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Trading Forex

The basics of trading forex

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Trading Forex

 

  • What is forex trading?

Foreign exchange, or forex, can be defined as a network of buyers and sellers who exchange currencies at a pre-determined price. It is the process by which individuals, businesses, and central banks convert one currency into another; if you have ever travelled abroad, you have certainly done so.

While some foreign exchange is done for practical reasons, most currency conversions are done to make a profit. Because of the large amount of currency that is converted every day, some currencies’ price movements can be extremely volatile. This volatility is what makes forex so appealing to traders: it increases the possibility of large earnings while simultaneously increasing the danger.

 

  • How does forex trading work?

On the foreign exchange market (forex), trade is conducted in an exclusively electronic format. Currency pairs are bought and sold 24 hours a day, 5 days a week by participants worldwide. Market participants engage the forex remotely, via internet connectivity.

Upon a trader sending a buy or sell order to the market, forex brokers facilitate the transaction by extending margin. Accordingly, the trader can open new positions far more than capital-on-hand, with the goal of realizing profits from beneficial movements in price. To complete each forex trade, the market’s technological infrastructure matches contradictory orders from market makers, individual traders, and other liquidity providers.

  • There are three distinct types of forex market:
  • Spot forex market: the physical exchange of a currency pair, which takes place at the exact point the trade is settled – i.e., ‘on the spot’ – or within a brief period
  • Forward forex market: a contract is agreed to buy or sell a set amount of a currency at a specified price, to be settled at a set date in the future or within a range of future dates
  • Future forex market: a contract is agreed to buy or sell a set amount of a given currency at a set price and date in the future. Unlike forwards, a futures contract is legally binding

Most traders speculating on forex prices will not plan to take delivery of the currency itself; instead, they make exchange rate predictions to take advantage of price movements in the market.

  • What is a base and quote currency?

A base currency is the first currency listed in a forex pair, while the second currency is called the quote currency. Forex trading always involves selling one currency to buy another, which is why it is quoted in pairs – the price of a forex pair is how much one unit of the base currency is worth in the quote currency.

Each currency in the pair is listed as a three-letter code, which tends to be formed of two letters that stand for the region, and one standing for the currency itself. For example, GBP/USD is a currency pair that involves buying the Great British pound and selling the US dollar.

So, in the example below, GBP is the base currency and USD is the quote currency. If GBP/USD is trading at 1.35361, then one pound is worth 1.35361 dollars.

If the pound rises against the dollar, then a single pound will be worth more dollars and the pair’s price will increase. If it drops, the pair’s price will decrease. So, if you think that the base currency in a pair is likely to strengthen against the quote currency, you can buy the pair (going long). If you think it will weaken, you can sell the pair (going short).

 

 

 

 

  • What moves the forex market?

The forex market is made up of currencies from all over the world, which can make exchange rate predictions difficult as there are many factors that could contribute to price movements. However, like most financial markets, forex is primarily driven by the forces of supply and demand, and it is important to gain an understanding of the influences that drives price fluctuations here.

  • Central banks

Supply is controlled by central banks, who can announce measures that will have a significant effect on their currency’s price. Quantitative easing, for instance, involves injecting more money into an economy, and can cause its currency’s price to drop.

  • News reports

Commercial banks and other investors tend to want to put their capital into economies that have a strong outlook. So, if a positive piece of news hits the markets about a certain region, it will encourage investment and increase demand for that region’s currency.

Unless there is a parallel increase in supply for the currency, the disparity between supply and demand will cause its price to increase. Similarly, a piece of negative news can cause investment to decrease and lower a currency’s price. Therefore, currencies tend to reflect the reported economic health of the region they represent.

  • Market sentiment

Market sentiment, which is often in reaction to the news, can also play a key role in driving currency prices. If traders believe that a currency is headed in a certain direction, they will trade accordingly and may convince others to follow suit, increasing or decreasing demand.

 

 

 

  • Economic data

Economic data is integral to the price movements of currencies for two reasons – it gives an indication of how an economy is performing, and it offers insight into what its central bank might do next.

Say, for example, that inflation in the eurozone has risen above the 2% level that the European Central Bank (ECB) aims to maintain. The ECB’s main policy tool to combat rising inflation is increasing European interest rates – so traders might start buying the euro in anticipation of rates going up. With more traders wanting euros, EUR/USD could see a rise in price.

Credit ratings

Investors will try to maximise the return they can get from a market, while minimising their risk. So, alongside interest rates and economic data, they might also look at credit ratings when deciding where to invest.

A country’s credit rating is an independent assessment of its likelihood of repaying its debts. A country with a high credit rating is seen as a safer area for investment than one with a low credit rating. This often comes into particular focus when credit ratings are upgraded and downgraded. A country with an upgraded credit rating can see its currency increase in price, and vice versa.

  • How to Start Forex Trading?

All forex trades involve two currencies because you are betting on the value of a currency against another. Think of EUR/USD, the most-traded currency pair in the world. EUR, the first currency in the pair, is the base, and USD, the second, is the counter. When you see a price quoted on your platform, that price is how much one euro is worth in US dollars. You always see two prices because one is the buy price, and one is the sell. The difference between the two is the spread. When you click buy or sell, you are buying or selling the first currency in the pair. Let us say you think the euro will increase in value against the US dollar. Your pair is EUR/USD. Since the euro is first, and you think it will go up, you buy EUR/USD. If you think the euro will drop in value against the US dollar, you sell EUR/USD.

If the EUR/USD buy price is 0.70644 and the sell price is 0.70640, then the spread is 0.4 pips. If the trade moves in your favor (or against you), then, once you cover the spread, you could make a profit (or loss) on your trade.

Trading FX pairs in the contemporary forex marketplace is straightforward and user-friendly. Vast functionalities are readily available on the software trading platform designed to aid in analysis and trade execution. Some of the most powerful features are advanced charting applications, technical indicators, and multiple order types. Whether you are an intraday scalper or long-term investor, modern platforms make it routine to conduct business with forex.

 

 

  • Pros and cons of forex trading

 

  • The Pros of Forex Trading

The foreign exchange market has several advantages not found in other markets. These include:

  • Easy access: The forex market is now probably the easiest financial market to open an account and begin trading in. Opening an online forex trading account can be done from anywhere in the world with as little as $1 and an internet-connected smart device.
  • Practice trading: You can easily practice trading or gauge an online broker’s services and trading platform by opening a free demo account that all forex brokers offer.
  • Quick returns: Once profitable forex positions are liquidated, the profits can be made available immediately for withdrawal, depending on the forex broker used.
  • High liquidity: The liquidity in the forex market is unmatched by any other capital market and central banks oversee the markets in their national currencies. Unusual circumstances, like the sudden imposition of exchange rate regimes, the release of major economic data and geopolitical events, can adversely affect the liquidity in affected currency pairs while the forex market is reacting to the added information.
  • Low trading costs: Overall, trading costs for forex compare quite favorably to other markets. If you trade in major currency pairs, then dealing spreads tend to be tight, which reduces your trading costs. Dealing spreads in the minor and exotic currency pairs are typically wider, however, which increases your trading costs in those pairs.
  • Ability to automate your trading: Many online forex brokers support the MetaTrader 4 or 5 trading platforms that allow you to run “expert advisor” or EA software that lets you automate your trading. Other trading platforms also offer this feature, so check with your broker to find out if their platform supports automation.
  • Moderately volatile: Substantial volatility without excessive market shocks tends to provide traders with decent opportunities and more stable returns than a market with low or excessive volatility. This makes the forex market suitable for day trading strategies.

 

  • The Cons of Forex Trading
  • Trading against professionals: As a retail forex trader, you trade against a host of professional traders, large multinational corporations, national central banks, and hedge funds that always have a presence in the forex market.
  • Knowledge of world events: Since the forex market consists of national currencies, knowledge of macroeconomics and familiarity with world events can be extremely important to achieve consistent profits. Ideally, you would limit your trading to a handful of currency pairs, researching each country’s fundamentals to make more informed decisions on trades.
  • Exchange rate valuations: Unlike stocks, the origin of currency valuations is not as apparent and rely on a series of factors that may or may not be readily apparent in the market. This works against retail traders who might not have access to this type of information.
  • Leverage: Trading with leverage represents a double-edged sword for forex traders. On the one hand, you can magnify your profits, but by the same token your losses also increase with leverage. Leverage can be just as much of an advantage as a disadvantage to forex traders.

 

Kashikoi Okane

Kashikoi Okane, also known as the “Cryptocurrency Master,” has been involved in the markets since 1996. Kashikoi started off in stock trading competitions while in business school and traded demo accounts for 18 months before putting in any money. After qualifying for trade accounts, because back then you had to have a proven track history before they would allow you to have a brokerage account, Okane began to successfully learn the markets. He specialized in high-risk stocks and developed three unique styles of trading. About 10 years later, Okane jumped into the Forex markets and became accomplished in these markets. When cryptocurrencies were born, Okane could not resist and went full speed into these new markets. Okane has been trading for over 25 years and loves the cryptocurrency markets. Okane has consulted many different companies on trading tools, education, and services. Kashikoi Okane is currently heavily focused in cryptocurrencies, blockchain, NFTs, exchanges and funds.

 

 

 

 

 

 

 

 

 

 

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