People make a lot of money from Forex trading. However, the process of actually trading forex can be very daunting. In this article, we’ve outlined and explained the fundamental news of Forex trading for 2019. After reading this piece, you’ll be able to:
- Choose how you want to trade forex
- Understand the forex market
- Open a forex account
- Organise and develop a trading scheme
- Pick a forex trading platform that best suits you
- Monitor profit/loss of your first position
In case you don’t know what forex is, think of it as a market for buying and selling a variety of currencies. It requires a 24-hour monitoring routine. You will learn how the forex market works, how to forex trade using CFDs (to be explained later) and what a typical forex trade looks like.
- Choose How You Want to Trade Forex
Primarily, the exchange of currencies, i.e. forex trading, is largely carried out by big banks and other major financial institutions. These institutions take part in buying and selling an exhaustive amount of currencies daily. Therefore, as individual traders, making billion-dollar forex deals is quite out of our reach. However, there are two ways in which an individual trader can trade forex successfully. The first is to get involved in forex CFDs trading; the other is to trade forex via a broker. You can learn more about what are CFDs here.
Let’s analyse the two methods.
Trading Forex Using CFDs
CFD is an acronym for Contracts for Difference. With CFD, you can trade on the price movement of different currency pairs without actually owning the financial asset. In the case of a forex CFD, you can either open a long position or a short position. When you open a long position, you make profit when the price of the currency pair increases. If the price drops, you make a loss. The opposite is true of opening a short position.
Trading Forex with a Broker
There isn’t much to separate CFDs from broker trading. Same as CFDs, you would via your forex broker (which could be a bank), speculate on the price fluctuations of currency pairs. Again, you don’t actually own these currencies. Same as CFDs, you open a short position when you see that the price is going down; and you open a long position when the price is headed upwards. The only difference between trading with a broker and trading CFDs is that, with a broker, you instantly lose access to other trading markets.
- Understanding the Forex Market
You may be familiar with the shares and futures exchange market; and how these systems operate. The forex market operates on a totally different system. The buying and selling of currencies is not done on a consolidated exchange. Rather, forex is purchased and sold by a close-knitted net of banks. In theory, the forex market is an OTC market, i.e. over-the-counter market, with banks acting as market makers, setting the bid price for buying a forex pair and an ask price for selling a currency pair.
Forex Providers—The Alternative Trading
Many traders who retail forex don’t deal directly with the major banks. They prefer to trade alternatively using forex trading providers. Forex trading providers act as middlemen, who constantly deal with banks to find the best offered prices. They then proceed to add these quoted prices on their personal market spread.
Some trading providers, although not all, allow a back-pass for traders to access the order books of market makers. This is called Direct Market Access (DMA). DMA allows professional traders to trade forex without spreads issued out by online trading providers. This gives these advanced traders direct access to prices offered by currency providers, making them eligible for variable commission.
- Open a Forex Account
Creating a forex account is not difficult. If you intend to trade forex using CFDs, however, you’ll need to register your forex account with a recognised training provider. The best trading providers don’t make you obligated to fund your account until you’re ready to place a trade. One of the best forex brokers are eToro forex broker – read the review here, Avatrade – read the review here and Plus500 – read the review here
- Organise and Develop a Trading Scheme
Having a trading scheme is very important, especially if you’re just getting a feel for the market. A trading scheme or plan gives you objectivity. It also structures how and when you open and close your trading positions. You can find various forex trading strategies on the internet that work. Many of these strategies are geared around how to identify opportunities in the forex market.
After settling on a specific forex trading strategy, you need to apply it. You will need some technical analysis software(s) to guide your trade, especially if it’s your first trade.
If you are intelligent enough to trade based on your knowledge of the forex market, know that you will also need to watch for volatility factors. Things like potential fiscal policies and commercial announcements may at some point in time effect changes in the forex markets. Therefore, you’ll need to pay attention to economic change indicators.
- Pick A Forex Trading Platform That Best Suits You
There are, no doubt, a lot of great trading platforms out there. As a beginner, though, it is important that you choose the right trading platform to begin with. Things you should look at before considering a trading platform are:
- Good user-interface
- Basic functionalities like interactive charts; and additional features like risk management tools.
- Smooth platform performance
- Round-the-clock customer support
- Trading flexibility: platform should be available on a web browser, on an app or on other advanced third-party platforms.
- Monitor the Profit/Loss of Your First Position
After choosing a suitable forex trading platform, you can begin trading. To open a position on your preferred market, simply create a deal ticket. You will then be shown a list of buy and sell prices. From here, you’ll be able to determine the scope of your trading position and set a limit which closes your trade after hitting your targeted level. Keep in mind: Buy means a long position; and sell means a short position.
Your trading platform should have an “open positions” tab which lets you monitor your position’s profits and losses. If you want to close your trading position, simply reverse the trade to when you first opened it.