Foreign exchange involves the exchange of currencies through currency brokers, forward contracts and futures contracts. The foreign exchange market is the largest financial market with high trading volume and liquidity. If you are a new or experienced trader/investor, you need to understand how the forex market works before you can trade it successfully. Keep reading to understand the basics of forex trading and how you can get started.
How does Forex trading work?
To profit from forex trading, you just need to buy a strong currency and sell a weak currency at the same time. Therefore, currencies are traded in pairs on brokerage platforms. The first currency is the base currency, while the second currency in the pair is the quote currency, and you can trade them on brokerage websites like www.oanda.com.
If you buy a currency pair like GBP/USD, you are buying the British Pound (base currency) and selling the US Dollar (the quote currency).
In addition to trading forex with brokers, you can also make profits from futures and currency futures.
Forex futures market traders trade by entering into a contract or agreement to sell a currency at a specified price in the future.
The futures market involves trading terms similar to the futures market. However, futures contracts require centralized exchanges to facilitate them. It is generally more liquid than the forward exchange market.
How do you know when to buy or sell?
To determine whether to buy or sell a currency, you need to analyze the forex market broadly. This involves technical and fundamental analysis.
Technical analysis requires you to analyze forex charts and determine the most likely direction for price based on indicators, trading tools, and theories.
Fundamental analysis refers to the analysis of economic news and data to determine the relative strength or weakness of a currency.
Where can I learn to analyze the Forex market?
You can learn technical and fundamental analysis from various sources. Most people prefer to use forex trading courses available on the internet. You can also learn from ebooks and free or paid online video lessons. Learning to trade can take a long time, so make sure you are learning from a source with a good track record.
The spread is the difference between the bid price and the ask price for a currency pair. This is paid as a small fee and may influence the accuracy of your execution and management orders. Liquid assets like major currencies generally have lower spreads which make it easier to execute trades.
Leverage means the ability to control a large amount of money with a small capital. Forex trading is characterized by high leverage, and this is intended to help traders take advantage of the liquid trading environment. If you have 1:1000 leverage in your account, then every dollar you deposit has a buying power of $1000.
To take advantage of
A take profit is a trade order that instructs your broker to close your trade with a profit once the market price reaches a specific level. The opposite of a take profit is a stop loss which instructs your broker to close out a trade once the market moves against you by a given number of pips.
Major/minor currency pairs
Major currency pairs contain the US dollar as the base or quote currency, including EUR/USD, USD/CAD, AUD/USD, USD/CHF, etc. Minor currency pairs contain the currencies of developed economies, excluding the US dollar. Examples include AUD/CHF, GBP/JPY, etc.
As retail traders, we make profits from small price fluctuations, and this is often measured in pips. The word pip refers to “point price”. It is the smallest measurable change in the value of a currency.
A long position is simply a “buy” transaction, while a short position is a “sell” transaction.
3 Steps to Successful Forex Trading
If you want to learn how to trade the forex market, follow these three simple steps to get started.
1 Get a good Forex education
You can learn the different styles of forex market analysis by taking advantage of the many resources available online. These include forex courses, free or paid video lessons, YouTube videos and ebooks. Learn the basics of trading and a profitable strategy for trading.
2 Choose the right trading tools
Trading tools such as forex robots, brokers and indicators are essential to your success. Choose a regulated forex broker and make sure all your trading tools are compatible with each other.
After learning how to trade, be sure to practice and master your trading strategy. It helps you improve and become the best trader you can be.