It is always better to understand the markets and methods of forex trading before you get your feet wet so that you are in a better position to manage risks and trade profitably.
What is Forex Trading?
Forex or Foreign Exchange refers to the process of trading in currencies of different countries against one another.
The purpose of foreign exchange may include trading, commerce, or tourism. Due to the world-wide reach, forex markets are trading the most liquid assets and are the largest markets in the world.
In Forex Market, different currencies are generally traded in pairs. For example, EUR/USD. You simply need to catch hold of efficient forex trading tools to reap true benefits.
Traders use forex for hedging it against international currency and risk of interest rate. So, when acted upon with the right strategy at the right time, you can take advantage of geopolitical events, diversify your portfolio, and earn good profits.
What is the Forex Market?
Simply stating, Foreign exchange market is where buyers and sellers meet for trading in currencies.
The forex market has no central marketplace for exchanging currencies, but this is conducted over-the-counter (OTC) in an electronic way. This implies that all the transactions are processed through computer networks across the globe.
The market is open for 24 hours in five and a half days weekly. It exists as both the cash market and derivatives markets.
Ways of Trading Foreign Exchange
There are 3 ways of trading forex:
- Spot market
- Futures market
- Forwards market.
The spot market is one of the biggest which is the basis of the futures and forwards markets. It’s a place where currencies are bought and sold at their current price which is determined by market demand and supply.
The deal closed in the spot market is called a spot deal, where both the parties deliver an agreed-upon currency amount to the other party based on the going exchange rate at the time the deal was closed. The settlement generally takes two days of time.
Many factors drive the price of currency like economic performance, interest rates, political sentiments, as well as the expected future performance.
Forwards and Future markets differ from spot markets since they don’t trade real currencies, but contracts representing claims about specific price and future date for settlement.
You can buy and sell the contracts over the counter in forwards market, and determine the agreement terms. Whereas in the futures market, the futures contracts are being bought and sold on public commodities markets, specifying details like number of units, settlement and delivery dates, minimum price increments, etc.
Hedging and Speculation of Forex
Let’s understand how forex trading is useful practically.
When companies do business in foreign countries, they face risk of fluctuating values of currencies. So, they hedge this risk via foreign exchange markets by fixing the rate at which transaction will be completed.
Therefore, traders in advance buy/sell currencies in the swap or forward markets, which locks in the desired exchange rate.
Now, let’s see how traders make money through speculation. As stated above many factors drive the price of currency like trade flows, economic performance, interest rates, political sentiments, and the expected future performance.
So, the volatility attached creates an opportunity for traders to make profit which is directly associated with the accuracy of prediction made by the trader.
Therefore, if a trader believes that a U.S. Dollar will become stronger compared to Indian National Rupees and thus, he predicts that the exchange rate of INR/USD will come down to 0.012. So, if his prediction is correct, he can earn profits by shorting INR or going long on USD.
How to Learn Forex Trading?
Now that we have understood the basics of what forex trading is, how they are traded, and how hedging and speculation of currencies work, let’s come to our basic question: how you can learn forex trading?
It is very much necessary to read and learn in detail about forex, how it works, how to trade forex, active forex trading times, and how to manage risk. So, getting educated and having practical experience will make you a good trader. You should start with a demo account, do some trading with it, and learn mechanics. Use a Micro Forex Account
It is widely accepted that when you put real money, then it is a real test of your performance because it has all the emotions attached like fear, excitement, patience, etc. as you have put your hard-earned money now.
That is why experts advise moving to a micro forex trading account so that you can make small trades. Mistakes and losses will teach you a lot which no book or a demo account can.
3.Learn about Currencies you Trade
Do not jump and start trading randomly being mad over the high leverages. Select some currencies, learn about them, do thorough research, and then trade so that you do not end up losing your hard-earned money.
Understanding what to buy, what to sell and when to buy, when to sell makes a big difference. Since there are a lot of currency pairs, it is always recommended to pick a few and focus on them only. It will be easy for you to focus on news events.
Again, it is very important to mention that managing emotions parallel to risk involved becomes difficult. So, if your greed or fear overtakes you, you might fail and incur losses.
Forex Trading: Final Thoughts
Therefore, it is always suggested to approach logically with an objective mindset maintaining patience. After you have been trading with a small account and you get a sense of what you are doing, then you can increase the amount.
Finally, don’t forget to control your emotions before becoming a successful forex trader. Remember, huge risks are involved in forex trading, so act very cautiously.