Get the basic rules of Forex trading and get a crack at the market multiplying your earnings
Have you ever wonder what is meant by Forex Trading? Or are you confused about what this economic activity is all about?
Then just don’t worry. You are about to get crash training in Forex Trading: Forex Trading 101.
What is Forex Trading?
Forex (foreign exchange) is the aggregation of foreign currency exchange. Foreign exchange is the process of changing one currency into another currency for a variety of reasons, usually for commerce or tourism.
Forex trading is the buying and selling for profit maximization in the Forex market. Trading usually takes place in an over-the-counter market that allows participants, including investors, institutions, banks, and retail traders, to trade currencies.
Forex market is the largest ‘commodity’ trading market in the world, with The Bank for International Settlements (the global bank for national central banks), in its 2019 Triennial Report stating that an average of more than $5.1 trillion was traded daily in foreign currencies across the globe that year.
Forex trading is a big international business that involved a network of several thousands of computers around the world, trading over-the-counter (OTC) in the Interbank market on the internet daily across various time zones. This makes it a non-stop market.
How is Forex traded?
Foreign currencies are traded in three basic markets: the spot market, forwards and the futures markets.
The Forex spot market is the most used market for trading Forex today. At the spot market, foreign currencies are bought and sold instantly at the current price. This trading cut across borders with the usage of the Internet, with the amount traded delivered immediately with the cash paid.
For the futures contract, delivery of the currencies and cash are delivered at a future date.
All trading in the Forex market is done with the bid for the purchase of one currency for the sale of another currency. That is currencies are exchanged in pairs. For example: (Naira & the US Dollar: NGR/ USD), (Euro & the US Dollar: EUR/USD), etc.
These pairs are many in the market and are categorised as majors, minors and exotic.
Major pairs: are the currency pairs that include the US Dollar as one of the currency in the pair with currencies of the major economies of the world. A large percentage of trading in the Forex market is done on the major pairs. There are 7 major currency pairs: US Dollar/British Pounds; US Dollar/ Euro; US Dollar / Canadian Dollar; US Dollar/Japanese Yen; US Dollar/ Swiss Franc; US Dollar /Australian Dollar; and US Dollar/ New Zealand Dollar.
Minor pairs: are pairs that have a combination of the currencies in the major pairs except for US Dollar, such as Euro/ Swiss Franc; British Pound/ Japanese Yen; etc.
Exotic Currency Pairs: are those with one of the eight major currency with another currency from emerging economies like Brazil, South Africa, Mexico, Russia and others. Euro/ Hong Kong Dollar; US Dollar/Russian Ruble; US Dollar/ Brazilian Real, etc
Can you make a Living off Forex Trading?
Yes, you can participate and make a decent profit from the Forex market. However, this is dependent on your knowledge of the trade and ability to predict the future outcome of each of your desired currency pair. But you need to be warned that Forex trading comes with a huge risk due to the high volatility of the market. So be cautious with your trading.
Millions of people around the globe trade Forex daily and thousands of them make a living off it with some even owning companies which trade with other investors’ money and share profits. How Can You Trade Forex Successfully?
Almost anybody can do Forex trading as long as you have a good knowledge of the market’s operations, a laptop, a good Internet connection and a starting capital.
So, you need to spend an ample amount of time studying the market’s basics to ensure you are on the right tracks.
How to start trading:
You need also need to sign up with a Forex broker to open a trading account to start trading. But be careful whom you choose, there are lots of scammers out there!
- Start with Demo Accounts: you should start first with a demo account with your broker to learn the trade as against doing live trading first. This will help you to test out your trading strategy and build your confidence for the live trades
- After gaining confidence, you can go live by placing your first bet and start your trade. You need to study and analyse the movements of the market news after which you can then decide whether you want to place a buy order or a sell order.
- You also need to take either the ‘long or short’ position in the market. The long position means that you are buying a currency pair and are betting on it to rise in value in the future. Like you are holding on to what is in your account. For example, if you believe that the US Dollar will rise against the Euro in the near future (soon) then you can place a buy order, buying the US Dollar and selling Euro.
For the short position, it is based on the belief that the price will change in a direction in the upcoming period of the market. If your belief that the present price of Euro to US Dollar would fall in the near future then you can place a sell order in the market.
- Then you need to close the trade: you must close the deal of your trade to have a valid transaction and make your profit or loss on such transaction.
For profitable trading, you need to:
- Develop a good win strategy: Every trader out there has a strategy that he/she follows strictly. You can develop your strategy or copy the strategy of a successful trader, and when you do, stick with and do not deviate unless it stops working.
Your strategy should be about perfecting your win rate and risk/reward.
Win Rate: Your win rate represents the number of trades you win out a given total number of trades. Say you win 55 out of 100 trades; your win rate is 55 per cent. While it isn’t required, having a win rate above 50 per cent is ideal for most day traders, and 55 per cent is acceptable and attainable.
Risk/Reward: signifies how much capital is being risked to attain a certain profit. If a trader loses 10 pips (the smallest unit in the currency quote given by the Broker) on losing trades but makes 15 on winning trades, then he is making more on the winners than losing on losers. This means that even if the trader only wins 50 per cent of his trades, he will still be profitable. Therefore, making more on winning trades is also a strategic component for which many Forex day traders strive.
A higher win rate for trades means more flexibility with your risk/reward, and a high risk/reward means your win rate can be lower and you’d still be profitable.
- Copy a Trader: Copy-trading is the act of copying the trades done by a professional trader, winning as he wins and losing as he loses. Copy-trading has become a popular thing lately as thousands of new traders flock towards Forex trading in search of profit.
There are software, apps and websites out there offering the services of copy trading for a fee. They present their customers with professional traders who spend most of their daytime studying the market and predicting the market flow.
Copy-trading seems tempting for a person who is too busy to sit and study Forex trading, but care must be taken to avoid its pitfalls. So many have lost all their money copying the trades of another person, so when you do, be sure to match their strategy and more importantly follow a trader with a good track record.
- Invest in a Forex Trading Company: If you don’t find a trill learning new things or watching the market spike and fall, or are just too busy to take the time to find a trader to follow, there is a third option for you.
You can register with reliable Forex trading companies in your country and have them trade on your behalf while you enjoy the benefits of a successful investment. But be careful who you choose so as not to be scammed or lose your capital due to market conditions because of the inexperience of the trader.
If you would rather invest than trade by yourself you need to research your chosen company before depositing with them;
Making money while you sleep is every man’s dream; therefore scams are not scarce in this field. Do a Google search about them, view reviews and reports giving by legitimate users of the company
Join a Forex trading forum on Reddit and ask about your desired company, surely one person will have an experience with them, and if they turn out to be unreliable, ask for recommendations from your peers.
Tread carefully: Do not hop on the excitement train, start small with your investment and try them out. This is because the market can be tricky and your chosen company could lose on your very first investment which might discourage you or cost you more than you can afford to lose.
Some market terms:
- Quote by the broker: this is the price placed on the exchange by the Forex broker – the Bid/Ask price to buy & sell the currency. For example EUR/USD 1.2611/14.
- Pip: the last decimal movement in the price given by the broker. For example, if the Quote of 1.2611 moves to 1.2612, the movement in the last decimal is 1 pip.
- Bid Price: the price at which the broker is willing to buy a currency pair from you. This price is shown on the left side in the quote ticker by the Broker. For Example: with a Quote price of EUR/USD 1.2611/14, you can sell 1 Euro for 1.2611 US Dollars.
- Ask Price: Ask price is the price, at which the broker is willing to sell a currency pair to you, it is shown on the right side of the quote ticker by the Broker. For Example a Quote price of EUR/USD 1.2611/14, means the broker will sell 1 EUR for 1.2614 Dollars to you.
- Spread: is the difference between the Bid & Ask Price quoted to you by the broker. The Quote of EUR/USD 1.2611/14, the difference between 1.2611 and 1.2614, which is 0.0003 or 3 pips.
Making a living while trading Forex is possible and fun, but you need to be careful and cautious. However, some successful traders are known to be daring and less cautious.
So decide what kind of Forex trader you want to be. But know that there is a guaranteed thrill in the experience.