WHAT IS FOREX TRADING
Have you ever traveled to another country? If so, you most likely had to exchange your currency for the currency of the country you’re traveling to. By doing so, most people don’t realize that they’ve just performed forex trading!
Forex itself is basically short for foreign exchange. This is where you exchange one currency for another. The forex industry is where all these exchanges take place. This is a trillion-dollar industry. In fact, the forex industry is the largest industry in the world. You may be wondering why this industry is so popular and how do people even profit from it.
You should know that the main aim of forex trading is to buy and sell a currency and profit from the difference in exchange rates. If you’re buying a currency at a certain price and you sell it when the price increases, you’ll make a profit. Similarly, if you’re buying a currency at a certain price and you sell it when the price drops, you would’ve made a loss on this trade.
Even though the concept behind forex trading seems pretty straightforward, most people hesitate to enter the industry after getting confused over several different terminologies. Once you understand this terminology, you’re one step closer to becoming a successful trader. Here are some of the most popular terminologies that you need to be aware of:
A currency pair is basically the combination of two currencies. An example is EURUSD. The first currency is the one you bought and the second is the one you sold.
In a currency pair, the currency that is being bought, or the currency that comes first, is known as the base currency. If we’re looking at the EURUSD pair, EUR would be considered to be the base currency.
In a currency pair, the currency that is being sold, or the currency that comes second, is known as the quote currency. If we’re looking at the EURUSD pair, USD would be considered to be the quote currency.
If we’re expecting the market price of a certain currency pair to increase, we’re probably going to buy that currency pair immediately in hopes that it’ll increase so we can close the deal and make a profit. This entire scenario would be considered as taking a long position.
If we’re expecting the market price of a certain currency pair to decrease, we’re probably going to sell that currency pair immediately in hopes that it’ll decrease so we can close the deal and make a profit. This entire scenario would be considered as taking a short position.
When we enter a trade with a certain currency pair through a sell position, the price we would’ve entered the trade is known as the bid price.
When we enter a trade with a certain currency pair through a buy position, the price we would’ve entered the trade is known as the ask price.
The difference between the bid price or the ask price of a currency pair is known as its spread. In other words, the difference between the rate at which you buy a certain currency pair and sell the same pair is known as its spread.
A pip is basically the smallest digit change in an exchange price. Let’s say that a currency pair is currently priced at 1.3430. If the price increases to 1.3431, we can say that the price increased by one pip.
Sometimes you just don’t have the time to watch the market and wait for it to be at the desired level so you can enter the trade. In situations like these, traders usually place order limits. This can be either a buy limit or a sell limit. How this works is when the market reaches the price you set in advance, it will automatically open the buy or sell position of that trade.
Sometimes when you feel that the market may go sideways and you just don’t have the time to be online 24/7 in case that happens, what you can do is place a stop loss. This is a value that if hit, the deal will automatically close in a loss. This can prevent you from facing more losses than you can handle.
If you believe that the market will go only till a certain high before immediately falling back down, you can place a take profit. This guarantees that if the position hits that pre-set value, the deal will automatically close in a profit. This is really helpful in preventing you from missing any good opportunities.
FACTORS AFFECTING THE FOREX MARKET
Now that we’ve understood that the forex markets fluctuate which is how we make our profits, we now need to understand what causes these markets to become so unstable. While there are countless factors that could impact the forex markets, let’s look at some of the most popular ones below:
The political situation of a country is one of the biggest factors that can impact the trading conditions of the currency markets of that country. Let’s say the US is going through a major political situation. This would cause all the currency pairs that contain the USD to become unstable. These currencies include the EURUSD, GBPUSD, USDJPY, etc.
Not many traders know this but the forex markets also majorly depend on the climate and forecasts of a country, along with the natural disasters that could occur in it. If a country faces a natural disaster like an earthquake, they’re going to suffer major economic damage to its infrastructure. This can be really expensive to repair and can cause the currency of the country to collapse.
Inflation is when the prices of common goods and services increase over time in a country. The higher the inflation, the worse the economy is doing. This in turn causes the value of the country’s currency to decrease. However, if a country is going through a period of deflation, its economy would be thriving and in turn, its currency would be thriving as well.
Interest rates are another factor that you need to keep in mind when trading in the forex markets. When the interest rates of a certain currency are high, traders will be really interested in its markets. This will cause the trading volume of the currency pair to increase and cause the market to become relatively unstable. When the interest rates are low, the competition will also be low which will cause the market to become relatively stable.
TYPES OF FOREX TRENDS
There are several different types of trends to look out for in the forex markets. However, there are two situations that are the most-awaited and followed by traders worldwide. They are as follows:
When a market that was previously in a downtrend starts trending upwards, the market is said to be bullish. An example can be seen below in the USDJPY charts where the market was previously in a downtrend and starts trending upwards. When traders believe the market is entering bullish conditions, they usually open buy positions.
When a market that was previously in an uptrend starts trending downtrend, the market is said to be bearish. An example can be seen below in the EURUSD charts where the market was previously in an uptrend and starts trending downtrends. When traders believe the market is entering bearish conditions, they usually open sell positions.
WHAT IS A FOREX BROKER?
When you want to buy something, you go to a store and buy it from the storekeeper. You don’t buy it directly from the shopkeeper. This is exactly what a broker is. A forex broker provides a platform where you can buy or sell currency pairs. Without the presence of a broker, it would take ages to find someone who would be willing to exchange their currency with yours. Therefore, a broker acts as the middleman in this situation and provides you with a very liquid market where you can easily buy or sell currencies without any hassle.
TIPS ON FINDING A GOOD FOREX BROKER
In the past couple of years, the forex industry has become concentrated with countless brokers, each trying to make a name for themselves in this space. However, many of these brokers don’t provide the best trading conditions and are borderline fraudulent in their services. There are a couple of things to consider when choosing a good broker. They are as follows:
The regulations of a forex broker are an important factor to consider when choosing where to invest your capital. You should know that there is quite a mixed reaction towards the need for regulations in this industry. Half the trading population likes to trade with brokers who are strictly regulated as this gives them peace of mind that their funds are in safe hands. The other half of the trading population actually prefers to trade with brokers who aren’t that strictly regulated as long as they have good reviews. Their reasoning behind this is that they believe fewer regulations mean more financial instruments up for trading. If you’re looking for some of the best unregulated forex brokers that can be trusted, I’d recommend checking out the following:
COMMISSION AND SPREADS
It is very important to check the rates of a broker’s commissions or spreads before signing up with them. The last thing you would want is to trade with a broker who has super high commissions or really wide spreads. This can make it nearly impossible to have profitable trades. This also means the broker cares more about their own income rather than yours.
There are tens of thousands of financial instruments up for trading in the financial industry. However, most brokers only offer around a thousand instruments for trading. This means they only offer about 10% of what is available in the market up for trading. The chances of your broker having the currency pairs you want to trade becomes really low because of this. This is why you should double-check if the broker offers the pairs you want before signing up with them. A great tip we can give you is to sign up with a broker that isn’t strictly regulated as this can give you access to a better variety of financial instruments.
There can be much that goes wrong in your trading account, especially if you’re a new trader who’s still learning the ropes. This is why it is always best to trade with a broker that gives you access to 24/7 customer support. This way you will have peace of mind knowing that there’s always someone there to guide you whenever needed.
HOW TO OPEN AND USE A FOREX TRADING ACCOUNT
It can be quite confusing when trying to figure out how to open an account with a broker, especially if their website isn’t user-friendly or they offer way too many accounts to choose from. Here are a couple of tips that should help you in the right direction!
CHOOSING A BROKER
The first step to opening a trading account is obviously choosing a broker. If you’ve gone through what we taught you earlier, this should be a piece of cake! Remember to always choose a broker that meets your trading needs. This way you will have the best chances of becoming a profitable trader.
CHOOSING A BROKERAGE ACCOUNT
The next step in opening a brokerage account is actually choosing an account type. Some brokers make this choice easy by only offering up to three account types to choose from. Others make this a tad bit more complicated by offering up to ten accounts to choose from. This can be really confusing for some people, especially newbies who probably won’t be able to tell the difference between these account types yet.
PRACTICE ON A DEMO ACCOUNT
Now that you’ve chosen and opened your trading account, you’re probably thinking the next step is to invest in it and start trading. But that’s not exactly the case. We highly recommend first testing out your trading strategies on a demo account. This is important in checking if your strategies are a good match with the spreads and trading conditions offered by your broker of choice. Once you’re comfortably making good profits on a demo, you can shift to trading in your real trading account.
QUALITY OVER QUANTITY
The best tip I can probably give you is valuing quality over quantity. A big mistake most traders make is that they open a ton of positions without even being certain that these positions will be profitable. I really recommend only opening a couple of positions that you’re absolutely certain of. This can really increase your chances of becoming a successful trader.
FOREX TRADING STRATEGIES
If you’re in the forex industry, you know that you’re basically recommended a new strategy everywhere you turn. There are countless strategies in this industry but only a few are proven to be profitable. Here are the most popular trading strategies that work for most traders:
Day trading is a type of forex trading strategy where positions are kept open for only up to a day. The goal of a day trader is to open several small positions which each give small amounts of profit. By the end of the day, all these small profits add up to give a decent amount of return.
Swing trading is a type of forex trading strategy where positions are usually held for a couple of weeks. A swing trader would analyze the economic calendar and watch for news updates or anything that could impact the market conditions. This strategy requires having quite a bit of knowledge of technical analysis.
Position trading is a type of forex trading strategy where positions are usually held for a very long time. This can be anywhere from a couple of months to over a year. A position trader is an utmost professional who focuses on long-term gains instead of minor daily gains. They have done a thorough market analysis and know what exactly the market is going to look like in a year’s time.
HOW MUCH MONEY DO YOU NEED TO START TRADING FOREX
With the multiple brokers available today, you may even begin trading forex with as little as $5. However, with so much money invested, you’re unlikely to make any money. We recommend that a newbie invest at least $100 to begin forex trading. This is assuming you have already traded $100 in a sample account. If you feel confident in your market analysis of current patterns and news, you may even start trading with $500.
Remember that the more money you put into your account, the more positions and trades you may create with a larger lot size. This increases your chances of immediately making larger profits. It does, however, enhance your chances of losing money. As a result, we only advocate spending more than $100 for first-time investors if they are confident in their market analysis skills.
WHY TRADERS LOSE MONEY
If you’re looking to trade in the forex industry, chances are you’re doing your research by surfing the web. However, what you probably won’t find is enough people telling you the dangers of this industry. Most traders lose a ton of money due to being careless, among other reasons. Here are the top reasons why most traders lose money while forex trading:
One of the biggest mistakes made by newbies is that they open way too many positions. The more positions you open can mean you have a bigger chance of having more profits but it can also increase your chances of incurring huge losses. It is always best to open a couple of confirmed positions rather than several unsure ones.
VOLATILE TRADING CONDITIONS
Another big mistake made by traders is that they often like to trade in unstable market conditions. They believe that they’ve got a great opportunity to make quick profits when the market is constantly fluctuating. This can be really dangerous as you have no idea which side the market is going to flip. You’re basically gambling with your investments if you trade in volatile market conditions.
PLAYING WITH EMOTIONS
The only way you will become a successful trader is if you put your emotions aside and play like a professional. If you keep doubting yourself or overthinking, you can end up doing more harm than good. Your emotions may make you close a position much earlier if you made a small number of profits. But this could’ve prevented you from making a much larger profit if the market continues in the same trend. Always follow your gut not your heart when forex trading.
HOW MUCH MONEY DO FOREX TRADERS MAKE
This is a difficult question to answer. A forex trader does not earn a defined sum or a specific range. Everything is dependent on their method and approach. It is also determined by the number of funds invested and the leverage on their account. Due to the amount of cash spent and their forex trading tactics, a professional trader may often make significantly more than a rookie trader.
A $100 investment will not allow you to establish as many positions as a $1000 investment. As a result, their odds of outperforming the other individual are reduced. Every month, an average trader who does not open many dangerous positions and attempts to follow the market trend as best they can makes a 5 percent to 15 percent return on investment. This depends on your degree of trading experience.
BENEFITS OF FOREX TRADING
Let’s take a look at some of the benefits of trading in the forex industry:
The forex industry is the largest financial market in the world. It trades over trillions of dollars on a daily basis. This gives you the best opportunity to make a ton of profits.
Since this is a very popular industry, there is a high trading volume due to the high number of traders in the industry. This causes the markets to be really liquid and best for trading.
The forex markets are open 24 hours a day, five days a week. No other market is open for this long. This increases your chances of having profitable trades.
DRAWBACKS OF FOREX TRADING
Let’s also take a look at some of the drawbacks of trading in the forex industry:
The forex industry can become really volatile, really quickly. And when the market is volatile, it is nearly impossible to predict which side the market is going to flip.
Most brokers give you the opportunity to use leverage with your accounts. Leverage is basically borrowed money from the broker. You should know that the higher leverage you use, the more chances you have of going in losses quicker than you realize.
There are certain countries that are super strict in their financial policies. This prevents the citizens of those countries from freely trading any financial instrument in this industry. They are usually only allowed to trade with a select few brokers and a select few financial instruments which can be really demotivating for anyone trying to become successful in this industry.