can be trading two currencies simultaneously.
In a long position, the first currency is bought and the second is sold. And in the short position, the first currency is sold and the second bought.
The first currency of a pair is actually called the base currency while the second is called the counter currency.
Take EUR/USD for example, if you want to buy the EUR/USD pair, you are in turn buying the Euro and selling the US dollar at the same time.
Note that, all currencies have their different personalities and their behaviour is dependent on market condition.
Currencies such as the Japanese yen, Swiss franc, and US dollar appreciates when investors pay no attention to risks, while currencies such as the Australian and New Zealand dollar tend to fall in value because they are risk currencies.
WHAT YOU NEED TO TRADE ON FOREX
Before you get thrilled by how much you can make from Forex trading, you need a computer with internet access, a brokerage account, and a trading platform.
Opening a brokerage account is quite simple.
Creating an account takes few minutes by filling out the register form and submitting on the broker’s website. After that, the application will be checked, and will be activated.
Then, you are ready for funding.
Most brokers use credit and debit cards, bank wire transfers, and online payment services for deposits. So, you can choose which is convenient for you. After depositing money into your account, go ahead to download the trading platform directly from your broker’s website.
You can use MetaTrader (the most popular platform) or your broker may offer an in-house platform.
It is best to check what is on offer beforehand.
Once the account fully activated, funded, with an installed trading platform on your computer, log in and start trading immediately. It is that easy.
Tip: It is advisable to start with a risk-free demo account first before you move on to a real account. Until you’re able to stay consistently profitable on a demo account.
HOW THE FOREX MARKET WORKS
Forex market is an over-the-counter (OTC) market, which implies there are no centralized exchanges for trading currencies.
Currencies are traded during major Forex trading sessions such as the London session, the New York session, the Tokyo session, and the Sydney session. These financial centers span across diverse time-zones. One can trade 24 hours a day except on weekends, when the market is closed.
However, this is one major advantage Forex market has over stocks. Stocks can only be traded during regular open market hours of a stock exchange.
The most liquid Forex sessions are the New York and London sessions. Because they have the highest trading volume on a daily basis.
So, it is okay to trade during those sessions if you want to be a day trader.
Also, there is a part of the day when these two sessions overlap. This is when the market goes through the highest volatility and highest trading volume during the day.
Be careful when opening trades in the beginning of the Sydney session at 21:00 GMT. It is also the time when the New York session closes.
However, transaction cost of a trade can widen significantly during these few minutes. It better to wait for Sydney to heat up before placing a trade.
HOW TO MAKE PROFITS ON FOREX TRADING
This is probably the most interesting part of this article because beginners are in a haste to make profit.
Just calm down and follow the rules, profit is sure.
Forex traders buy a currency cheap and sell it later at a higher price.
For instance, if EUR/USD currently traded at 1.20, a trader believes that the exchange rate may rise in the future, he buys the pair at 1.20 and sell it later for a profit.
However, if the exchange rate goes in the opposite direction, the trader would incur a loss. In order to prevent losses, you should use stop-loss orders on all your trades.
A stop-loss order closes your position automatically when the price gets to the pre-specified stop-loss level. Stop-losses are important for risk management. Take-profit orders are very similar to stop-loss orders, only these close your position when the price goes in your favour.
Having read through this article, you should have an understanding of how Forex and currency trading works. It is the marketplace of the world’s currencies, and factors work simultaneously in moving exchange rates up and down. To fully understand how Forex works, you must pay attention to the supply and demand forces on a currency.