What is Forex Trading
The foreign exchange or forex trading market that is sometimes abbreviated as FX is a market that involves the trading of currencies.
It is estimated that over $5 trillion is traded on a daily basis (around $220 billion per hour) in the FX market.
This is a market that involves diverse participants ranging from investment banks and billion-dollar hedge funds to private traders with limited funds capacity.
Currencies are normally traded in pairs where the movement involved is usually a measure of the value that a certain currency has against another.
A good example is where the USDCAD currency pair shows the measure of the US dollar value against the Canadian dollar.
When there is an increase in the value of the pair, it means that the value of the US dollar has increased compared to that of the Canadian dollar and vice versa.
In forex trading, traders tend to make profits from the currency movements.
Which Currency Pairs can one Trade?
In the FX market, currency pairs are categorized into minors, majors, and exotics.
Major pairs normally include the most traded currencies in the market.
USD- US Dollar
GBP- British Pound
CAD- Canadian Dollar
JPY- Japanese Yen
CHF- Swiss Franc
NZD- New Zealand Dollar
AUD- Australian Dollar
When any of these currencies (outlined above) are paired against the US dollar, then that is regarded as a major currency pair i.e. USD/CAD, EUR/USD, USD/JPY, USD/CHF, AUD/USD, NZD/USD.
Minor currency pairs, on the other hand, include these other currencies when paired against each other and not with the USD. For example EUR/GBP, AUD/NZD, GBP/CAD, CHF/JPY and so on
Exotic pairs involve the other currencies that have not been mentioned above, such as the Norwegian Krone (NOK), Hong Kong Dollar (HKD, Thai Baht (THB) and the South African Rand (ZAR).
Exotic currency pairs normally include one major currency paired against an exotic currency.
It will be good for you to focus on the major and minor currency pairs when beginning your forex trading journey as they have tight spreads and good volatility.
Forex trading for beginners can be quite overwhelming and that is why there is a need for guidance when you are starting out.
How Does Forex Trading Work?
This is more of forex trading how to.
The FX market involves the buying or selling of desired currencies.
The mechanics used in placing a trade in the foreign exchange market are similar to those of other financial markets hence making it easy to place a trade.
Forex trading works with the concept of exchanging a given currency for another going with the expectation that there will be changes experienced in the price involved i.e., the bought currency will increase its value compared to the one that was sold.
The currency pairs are categorized into base and counter (quote) currency. The base currency is the one that is listed first (before the “/”), while the quote (counter) currency is the one on the right.
For example, given EUR/USD, EUR is the base currency, while USD is the quote currency.
The base currency usually forms the basis for sell or buy
For example, if you buy EUR/GBP, it means that you are buying EUR (which is the base currency) and selling GBP (which is the quote currency) simultaneously.
You are going to buy the base currency in the event that you believe it will gain value compared to the quote currency and vice versa.
Before thinking of anything to do with ‘long/short,’ you should first have an idea of whether you want to sell or buy a certain currency pair.
For traders, long = buy; most of the times, you will hear traders saying I am taking a “long position” or I am “going long.”
On the other hand, short = sell, and this is signified by the words “short position” and “going short.”
The Bid, Ask and Spread
In the FX market, currencies are quoted with the bid and ask prices.
The bid price is usually lower compared to the ask price.
The bid normally represents the price that the forex broker is willing and ready to buy the base currency from you in exchange for the quote currency.
The ask, on the other hand, represents the price that the broker is willing and ready to sell you the base currency in order to exchange for the quote currency. Ask can also be regarded as the offer price.
SPREAD now is the difference that arises between the bid and ask prices.
Forex Trading Hours
It is good to be conversant with the trading hours for forex to ensure that you’re reaping the maximum benefits in the market.
Knowing the different forex trading hours can impact your trading significantly.
Let us commence by assessing the major forex exchanges.
The 4 Major Forex Exchanges
These four main forex exchanges are situated in New York, London, Tokyo, and Sydney.
As a forex trader, you should commit your hours to memory, paying specific attention to the hours when two exchanges tend to overlap.
When more than one exchange is simultaneously open, it tends to increase the trading volume, while at the same time adding to the volatility of a currency pair.
Volatility is the extent and rate at which currency prices change.
These two factors (volume and volatility) can be good to you as a forex trader.
I know this might appear as a disadvantage to investors since they are basically afraid of market volatility.
However, when it comes to forex trading, greater volatility results in greater payoff opportunities.
Global Forex Markets Hours
When it comes to forex trading days, every exchange is open weekly from Monday to Friday, where each has unique forex trading hours.
However, from an average trader’s view, there exist four most important time windows.
- London: 3 a.m. to 12 p.m. (noon)
- New York: 8 a.m. to 5 p.m.
- Sydney: 5 p.m. to 2 a.m. (midnight)
- Tokyo: 7 p.m. to 4 a.m.
NOTE: All times are shown in Eastern Standard Time.
Every exchange works independently and they all trade the same currencies.
If two exchanges are open at the same time, the number of traders that are actively buying and selling a given currency pair tends to increase significantly.
The asks and bids in one forex market exchange tend to affect asks and bids on all other open exchanges instantly. This increases volatility and reduces market spreads.
This situation is experienced during:
- 8 a.m. to noon, when both New York and London exchanges are open
- 7 p.m. to 2 a.m., when both Tokyo and Sydney exchanges are open
- 3 a.m. to 4 a.m., when both Tokyo and London exchanges are open
You should note that the times given are in Eastern Standard Time. Try to work it out using your own time zone.
The best forex trading session is 8 a.m. to noon. This is when the New York and London exchanges overlap.
These two trading centers account for more than 50% of all forex trades being executed.
On the other hand, from 5 p.m. to 6 p.m., trading mainly takes place in the Sydney and Singapore exchanges, where the volume is less compared to the London/New York window.
However, there can be exceptions since the projected trading volume is normally based on the postulation that no significant news events will come to light.
Military or political crises that occur during otherwise slow trading hours have the ability to spike the trading volume and volatility.
Forex Trading Strategies
The Forex market has hundreds of varied trading strategies. However, for traders who are just venturing into forex, there is a common question on the forex trading strategies that are best for beginners.
This question is important for those trying out forex trading for the first time.
It’s normally said that a beginner trader is closer to achieving consistent profitability compared to a trader that has been trading for years without success.
This is because a new trader hasn’t had the time to create any bad habits in the market, which usually results in the burning of accounts for many traders.
For traders that have been striving for years, they not only have to discover what works best for them, but they also need to stop any bad habits and set aside any negative feelings they may have built up over the years.
This is where you are required to rewire your trading psychology so that you can change the inherent negativity that you have been harboring.
It can be difficult, but if you are committed, it is something that you will actualize.
The good thing is that regardless of whether you have been trading for years or you’re a beginner trader, there are some trading strategies attributes that you should always remember.
Which Forex Trading Strategies are Best for You?
This is not a question that you should just answer from the top of your head. There are things you need to take into consideration.
There are traders who waste so many years on trading strategies that are not good for them right from the beginning.
This is bad, and it is not something I would wish for my readers or students.
You should, therefore, consider these 3 questions before you start to trade any forex trading strategies:
1. Do you wish to grow your wealth or make an income from trading?
We will begin by defining income and wealth. To my surprise, a lot of people cannot differentiate the two.
Income = Involves making X dollars a month
Wealth = Involves growing X % a year
When you intend to generate an income from trading, you need to find more trading opportunities within a shorter time period; for the law of large numbers to work in your favor.
What this means is that you have to trade the lower timeframes (i.e 5mins, 15mins, 1 hour), and spend more time on your screen.
Among the forex trading strategies that you can use in this case are day trading, scalping, or short-term swing trading strategies.
This is what will help you to actualize your desired goal.
If your aim is to grow wealth from trading, then you can comfortably have less trading opportunities.
This signifies that you could trade the higher timeframes and spend less time in front of the screen.
This works best for people who have other engagements too as they only spend less time on their PC doing the analysis for the few trades they intend to execute.
The trading strategies that you can use in this case are position trading or swing trading.
2. How much time can you devote to trading?
This is very easy to answer. It is however included here since there are traders who are not able to think logically some or most of the time.
Therefore, in case you have a full-time job, or you can’t manage to spend 12 hours a day in front of your monitor, then never ever think of getting into day trading or scalping.
In this case, you should be going with position trading or swing trading since they will give you ample time to conduct your analysis and avoid being left out on many trades.
If you however have all the time in the world and you enjoy the thrill short-term trading, by all means necessary, go ahead.
Don’t just adapt to a certain trading timeframe because someone is telling you that it is the best. It is more about what you feel you are comfortable with.
3. Is this forex trading strategy fit for you?
Let me give you a breakdown:
The majority of trading strategies can be classified into one of these two categories.
- A low win rate with a high reward compared to risk
- A high win rate with a low reward compared to risk
Which approach is better in this case?
In regard to profitability, both approaches may work as they are determined by the risk to reward ratio and your win rate.
A better question to ask yourself would therefore be, “which approach am I more comfortable with?”
In case you prefer a higher winning rate but smaller gains, then day trading and swing trading is best suited for you.
However, if your preference is a lower winning rate with larger gains, then the best approach for you would be position trading.
Forex Trading Strategies for Beginners
Are you confused on how to get started?
If the answer is yes, continue reading.
If you are just starting out, it may get overwhelming with the sheer number of trading strategies available. There are things such as chart patterns, trading indicators, Elliot Waves, candlestick formations among others.
This can be very confusing since you will find everyone out there saying that whatever they are giving you is the best.
So, where do you start?
I would advise you to start with mastering Support and Resistance levels.
Why am I advising you to do this?
This is because, in the forex market, the price is only likely to do two things
- Break support and resistance level
- Reverse at the support and resistance level
Even if the market is ranging, at some point it will have to do either of the two.
This means if you’re conversant with support and resistance areas, you can be a breakout trader, reversal trader, or even a trend trader.
The good thing is that all of these trading strategies tend to work on the different timeframes that are available for you. This means that it does not matter whether you are day trading, position trading, or even swing trading.
To get started:
Understand how to draw Support and Resistance levels
It is good to learn how to draw these levels so that you don’t end up cluttering your charts with unnecessary lines like I see most forex traders doing. Your charts ought to be as clean as possible.
Make sure you know how to identify the main levels and plot them out. Actually, price is more likely to react at the main levels.
Understand how the price is likely to react at Support and Resistance levels
You should note that I have used the words “likely to react.” Yes, that is accurate. The reason why I have used the word “likely” is because forex trading is a game of probabilities. You can never know with certainty where the market is headed.
That is why I normally say don’t try to guess the direction of the market, just let the market give you an idea of where it is headed.
If the price breaks or reverses at support or resistance, you should be asking yourself about the pattern that had been formed before this breakout or reversal.
The pattern formed before a reversal or breakout at a support or resistance level will tell you the direction where the market is headed.
This way, you will easily avoid false breakouts and benefit from trapped traders. They are usually many.
However, this is not something that comes overnight.
You have to sacrifice an adequate amount of time to study forex trading charts in order to understand the different dynamics of the market.
Upon studying thousands of charts, you will always have the ability to tell with a high degree of probability whether the price is likely to break or reverse at the support or resistance level.
Define your trading timeframe
As I have told you above, let no one tell you of the best timeframe to use when you are dealing with forex trading.
What someone is telling you to be the best is based on their personal preference. This might be working for them, but it does not necessarily mean that it will work for you.
You should define your trading timeframe based on what you feel you can trade comfortably.
When you have a full-time job, it is not logical to trade the 5mins or 15mins timeframes since your time doesn’t allow it.
You’re instead better off trading the higher timeframes, such as 4-hours and above, since it requires less screen time. You will have sufficient time doing your analysis without any pressure.
It is therefore good to be honest with yourself and choose a timeframe that is good for you.
Don’t just go with what someone else is putting out there. First, assess yourself before making the decision.
Develop a trading plan
When you know your strategies for forex trading and timeframe, you can develop a trading plan around it.
A trading plan is very important for a forex trader. It ensures that you’re not trading blindly hence you can avoid taking unnecessary trades.
If a trade does not meet the checklist criteria in your trading plan, just let it go and move on to the next one.
With all the aspects I have mentioned above, I want to add that forex trading learning is very important. This is what will help you to identify which kind of trader you are, and hence adapt accordingly.
There are a lot of forex trading books out there offering all sorts of information.
Forex Trading Using Technical Analysis
Technical analysis in foreign exchange involves studying historical price action to help determine probabilities and identify patterns of future movements in the currency market using naked price action chart analysis, indicators, technical studies among other analysis tools.
The most common things to consider in FX technical analysis is identification of the trends and identification of support and resistance areas using timeframes and/or price charts.
The forex market can only move down, up or sideways.
Typically, prices on forex trading charts move in a zigzag fashion hence resulting to trends, channels and ranges.
Technical analysis is vital in determining where as a forex trader you will enter the market, and where you will also exit the market.
How to Use Technical Analysis
The fact that no one knows exactly what will happen in the currency markets since they are chaotic, forms the basis for technical analysis.
However, this does not mean that price action is completely random.
The mathematical Chaos Theory has proven that within states of chaos there are still identifiable patterns that normally tend to repeat.
It is a type of chaotic behavior observed in nature through weather forecasts.
Most of the traders (even the most experienced and profitable forex traders) admit there are no certainties with regards to predicting exact price movements.
This works to mean that successful forex trading does not revolve around being wrong or right. It is more about determining relevant probabilities and taking FX trades when the odds are in your favor.
Forecasting market direction and where/when to enter trades makes up the part of determining probabilities. However, it is important to determine your risk to reward ratio too.
It is good to note that there is no existence of a magical combination of technical indicators that would help to unlock a secret trading strategy.
Discipline, ability to control emotions and good risk management are the secret to successful forex trading.
You can guess the right direction and win here and there, but it will be impossible to remain profitable without adequate risk management.
Forex Trading Using Fundamental Analysis
In FX trading, fundamental analysis involves analysis of political, economic and social forces that are likely to influence the demand or supply of a given currency.
Predicting the direction of price using the demand supply zone is easy, but it is a daunting task when it comes to analyzing all the relevant factors likely to affect demand and supply.
As a fundamental trader you have to understand why occurrences like increased unemployment rate affect the monetary policy and economy of a country and how this ultimately affects the demand level for the country’s currency.
This type of analysis is vital for a fundamental trader since in case the future outlook of a country’s economy is good, the currency should strengthen.
In short, a good economy results to higher currency value while a bad economy results to lower currency value.
Making successful trades is the objective of every trader that makes the decision of being involved with currency trading.
Trading in the currency market becomes easier the moment you are aware of why the market is moving in a certain direction (buyers or sellers direction).
No one was born a successful forex trader, you are either taught or learn using different mechanisms. However, learning never stops.
As a result, there are Foreign exchange traders who want to have access of the prevailing market news, charts, quotes among other things at their fingertips always.
Major currency pairs are traded the most in the forex market and this makes them more event-driven and often volatile.
This makes the currency pairs susceptible to varied economic related news announcements that occur throughout the day. Relevant data and market news can be found in numerous sources.
The internet stands out when it comes to this aspect. It is easy for currency traders to access a range of information, at the speed of light, regardless of one’s geographical location.
For this reason, I have included a list of six forex trading websites that will help you access the relevant news events coupled with access to other forex related information to help supplement the required knowledge in the FX market.
Investopedia can act as a dictionary for those terms that you come across, and you do not comprehend what they imply.
It is more of a comprehensive dictionary of the key trading vocabulary and terms to help you prepare for your trading endeavors.
Forex Factory will keep you updated on the prevailing news releases while giving an insight as to how the news is likely to affect your preferred trading session.
The website uses a color system on the forex news section to help guide the users on understanding the intensity of the news that is going to be released. This helps to understand the news that will have significant impact and those that will have minimal to negligible effect.
The platform also provides several forums where traders with similar interests can interact and share ideas on varied issues related to forex trading.
This is a site news currently owned by IG Group. The platform provides up to the minute forex news coupled with fundamental and technical analysis.
DailyFX provides free forex charts along with an economic calendar that contains major news releases. There is the provision of a forum too where traders from different parts of the world engage in discussions.
Babypips offers a favorable platform for newbie traders. The website breaks down all the fundamentals of forex into a way that is easy to learn for beginner forex traders.
The website covers varied aspects like trading psychology, technical analysis, trade ideas, trading systems and automation among other things.
This is a very good platform if you are new to the currency market.
If there is one thing that I have noted since I started my journey in forex trading is that it can be lonely.
As a result, it is important to find friends, groups, peers or a community involved with your form of trading.
This is a platform that gives you an opportunity to do so since it has a forex forum converging traders from all over the world. All the topics related to the financial markets are usually explored here.
You can take this opportunity to help out fellow traders, contribute your trading experiences and get feedback from other traders too.
This is something that will help expand your knowledge and help you become even a better trader. However, you should navigate carefully to ensure that you are not clogged with information overload since the information you will be subjected to is immense.
Information overload is likely to lead to paralysis; whereby you end up doing nothing.
Foreign exchange rates tend to change every now and then. As a result, you ought to make sure that you are up to date with regards to the currency pairs that you are involved with.
The website provides exchange rate data for all the currency pairs. There is also the provision of currency conversion, performance information, an exchange rate alarm that notifies you of key signals and key cross rates.
Despite forex news working to supplement desired information, it has always been an area of debate among many traders. This has resulted to emergence of forex traders who use the news and those that do not.
For traders using fundamental trading techniques, use of forex news is not optional as this is among the ways of knowing what aspects are likely to move the market.
Traders using technical analysis usually have the option of deciding whether to make use of forex trading news or not.
Making this decision is normally dependent on the trading strategies being used and the time frame involved.
For someone trading the higher timeframes, they can ignore the news events without encountering any issues.
However, the same cannot be said about the technical traders involved with lower time frames. In these time frames the markets move rapidly and can be easily affected by upcoming news events.
For someone using technical trading strategies for lower timeframes, there might be a need of combining it with fundamental strategies, as a result.
On the other hand, this is not mandatory.
One way of avoiding the negative effects of the forex news while trading lower time frames while using purely technical trading techniques is by avoiding involvement in currency pairs that have upcoming news events.
To know whether a currency is going to have a significant news event in the course of the day can be aided by the websites I provided above. ForexFactory does a good job for me in this area. Their forex calendar is dope.
Different Types of Forex Orders
Forex orders include:
- Limit Order
- Market Order
- Stop Order
- Stop-Loss Order
A limit order is an order to sell or buy.
Buying and selling can however only take place if specific conditions included in the original trade instructions are met.
Until this happens, the order remains a pending order and does not affect your margin calculation or account totals.
The most popular use is to create an order that is executed automatically when the price gets to a particular level.
If the conditions of a limit order to sell, or buy are met the order is automatically executed.
Market orders are the most popularly used type of orders in the Forex market.
It is simply an order to buy or sell at the existing market price.
If you have ever bought anything online, the “Buy Now” button somehow does what the market order does in the Forex market.
It can thus be said that the market order is performed on a real-time basis when it’s placed.
This order directly searches the best possible price available in the market and proceeds to book your order at that price.
Because prices in the Forex market keep changing rapidly, it is likely that the market order may get executed at a slightly different price than you wanted.
This execution is referred to as slippage in the market context. Slippage may at times work in your favor or work against you.
A market order instantly becomes an open position. This way, losses and profits that accumulate on this order have to be realized when the position is closed.
In simple terms, this means that you only enter the trade when the market moves in your favor.
For instance, the market might be in a range. If you intend to trade the range breakout, you can put a buy stop order at the breakout price, above the current price.
This ensures that you will only be filled on the trade to go long when the market trades and gets to this level.
The disadvantage with a stop order is that you are likely to encounter a false breakout.
However, you also stand the chance of entering trades with momentum due to the prior accumulation period.
Stop Loss Order
A Stop Loss Order is slightly different from the other orders mentioned above.
This is because the other orders that I have discussed above are entry orders as they get you into a trade. A Stop Loss order on the other hand gets you out of the trade since it is an exit order.
An example is when you buy at support expecting the market to keep trading higher and you place your stop-loss order below support.
In the event the market collapses after you have entered the trade and gets to your stop-loss level, you will be out of the trade for a loss.
What a stop loss order does is that it limits the amount of loss you are likely to experience when a trade goes against you.
If the market went against you, and you don’t have a stop-loss order, you could end up burning your entire account depending on your lot size and amount of leverage used.
A stop-loss order is therefore used as a defensive strategy to protect your capital/account balance in case the market goes against you.
However, despite a stop-loss order working in your favor, it can also come as a disadvantage on your side.
The disadvantage is that the market could turn back in your intended direction after you have been stopped out.
But I think It is better to get stopped out in one trade and end up with small gain as you move to the next trades rather than losing a huge amount on one trade.
What you do is that you place your stop-loss order at a point where if it is triggered it means that you are already wrong about that trade and it is time to move on.
Pros and Cons of Forex Trading
Pros of Forex Trading
1. High Liquidity
The FX market has the highest number of market participants compared to all other financial markets.
As a result, it has the highest level of liquidity hence making it possible for even large currency trade orders to be easily filled with efficiency and without large price deviations.
This aspect ensures that there is the elimination of price anomalies and the possibility of price manipulation hence enabling tighter spreads that result in more efficient pricing.
As a forex trader, you do not have to worry about the stagnant price ranges in the afternoon or high volatility during the closing and opening hours unless there are major events taking place.
The forex market stands out among the most accessible markets when it comes to individual traders
The process of setting up a forex trading account can take a period of like one to three days, and the trader commences operations with as little as $50.
As a trader, you have access to real-time news, market pricing, tools, strategies, and price charts via varied trading platforms provided by the forex brokers.
3. Reasonable Cost
Forex trading not only gives you a lot of options, but it also provides you with a low-cost investment opportunity when compared to other investment paradigms.
In the moment when you are making a percentage basis comparison, you will see that the FX market is quite reasonable compared to other markets out there.
Most brokers are now offering extremely low deposit requirements for traders that want to trade through their platforms.
Forex trading cost is low due to the direct involvement of dealers by way of reserving themselves for covering the inherent risk, and therefore minimum brokerage is involved.
4. Use of Leverage
Traders are usually provided leverage by the forex brokers to enable them to trade in the forex trading market, and this is something that gives foreign exchange traders the freedom to trade with more in the currency market compared to what is available in their trading account.
Leverage helps forex traders to keep risk capital to a minimum while giving them an opportunity to make higher profits.
A good example is where a FX broker offers a 20:1 leverage, and this means that a $500 margin deposit can enable you to sell or buyer $10,000 worth of currencies.
5. Less Potential for Insider Price Manipulation
Bond, commodities, and stock markets are usually susceptible to influence by private information that is held by insiders and key stakeholders of the relevant assets.
The fact that the control of the FX market is less centralized compared to these markets makes it less influenced by insider information.
On most occasions in the currency market, it is the central bank authorities and government officials that are the holders of any prospective “inside information.”
These sets of individuals are usually subjected to intense public scrutiny and rigorous government oversight, and this is something that puts forex among the most transparent markets for trading.
6. Works 24 Hours
The currency market is in operation 24 hours a day for 5 days a week, starting with the opening of the Asian Trading session on Monday and closes on Friday as the New York trading session comes to an end.
Forex has the ability to trade for 24 hours in a day due to different international time zones, and the fact that these trades are normally executed over a network of computers.
As a result, currency traders can take this as a full-time job or part-time job in whatever conventional hours that make them comfortable.
Cons of Forex Trading
1. High Risk due to High Leverage
There is high leverage in FX trading, meaning that as a trader, you can get a loss/profit exposure that is in multiple times of your trading account.
The leverage not only comes to the advantage of FX traders that do not have a lot of money to trade in the currency market, but it also results in magnifying of losses.
If you do not have a robust knowledge of how leverage works in the FX market, you might be highly susceptible to making losses.
There is need for a currency trader to have an efficient capital allocation scheme and adequate control over emotions ( like a willingness to cut losses short) to help deal with the negative side of leverage.
The involvement of brokerage in the forex market reduces the inherent transparency hence reduced the outcome on investments.
As a result, it is advisable that before investing in forex trading that you take your time and find the best forex trading broker to go with. An appropriate broker should be regulated and follows the prescribed rules as a result.
3. Self-Directed Learning
Unlike the stock market where a trader has the ability to seek professional assistance from trade advisors, portfolio managers, and relationship managers, forex traders are usually on their own with very little information, if any.
As a result, continuous and self-directed learning becomes a must throughout your trading career.
Accessing quality information is usually problematic since most of the things being done are trial and error.
Most newbie traders end up quitting in the initial stages due to losses being suffered as a result of limited forex trading knowledge and know-how.
In order to overcome this,
You have to ensure you are reading helpful books for forex trading. You can also go to the extent of taking a forex trading course if you are confused on where to start. You can access some good forex trading tutorials.
However, never indulge in buying forex trading signals. You will never learn anything when you take this path.
Read: Best Day Trading Books
4. Social Trading
The internet makes it easy for traders to exchange information regarding various market conditions and possible investment opportunities. This is why social trading is building momentum at the moment.
However, following inexperienced traders while doing copy trading might result in significant losses over time.
This means that you will have to invest your time and resources trying to find that experienced trader that will help you to make desirable returns in future.
Forex Trading Risks
Leverage comes in during margin trading, as it allows you to take advantage of a significant market exposure using only a small amount from your trading account.
A broker might be offering a leverage of 400:1, but this does not mean that you have to use it since it is there.
There is a significant risk associated with high leverage. It is saddening how most newbie traders do not understand this, and will always go for the highest possible leverage.
A trading account with an aggressive use of leverage has a very high-risk level. It is quite easy for such an account to be wiped out.
Always do some research before depositing your money with any broker to ensure you find a reputable forex broker.
Some of these brokers do not have your best interest, more so going by the fact that they are not regulated.
There are very many forex brokers out there, and each is competing for your business, so you have a wide pool to choose from.
Therefore, it is your responsibility to exercise due diligence by conducting relevant research to locate the most suitable forex broker that will serve your needs.
Exchange Rate Risk
This is the risk exposure that emanates from the fluctuations in the value of a base currency.
This is more of an unavoidable risk but is something that a trader can avoid through varied hedging techniques.
Interest Rate Risk
This is a form of risk that arises due to a loss or profit generated by forward spreads fluctuations coupled with maturity gaps among transactions and forward amount mismatches in the foreign exchange book.
Interest rate risk is relevant in currency swaps; futures, options, and forward options.
Setting limits on the total size of mismatches helps to minimize this risk exposure.
These are forms of exchange rate risk that are associated with the time difference between the commencement of a contract and the moment it settles.
Given that forex trading takes place on a 24 hours basis, there is a probability of changes in exchange rates before the trades have settled.
As a result, there is the possibility of currencies being traded at different prices during different trading hours.
Transaction risk increases as the time difference between entering and settling a trade increases.
How to Become Successful in Forex Trading
1. Always know yourself by defining your risk tolerance and understanding your needs
2. Develop a trading plan that you will always follow without deviating.
3. Establish your desired goals and ensure that you choose a trading style that is compatible.
4. Ensure that the broker you choose offers a suitable trading platform.
5. You should, at all times, pick your leverage ratio and account type in accordance with your expectations and needs.
6. Ensure you use a stop-loss for every trade to avoid burning your account.
7. It is good to begin with small broker deposits and let the account size grow through organic gains.
8. Study your failure and success by taking notes.
9. Never add to a losing position with the objective of compensating incurred losses.
10. Never rely on forex wonder methods, forex robots, or any other snake oil products in the market.
11. Separate your emotions from trading all the time.
12. Always keep your trading plans and analysis simple that you can easily understand and explain them.
13. Trade only when you feel it is the right moment.
14. You should avoid going against the market unless you have sufficient financial resilience and patience to stick to your long-term plan.
15. Every trader has losses, so do not be afraid of them.
16. Do not fight the market; just remain patient and humble.
17. Take your time to study the market; technical and fundamental factors guiding the price action.
18. Invest time in studying money management.
19. Work to having more winning trades compared to losing trades.
20. Conduct post-analysis of the trades taken for that week during the weekend
21. Never give up, even when things don’t seem to be going your way.
Forex Trading FAQ
Is forex trading profitable?
This is a question that has been argued for some time now.
This is because of the fact that many traders have not attained the success trading forex as they had expected while starting.
The trading experiences have left them doubting the viability of forex trading as an investment option.
Nevertheless, the fact that the forex market trades about $5 trillion daily in volume, is evidence that there are traders who make profit from forex.
If that was not the case, the forex market would not have the popularity it has at the moment as it would have faded out with time.
As a result, the appropriate question to ask should not be “Is forex trading profitable,” instead the question should be on how to trade forex profitably.
In this case, it is how to ensure consistent profitability in forex trading. Not being profitable at one point, and then lose everything the next time.
Like all other investments, forex trading has its risks and therefore the possibility for profit or loss exists.
Understanding how you can manage the risks largely helps traders to determine their forex trading profit or loss.
It is easy at times to be carried away by the success of another person who has achieved success in forex trading, and you end up throwing your money into the market, without taking your time to understand how he/she came to be profitable.
So as to have any chance of making profit in forex trading, you should first learn the market and the factors that are important to succeed.
So I revert to the question, is forex trading profitable?
The answer is YES it can be.
Why “it can be?”
This is because it depends on how you are going to approach it. If you take your time to learn, and ensure you practice sufficiently, you will definitely end up being successful.
Just like any other business, there is no short cut, you have to put in the needed effort. Don’t
think you will know about forex today and in three months you are a consistently profitable trader.
Be patient and ensure that you do everything right.
In my case, my first 2 years were more about learning and practicing. Now I am reaping the fruits of all the work that I did put in during that period.
Is forex trading for Me?
Forex trading is without a doubt a high-risk venture.
The higher the risk, the higher the potential for profit in forex trading, just like any other business.
The most important question to ask yourself is if you can handle the risk.
Not all trades end in a profit and you should be ready for losses every now and then regardless of how good you are.
In that time I have been in this industry, I have never heard anyone say that they have a trading strategy with a 100% win rate.
Want to know whether forex trading is for you?
Do you intend to continue trading even after continuous losses? If you feel that you cannot handle such, maybe forex trading is not your thing.
However, in case you decide that forex trading is your thing you should consider using risk management in your trading strategy. This will help you to lower the trading risks.
Also, ensure that you only risk that amount that you are comfortable losing. This amount is also known as risk capital.
Just like any other business, you should invest wisely.
Learn the basics of how the market works, and like in any other market, if anything makes you uneasy, then don’t trade it.
Is forex trading gambling?
With my experience in forex trading, I have encountered several questions related to the industry.
The question of whether forex trading is gambling has come about on many occasions.
Why? I don’t know.
I think many people take forex trading to be nothing but gambling.
Either way, any time you take a position in a certain currency pair, you are basically betting on the price to either go up or down by taking a long or short position.
So is forex trading simply another form of gambling?
Determining whether forex trading is gambling is dependent on how you approach it.
To those without the relevant know-how, it may be easy to think of forex trading as gambling. This is more so when you begin to watch the trading charts of any currency pair and see the way it moves in a seemingly random trend.
However, there are many large financial institutions, and even individual/retail traders that tend to generate consistent profits from trading in the forex market.
You can, therefore, be very certain that they’re not randomly gambling away large amounts of money every day.
What you do in forex trading is that you study and practice consistently until you develop an edge in the market.
There are various ways you can develop an edge while trading forex.
The main way is definitely via technical analysis.
This is generally the study of technical indicators (for those who trade with indicators) and charts (naked charts) to identify trading patterns and help you find possibly high probability trading positions.
These work very well since traders all over the world are viewing the same charts and using the same technical indicators and identify the same patterns repeating themselves over and over.
This makes it possible for them to take positions knowing that the price will mostly behave the same given similar market conditions.
Greed is the worst trading motivation. The market normally punishes greed and rewards moderation.
There is a very thin line between gamblers and traders. There are those who are always willing to risk, provided there is money on the line even when they don’t know what they are doing.
If you want to be consistently profitable, avoid thinking like a gambler, avoid taking blind chances, and do not rely fully on luck.
Keep in mind that luck comes and goes.
Therefore in response to the original question, I would say that forex trading is really not another type of gambling.
With some education, you can be a skilled technical trader and determine high probability trading positions where you are able to win more than you are losing.
2 thoughts on “What is Forex Trading? The Ultimate Guide”
Quite informative. Thank you.
It is my pleasure that it was helpful.