What is Forex Trading
What is Forex | How to Trade & Make Profit
If you are looking to learn about what is Forex trading then do read this complete guide without leaving anything above.
It is the process of exchanging currencies to gain monetary benefits.
As the global business market is slowly changing, therefore, it has become necessarily important to allow the free floating of currencies to facilitate different needs.
Initially, the concept of forex trading was common amongst the tourists and business entities since they were required to acquire the currency of the particular country for fulfilling their needs, however, now this concept has transformed into a global phenomenon and used by the business giants and individuals for earning the gains.
Forex Trading and its Factors
Forex trading is short for Foreign exchange in which liquid assets (currencies) are exchanged in the foreign market. During earlier stages, the functions of forex trading were handled by the investment and commercial banks who used to act as the agent for their potential clients.
However, now the trend has witnessed the incredible shift in which individuals are operating in the forex market through the internet.
The working of the forex market is preferred due to the following factors:
The market of forex trading is highly liquid as it involves the transaction of short-term assets. Additionally, it is the opportunity market which gives the numerous chances of earning monetary gains.
Forex market is the independent market because it is not controlled by commercial or investment banks. Additionally, no other leading bodies are capable of influencing the working of the market except the regulating ones.
Since the mechanism of forex market largely revolves around 8 to 10 major currencies, therefore, it is called as a narrow independent market.
Risky but Profitable
The risk is the crucial aspect of Forex market, which has always been the center of confusion for the traders. As the mechanism of the market is independent and unpredictable, therefore, this market possess the higher chances of risk.
Additionally, the profit is not dependent on how sound your investment strategy is, but it is determined on the basis of money you are investing. The principles of this market revolve around the proverb ‘the more you risk, the better you get’.
In other terms, the market is slow in the sense of generating profitability, however, equal probability of the success exists.
Basic forex jargons are the terms which are continuously used by the traders in the market for gaining the required information.
Ask Price (Seller)
Ask price is the offered price which is provided to the trader in the market. As a purchaser, it is the price at which you can buy the currency.
Bid Price (Buyer Price)
The bid price is always lower than the asking price because it is the price which purchaser of the currency is willing to pay. The bid price is determined on the purchasing power of the market.
The difference between the asking price and bid price is called as the forex spread. For instance, if the currency is being traded at USD/JPY, 9.95/10 respectively.
In the stated case then ask price is 10 and Bid Price is $9.95, the difference of .5 between ask and bid is the spread.
In the forex market, PIP is the parameter to determine the value change between two currencies. It is basically the profit you are earning by trading the currencies. For instance, if you have earned 10 pips it means you have the profit of 10.
Base Currency and Quote Currency
Base currency and quote currency are used to determine the relationship between two currencies and to check whether they are exchangeable with each other or not. They are also called as the currency pairs.
For instance, EUR/USD = 1.25 means that you can exchange 1 euro with the 1.25 dollars. In this equation. EUR is the base currency and USD is the quote.
Types of Account in Forex Trading
The power of playing with the profitable forex pips lies behind the concept of selecting the right account for yourself. There are three major types of forex accounts which aims to facilitate the trading process and allows you to trade with the giant traders for earning a profit.
Standard Trading Account
Standard trading account is the common forex account which allows you to trade single standard lot (equals the 100,000 base currency units) with $1000 in your margin account (the account used by broker for depositing the amount for the purchase of securities)
The standard trading account is beneficial for the individual traders because this type of account is preferred by the brokers and they are willing the traders and invest money in the account.
Additionally, through this account, you can earn more potential gains. For instance, standard account gives you the facility of $1000 with the 100 pip in one day.
Irrespective of having numerous benefits, the capital requirements for this account for the brokers is relatively high. Sometimes brokers are expected to have at least $2000 of minimum balance to start their account.
Managed Trading Account
As the name suggests, managed trading accounts are handled by the managers who are responsible for the selling and buying of the currencies in the forex market.
As an investor, you will be empowered to set the profit objectives, risk ratio and how many currencies should be invested, however, the manager will be making strategies for achieving the set goals.
There are two sub-categories of the managed trading account
The pooled account is the one in which investor joins hand with other traders in the market and set trading objectives which will further be managed by the manager.
In this account, only one trader will be investing the money and enjoys all the profit.
- This account helps in the professional handling of the currencies, which can facilitate in diversifying the trader portfolio.
- Additionally, the professional can guide you about the risk management policies and how the objectives should be set.
- The capital requirements for this account are relatively higher. If you are pooling funds then, you might have to invest low, however, in individual accounts the investment is high.
- As a trader, you will have no flexibility of handling the account or making any decision about the selling and buying of the shares.
Mini Trading Account
Mini trading accounts are the ones in which are allowed to make transactions in the form of mini lots. As this account is smaller than the standard and managed accounts, therefore, the capital requirements are also low.
- This account empowers you to make the decision of buying and selling thus making the trading environment more flexible.
- A mini account is known for lower risk. As the capital requirement for mini account is low, therefore, there are very fewer chances of having loss
- Low Profitability: Due to the lower risk, the chances of having higher profitability are also eliminated.
How to Start Forex Trading?
Starting the trade in the forex market is all about selecting the right broker, who is capable of understanding the small technical things involved in the trading procedure. Additionally, your broker will directly impact the level of profitability.
Some of the factors which can help you in selecting the right broker are as follows.
The brokers in the forex market don’t charge any sort of commission for performing the duties, however, the play around the spread which is generated on the basis of the bid and ask price difference.
If you are looking for a good broker who can perform all the work and also save your money then, start looking for the lower spreads. This step can surely help you in finding the right forex guide without risking too much of your money.
Always check the associations of the broker. Associations help in determining the qualification and experience of the broker. Moreover, you can check whether the broker is registered with the Futures Commission Merchants backed by the Commodity Futures Trading Commission or not.
Additionally look for the past portfolio of the broker. For instance, you should also check the list of banks and financial institutes which are giving them back to the broker.
The working of forex market basically revolves around the concept of trading platforms which allows you to make the perfect trading strategy and implement them for the gains.
Before committing to any broker, you should always ask for the free trial of the trading platform and conduct the deep research before selecting any package. This step is highly crucial for the future decision making and can determine the profit consistency of your account.
For the research purposes, you can study the economic calendars and data available on the forex website for proper confirmation.
Check the Leverage Options
Leverage is the form term which is expressed by using the ratio formula. Moreover, leverage is the determinate for forex profitability.
For instance, if your broker has offered you the leverage of 100:2 then, it means that your broker will give you $100 for $2 based on the actual capital. Always remember that leverage is the only way of earning the profit.
If your broker is offering you lower leverage then, you might lose some money in the future. If you have no financial constraints then, you can bring diversification in your portfolio by using the strategy of lower leverage, however, higher is better.
Avoid Premature Selling
Before starting the trading procedure, you should convince yourself that forex market is not for the short-term gains and it is impossible to commit shady acts for making the higher profits.
Your broker might never tell you that he is performing the shady task for gains, however, it is your duty to check out their duties and see whether they are implementing the right policies or not.
If you want to make a profit then, you have to wait for a while and understand the actual work. For a basic understanding, you should start the work by making the demo account.
Once you have acquired proper knowledge about the initials of forex trading then, next step is all about making the forex strategy which can help you in making a profit and staying on the track.
The entire working of technical analysis revolves around the fluctuations in the price trends. These trends are used by the forex analysts for making the price prediction and how currencies can move from one wave to another.
Technical analysis is the most common way of giving prediction; which is made by using the technical predictors. Since forex database has the largest amount of information, therefore, it is easy for predictors to give a statement about the future activity of price while using the basis of technical analysis.
For analysis purposes, the proper trends are monitored by using the statical tools which help in determining the movement of activity from one sideway to another. There are a number of ways through which activity can be determined.
It is better to ask your broker about the movement policies of trends in order to understand the underlying forex concepts.
The fundamental analysis is the long-term forex currency prediction method which is used by analysts for checking out the trends with the help of country or new analysis.
Fundamental analysis is very difficult to perform because, in this method, the broker is supposed to understand the entire economy of the paired-currency country and analyze the below-stated factors for predicting the movement of the trend:
- Purchasing Power
- Individual Income
- Durable Goods
- Increase or decrease in the retail sales
- Performance of the economy.
Fundamental analysis is highly unpredictable because they are dependent on how the economy is performing. For instance, if your currency is paired with the unstable economy then, there are very high chances of losing investment.
It is always advised to take proper consultation from your broker before making any buy or sell decision.
Before taking any decision, always remember that forex market is the largest trading
market which is not working on your demands. If you want to stay in the market and
make a profit then, you have to understand the underlying principles by working on the
Demo account not only increases the chances of growth, however, it helps in deciding
the right forex strategy which can lead to higher and consistent profits.
Always remember that investing a large amount of money is no joke!