The forex market is the largest financial market in the world. Its volatility, high trading volume, and liquidity provide numerous opportunities for speculators to trade daily. However, if you’re new to forex trading, you probably have many questions and concerns that need to be addressed.
This article will discuss the details of foreign exchange trading – how it works, how you can earn from it, and so much more. If you need answers to questions relating to the forex market, then read this article until the end.
What is Foreign Exchange Trading?
Foreign exchange refers to the exchange of currencies for reasons such as trade or business. The foreign exchange market is a financial market in which currencies are traded and exchanged. This was initially exclusive to banks and financial institutions, but in recent times, retail traders can access the forex market once they register on a forex trading platform.
In forex trading, currencies are traded in pairs, and you have to buy one currency and sell the other simultaneously. The value or price of a currency is controlled by a variety of factors, mainly the supply and demand for the currency and the political and socioeconomic atmosphere in the home country. In addition, the banks and financial institutions usually have a massive volume of orders, which influences the price of a currency by affecting its demand and supply.
If a country experiences an economic boom, investors come in to invest, leading to an increase in the demand for the currency, leading to its appreciation.
As a trader, you need to holistically analyze the foreign exchange market and determine the likely direction of a currency’s price.
How Does Forex Trading Work?
Forex trading allows you to profit from exchange rate fluctuations. If you believe that a currency’s value will increase, you can buy that currency and sell a weaker currency simultaneously. These trades can be executed on a brokerage platform or forex trading platform. There are three ways to engage in forex trading;
- Spot Trading
Spot trading occurs when you trade currencies in a forex pair at current prices. The currencies are exchanged in real-time, and their values are influenced by supply and demand.
- The Forward market
The forward forex market allows traders to enter into private contracts to exchange currencies at a specific price and a specified date. The terms of the trade are determined by the parties involved.
- The Futures Market
The futures contracts are standardized contracts executed on exchanges. The contract sizes and settlement details are predetermined and legally binding.
The majority of retail forex traders execute spot trades on forex brokers. The currency pairs traded can be divided into three categories: major pairs, minor pairs, and exotic pairs.
Major currency pairs are pairs that contain the US dollar. Examples are EUR/USD and USD/JPY. Major pairs are the most widely traded currency pairs.
Minor currency pairs are cross pairs consisting of currencies of developed economies, excluding the US dollar.
Exotic pairs contain currencies from emerging economies paired with a currency from a developed economy. Examples are AUD/MXN and USD/ZAR.
Forex Trading vs. Stock Trading
While forex trading provides access to currency trading and exchange, stock trading allows retail traders and financial institutions to speculate on the price of blue-chip stocks and penny stocks. These are stocks of large, mostly multinational corporations with enormous market capitalization. Trading the stock market requires a broker (just like forex trading), but some stock traders use ETFs – exchange-traded funds. There are four main differences between forex and stock trading;
- Trading Volume
The forex market has a larger trading volume than the stock market. This is because there are many participants in the forex market with numerous tradable currency pairs. However, the stock market has a lower volume of tradable assets, with fewer participants.
- Trading Hours
The forex market is open to retail traders 24 hours a day for the five working days of the week. However, the stock market has a set timetable, and the opening hours differ for different exchanges and brokers.
- Volatility
The stock market is less volatile than the forex market. Volatility measures the extent of price movements that occur in an asset. The forex market is highly volatile because it reacts to daily news and economic data.
- Liquidity
The forex market is more liquid than the stock market due to the numerous participants. This makes it easier to execute trades and find counterparties to your trades. For example, if you want to sell a currency pair at a specific price, there is usually someone in the world willing to buy at that price and vice versa.
How to Earn In Forex Trading
To earn in forex trading, you need to forecast price movement by analyzing the technical forex charts on a forex trading platform. Besides technical analysis, you also need to carry out a fundamental analysis of the currency pair. This involves examining the news and economic data associated with the currencies to be traded. Once you have done these analyses and come up with a bias, you have to execute trades or make forex investments in line with your research. Then, you can earn if the currency’s price moves in your favor.
In a currency pair such as EUR/USD, the first currency (euro) is the base currency while the second (US dollar) is the quote currency. If the base currency is stronger than the quote currency, you BUY the currency pair. If the quote currency is stronger than the base currency, you open a SELL trade.
Is Forex Trading a Good Idea?
The decision to trade forex is entirely up to you. Fortunately, you can trade the forex market on a demo account to simulate live trading conditions. Demo trading helps you envision yourself as a trader and ultimately determine if forex trading is right for you. But, of course, you also have to consider the effort and hard work required to become consistently profitable and decide whether or not you’re willing to put in the work.
Can You Get Rich Trading Forex?
Forex trading has enormous profit potential. You can get rich trading forex, but it isn’t a guarantee. As a trader, how much you earn depends on your discipline, hard work, and dedication to learning how, successful traders think and operate. The journey to becoming a consistently profitable trader can be strenuous and challenging. Nevertheless, if you stay focused on your growth as a trader, you can grow into a successful trader and amass wealth in no time.
How Do I Start Trading Forex?
If you want to start trading forex, then you need to follow these five steps;
- Educate Yourself
If you want to learn forex, you need to begin by educating yourself. Learn the basics of trading and understand the fundamental concepts such as; pips, leverage, limit orders, and other terminologies relating to forex.
- Develop a Trading Strategy
Once you have learned the basic concepts, you need to develop a trading strategy or adopt an existing one. There are a variety of resources to learn from – ebooks, courses, and video lessons. Before choosing a strategy, make sure that it’s a profitable strategy used by professional traders.
- Register on a Trading Platform
After learning a strategy, you need to register on a forex trading platform to execute your trades. As a new trader, you can open a demo trading account and use this to simulate live trading and gain mastery of your trading strategy. Once you have consistently profitable results over time, you can fund a live account on your trading platform and execute live trades.
- Develop a Trading Plan
Once you’ve registered on a brokerage platform, you need to develop a trading plan. The trading plan is essentially a set of rules and instructions that will guide your trading decisions. This helps you remain disciplined and get consistent trading results by following the same rules and criteria every time.
- Execute Trades
You can execute trades on a brokerage account if you have a trading plan and a profitable strategy. Ensure you use proper risk management by pre-determining your risk per trade and controlling losses with a stop-loss order.
Start Trading Forex Online with Decode Global
Forex trading is a great way to accumulate wealth. However, becoming a consistently profitable trader requires effort, hard work, and consistent practice. If you are determined to succeed as a trader, then sign up on a forex trading platform and start learning about the forex market today.