Looking to start a career in trading by diving into the Forex market? Read the article below before starting trades to learn the essential key points of Forex Trading.
Beginner’s Guide to Forex Trading
The term ‘Forex’ is portmanteau of the words “foreign currency” and “exchange.” Forex trading occurs in a decentralized market operating via interbank transfer.
It is the transaction of foreign currencies as people generate rewards, forwards, and profits. In an over-the-counter market that is trending globally, numerous currency transactions occur. Investors sell and buy currencies in the form of currency pairs.
Reports suggest that the decentralized Forex market generates a regular turnover of five-trillion US dollars. Some of the traders in the Forex markets include multinationals, central and commercial banks, along institutions of investors. Together, all of them trade on the Forex market.
However, underestimating financial instructions and education before you start trading on the Forex markets is unwise. Keep a few things in mind when opting for Forex trading, especially if you’re a beginner.
Importance of Forex
The basic concept is that it is the conversion of one currency into another (for instance, us dollar into sterling pound). You can take the example of tourism. Every country has its own currency, and the currency’s rate of exchange keeps fluctuating. Suppose you leave your country to visit another for the purpose of recreation and tourism.
You will need to exchange your home currency into the currency of the place you’re visiting. This allows you to make transactions for as long you are in that country. Thanks to a foreign exchange market (Forex), this is possible. Commercial and trading reasons are also present.
How does Forex Trading Works?
You simultaneously buy one currency and sell the other, or vice versa. The Forex market is open twenty-four hours and five times a week. This is due to the lack of a central location to operate this over-the-counter market. The process works like this: create an account, deposit funds, find a Forex broker, and select the currency pair you want to trade. Then, you can finally start using the Forex broker’s platform to buy and sell the currencies.
Explaining Forex Market
The Forex market works with the valuation of one currency in terms of another. Simply, appreciation and depreciation. For example, if US dollar holders start converting their funds into UK pounds due to high demand. This will lead to an increase in the value (appreciation) of the UK pound and a decrease in the value (depreciation) of the US dollar.
Now, fewer UK pounds can buy more US dollars. This attracts potential investors who see an opportunity to make a profit.
Common Terminologies for Forex Trading
Not knowing common terms of the Forex market can make for a difficult trading experience. The following are some of these terms:
Bid and Ask Prices
You receive the bid price when selling a currency. Similarly, you pay the ask price when buying a currency.
Pip
A pip represents the exchange rate difference in a currency pair. It is often the fourth decimal place or an equivalent of 1/100 or 1%. For example, if US Dollar moves from a value of $1.4456 to $1.4486 against a Euro, then the pip calculates to 30.
Leverage
Amplifying your gains or your losses, leverage in Forex trading allows you to trade large sums of currency on fairly low deposits. This is, of course, on your Forex broker’s arrangement/ agreement.
Bull and Bear Market
A bear market is when the stock value is moving downwards, also called “bearish market”.
A bull market is when there is an increase in the value of stocks, either representing an individual or a sector of stock in the market.
Now that you’re familiar with common terms of the market, it’s time to understand the potential risks of trading on Forex.
Some Potential Risks
Here are a few potential risks to consider:
Interest rate
If your country increases its interest rate (IR), it attracts foreign investments. This increases the demand for your country’s currency, resulting in an appreciation. You can use this strengthened currency to buy more of the other currency or currencies. However, keep in mind that this can go the other way around.
Leverage
Your benefits and losses magnify based on the scale of leverage you use to invest in the Forex Market.
Risk of Transaction
This refers to the time differences of various countries on the Forex trading platform. As the times vary for many countries, a change in the exchange rate can occur at any time. For example, the exchange rate for your currency trading pair may deteriorate just when you settle a trade.
Final Thoughts
You can make use of the information and tips above to explore the Forex trading market. Many Forex brokers provide “micro Forex trading accounts.” These accounts help you make small investments in the market before you use your own funds for huge investments. This will minimize risks to help you learn a few of the market’s tactics and trends.
