You see a promising trade setup, but then it doesn’t go well, and you lose your money. It’s frustrating, and it can happen to anyone.
If you want to avoid this situation, you need to prepare your trading skills and follow a proven strategy. We’ve got advice on how to do that here.
What is Forex Trading?
Forex trading is when a trader buys a currency and sells a different one, and the exchange range fluctuates according to the demand and supply. The trade for currencies takes place in the foreign exchange market that is open from Monday to Friday.
The Foreign exchange market is open 24 hours a day. All currencies are traded over the counter (OTC), which means there are no physical exchanges, and a worldwide network of financial institutions and banks oversee the operations. As a result, the vast majority of trading in the market is between institutional traders.
Different Ways of Trading Forex
There are three ways to trade Forex:
- Spot Market: This is the primary market for trading forex; here, pairings of currencies are swapped, and the exchange rate is determined based on demand and supply.
- Forward Market: Instead of initiating a trade, traders can have a binding contract with another trader in the forward market. The two parties will also decide the exchange rate, amount of currency, and a future date.
- Futures Market: Like the forward market, traders can opt for a contract to sell or buy a fixed amount of the currency at a specific exchange rate in the futures market.
What Moves the Forex Market?
Like other marketplaces, the price of the currencies is determined by their supply and demand. However, other factors in the forex market need to be considered. For example, sometimes, demand for a certain currency can be influenced by the political climate of the country, economic growth, and interest rates.
The Forex market is open 24 hours and five days a week (Monday to Friday), which allows the traders to be flexible and react to changes abruptly. However, since currency trading is based on speculations, traders need to remain sharp.
The Risks of Forex Trading
Forex traders require leverage, and traders will also use margin, so there are risks involved. Currency prices fluctuate but not by a huge margin, so traders often need to execute a trade using leverage. If the trader makes a winning bet, the leverage can help maximize the profits.
However, the leverage can also increase the losses. If the value of a specific currency falls significantly, traders that rely on leverage open themselves up to margin calls, which can force them to sell off their securities. Other than losses, transaction costs can also reduce the profit.
To become a successful Forex trader, you need to be skilled and extremely sharp, as there are many obstacles, and the risk of fraud and misinformation is high.
What is a Forex Trading Broker?
A Forex broker is an intermediary between the interbank system and the trader. The interbank system is a network of banks that trade with each other. Typically, a broker at Forex will offer the clients prices of banks that have access to forex liquidity and lines of credit.
Most forex brokers will offer prices of several banks and will help clients find the best prices.
Opening a Forex Trading Account
The process of opening a Forex trading account and a bank account are quite similar, as both require identity verification and paperwork. The entire process usually lasts a few days.
However, brokers also offer demo accounts to their clients, which require minimal paperwork. The demo account will help traders practice trading and prepare them for the tough journey ahead.
Broker’s Reputation
Forex brokers are there to help clients connect with banks that are selling and buying currencies. There are a set of rules and regulations that all brokers need to adhere to. Although the rules and regulations of Forex marketing are strict, traders can still bump into inexperienced brokers and lack information.
The National Forex Association (NFA) follows all the brokers at Forex, and can also identify their reputation. Before choosing a broker, traders must first ensure that a US authority regulates them. Brokers that are regulated provide information on their websites.
Spread in Forex Trading?
While most forex currencies don’t come with a commission, a spread is a cost that is attached to every trade that traders make. However, leveraged traders will add the spread in the trading cost. The size of the spread also varies and can be influenced by various factors such as currency pairing, trade size, and much more.
Major Forex Currency Pairings
- EUR/USD (Euro and US Dollar)
- USD/JPY (US Dollar and Japanese Yen)
- GBP/USD (Great Britain Pound and US Dollar)
- USD/CHF (US Dollar and Swiss Franc)
Forex Trading PIP Spread
The spread measurement is done in PIP, which is a small movement in the value of the currency pair price and the last decimal point is 0.001. However, the Japanese Yen is the only currency where the decimal point is 0.01. Therefore, a wider spread indicates a greater difference between the two prices.
A wider spread indicates high volatility and lowers liquidity, whereas a lower spread indicates lower volatility and higher liquidity. Therefore, when trading a currency pair with a tight spread, the trader will pay a spread cost.
While trading Forex, the spread will either be fixed or variable. The spread for forex currency pairings is variable, so when the price of the pairing and the bid change, the spread changes. Pros and Cons of fixed and variable spread:
Fixed Spread
- Could potentially face requotes
- Transaction costs are predictable
- Capital requirements are small
- Appropriate for novice traders
- A volatile market will not affect the spread
- Vulnerable to slippage
Variable Spread
- Requotes do not exist.
- Spread is tighter
- Market liquidity
- Appropriate for seasoned traders
- High volatility can widen the spread
- Vulnerable to slippage
Forex Day Trading
Forex day trading is a trading strategy for the short-term, and its main purpose is to buy and sell currency pairings on the same trading day. Usually, Forex traders place numerous trades a day, and by the end of the day, close them out and rarely hold positions overnight.
The price of currency pairings fluctuates, and this provides opportunities for day traders, as they are constantly looking for volatile pairings and have high liquidity. Forex day trading can generate results abruptly and is a quick way of seeing returns on investment.
The day trading is for those traders that have time to analyze trading information throughout the day. However, day trading also requires reactions to short-term changes and fluctuations in the prices of currency pairings. Therefore, traders will need to be disciplined and knowledgeable.
Strategies for Day Trading
Traders must be aware of the crucial day trading strategies, and they involve technical and fundamental analysis. For example, the information will help traders determine when to sell or buy currency pairings. Sometimes, traders will need different strategies, as the conditions of the market can change instantly.
Forex News Trading
Traders need to stay up-to-date with the latest news so that they are well aware of the market conditions. This crucial step will help traders reduce risks and enable them to plan.
Traders should also set their targets and goals according to the daily news. Other factors such as economic indicators and interest rates can also influence the price of the currencies.
Trend Trading
Another important trading method is trend trading, and it involves studying long-term data to determine trends. Once a trend has been determined, traders will study charts with a smaller timeframe for trends moving in the right direction.
Momentum Trading
Momentum trading is a popular Forex day trading strategy, and traders that incorporate this strategy are looking for strong price movements paired with a high trading volume. Momentum trading requires traders to be patient and wait for the best possible opportunity.
Skills Needed to Become a Successful Forex Trader
If you are planning to become a Forex trader, then you need to hone your skills. The best way to sharpen your skill set is through discipline and practice. Traders should also be knowledgeable and should be able to analyze valuable and crucial information.
Below is a list of skills that traders need to have to be successful:
- Understand the Price Signals
The trader should be able to understand the price signals, as this will determine their success. Over time, traders must master this skill, and the first basic step is to study the price reaction. Beginners can also practice this skill by making a demo account, as it will allow you to learn from your mistakes.
- Devise a Balanced Strategy
Most traders apply the Fibonacci Trading Strategy, as it allows them to earn huge profits and minimizes the losses. Therefore, a successful trader should always look to incorporate the Fibonacci strategy. However, before applying the strategy, please familiarize yourself with it to reduce risks.
- Risk Management
A successful trader is someone who can manage the risks by not engaging in aggressive trading. In most cases, aggressive trading leads to losses, so traders need to consider the 2 % risk management policy. Traders should not risk more than 2 % on a trade.
- News
Keeping an eye on the news is crucial, as it does influence the Forex market. Traders should learn to read the news regularly and stay in the loop. Traders should also analyze the news and always keep the bigger picture in mind.
How is Forex Traded?
Below we have discussed some important steps that need to be taken before you trade for the first time:
- Select a Currency Pairing
When doing Forex trading, traders exchange currencies, which means they will buy one currency and sell another one. Due to this, traders will always trade currency in pairings. On the other hand, new traders will start by buying and selling the most commonly traded currencies.
- Analyzing the Market
For a trader having a proper market, information is the most valuable tool, and if your research skills are not up to the mark, there will be hurdles for you in the future. When traders first start researching, they get several resources from Forex, and traders are supposed to research a specific currency pair.
Traders need to study charts, analyze the data, and keep in touch with economic indicators to understand the market’s conditions better.
- Pick your Position
If you have experience trading bonds, stocks, or other financial products, you should be well aware of the market’s direction. However, Forex trading is different because you are buying one currency and at the same time selling another one, and you can speculate the movements of the market.
Buying Position: When in a buying position, a trader believes that the value of the base currency will rise compared to the quote currency. If you are buying EUR/USD currency pairing, you expect the price of EUR to strengthen against USD. This also means that EUR is bullish and USD is bearish.
Selling Position: When in a selling position, a trader believes that the base currency will fall compared to the quote currency. For example, if the trader is selling EUR/USD, the price of EUR will weaken against USD, so in this case, the EUR is bullish, whereas the USD is bullish.
Best Courses for Forex Trading
Each Forex trading course comes with its teaching method, choice of languages and will have these characteristics:
- The Material is Fun and Engaging
Keeping the interest of the student is crucial and the main target of the course. However, it is difficult for online instructors to ensure that the students give the course undivided attention. The best online courses will use videos, graphs, supplemental material, and live demonstrations to engage students.
- The Course is Fully Functional
An online course is different from a textbook, as the instructor needs to be technically sound and proficient. The best online course for Forex keeps the material fresh, interesting, and up-to-date. Instructors must ensure that all the links that they provide are working properly.
- The Course is Attracts all types of Learners.
A good quality Forex course will attract the attention of all types of learners, and some courses even do webinars. Instructors will also use slideshows and videos to engage visual learners.
- The Course Should be Professional Presented
This is a crucial characteristic for a course because the students will quickly lose interest if it is not professionally presented. The text provided by the instructor should not contain any spelling mistakes; the material should be accurate and helpful.
Below is a list of some of the best Forex courses available online: