What is forex trading?
The term forex is a combination of the words foreign currency and exchange. Foreign exchange typically refers to the process of converting one currency into another. It is often done for a variety of reasons, such as trading, commerce, or tourism. Currently, the daily global volume for forex trading sits in the trillions.
What is the forex market?
Much as its name suggests, the forex market is where currencies are traded. The forex market is the world’s largest, active and liquid financial market. One of its most unique aspect is that it does not have a central marketplace. Instead, currency trading takes place over-the-counter (OTC). This means that all transactions take place through computer networks among traders around the world instead of on a single centralised exchange.
The market is open 24 hours a day, five days a week. Currencies are typically traded around the world in major financial centres such as London, Hong Kong, Singapore, Tokyo, Sydney, Paris, New York, and more.
How to start forex trading
There is no doubt that for novice traders, learning how to trade in any financial market can seem daunting at first glance. However, it need not be a complicated endeavour. On the whole, starting an online forex trading journey requires careful preparation and a solid understanding of the forex market. Fortunately, we have prepared a step-by-step guide for traders to look at.
Before diving into the forex market, it is best that traders educate themselves on the basics of forex trading, how the forex market works, any strategies they may use, risk management techniques, as well as technical analysis. Fortunately for most traders, there are numerous resources online, such as tutorials, courses, and videos that can help traders gain a comprehensive understanding of forex trading.
Choose a reliable brokerage firm
In order to begin trading, traders must select a reputable and regulated forex broker. This is because a broker acts as an intermediary and provides traders with access to the forex market and other instruments. However, it is important traders do their research before settling on a particular broker. This is because there are plenty of brokerage firms available, and not all of them offer the same things. As such, traders should make sure their forex broker should offer a user-friendly trading platform, as well as provide excellent customer support. Make sure that the brokerage firm offers competitive spreads, low fees, and a wide range of currency pairs to trade with.
Open a trading account
After picking a brokerage account to work with, a trader has to open a forex trading account to get trading. Most brokers offer various account types with varying minimum deposit requirements. In order to open an account, a trader most likely also has to provide some form of documentation. This includes proof of identity (such as a passport or government-issued identity card) as well as proof of address (such as a utility bill), or even a Tax Identification Number (TIN). Traders can even start with a demo account to practice trading with virtual money before funding a live account and trading for real.
Learn about trading tools
Traders should familiarise themselves with the trading tools and platform offered by their brokerage firm. Fortunately, most brokerage firms do offer guides, instructions, and tutorials so that traders can easily get the hang of using their online trading platform. They should also understand how to place trades, analyse the charts, use technical indicators, and set up any risk management parameters that suit their investment goals. Worse comes to worse, a trader can always contact a broker’s customer support for further assistance.
Develop a trading plan
Traders should also create a detailed trading plan that outlines their financial goals, risk tolerance, preferred trading timeframes, as well as trading strategy. A trader’s trading plan should entry and exit criteria, as well as rules for managing risk and protecting their capital. This way, a trader can remain focused and not panic in the event the market moves in an unexpected way. Traders should also evaluate their trading plan on a regular basis in case they may need to update or tweak it.
Practice with a demo account
Traders have the option of using a demo account provided by their brokerage firm to practice trading in a risk-free environment. The demo account may look similar to a live trading account, but there is a fundamental difference – it only allows for paper trading. This means all trades done in a simulated environment, so there is no risk of making a loss – but no monetary awards either. A demo account is great for traders to test their strategies, analyse market movements, hone their trading skills, and gain confidence before putting their real funds on the line.
Begin with a small investment
When a trader feels they are ready to start trading with real money on the line, they should start with a small investment that they can afford to lose. On the other hand, they should avoid risking a significant portion of their capital until they gain more experience and confidence in their trading abilities.
Implement risk management
Traders should also implement strict risk management strategies to protect their capital in case anything in the market goes sour. For instance, they can set stop-loss and take-profit levels for each trade, and never risk more than a small percentage of their trading account on a single trade.
Monitor and analyse the market
Once a trader has a made a trade, that is not the be all end all. They must also keep a close eye on the forex market and stay updated on economic events, news releases, and current developments that can impact currency prices. One way to do so is by using technical and fundamental analysis that can help traders make informed trading decisions.
Keep learning and improving
Although most people may believe that executing a trade is all there is in forex trading, it is not actually true. Forex trading is actually a continuous learning process. As such, traders should make the effort to stay open to new strategies, ideas, and market insights. They should analyse their trading performance on a regular basis (that will depend on their trading strategy), learn from their mistakes, and adapt their trading plan accordingly.
Overall, traders should remember that forex trading carries a high level of risk and it is not suitable for everyone. As such, traders should be prepared to incur potential losses as well as returns. They should also never trade with money that they cannot afford to lose. By approaching forex trading with an educated and disciplined mindset, traders can increase their chances of success in the forex market.