Forex trading is just one of the selections you can choose when it comes to trading. But before you start trading in forex, let us discuss first the basic necessities in forex trading.
As a beginner in trading, you might hear the term “forex” and you’ll get confused on the meaning of forex. You don’t have to worry about that anymore, because we’ll teach you the basic way to learn about forex.
What is Forex?
The word “forex” or “FX” stands for Foreign Exchange. It refers to the buying or selling of one currency for another.
Forex is the most heavily traded market in the world as people, businesses, and other countries all partake in it. When you go on a trip to other country and you convert your money to the state’s currency, you’re already participating in the global foreign exchange market.
Meanwhile, in the forex market currencies are always traded in pairs. For every foreign exchange transaction, you must exchange one currency for another. That is why in forex market they use currency pairs, so you can see the cost of one currency relative to another. Also, forex market can be referred to as FX Market, Currency Market, Foreign Excahnge Currency Market, or Foreign Currency Market.
Take note that in forex market they use symbols for currencies. USD stands for U.S. dollar and EUR symbolizes the euro. There are other currency symbols: JPY is for Japanese yen, CAD stands for Canadian dollar, NZD for New Zealand dollar, CHF is for Swiss franc, AUD stands for Australian dollar, and GBP is for British pound.
Each of these forex pair will have a market price linked with it. The price refers to how much of the second currency it takes to buy one unit of the first currency. For example, if the price of the EUR/USD is 1.3663 it costs 1.3663 U.S. dollars to buy one euro.
One of the best ways to learn about forex is to see how the prices move in real-time.
What is Forex Trading?
Forex trading is the speculation on the price of one currency against another.
For example, if you think that the euro will increase against the U.S. dollar, you can buy the USD/EUR for a low price and then you can sell it for a higher price to make a profit.
However, if you bought EUR/USD and the U.S. dollar strengthens, you will be in a losing position. That is why it is so important to be aware of the risks involved in Forex trading.
In addition, the foreign exchange market has over 5 trillion dollars’ worth of currencies that are traded worldwide. This makes forex a highly liquid and dynamic market.
With high market liquidity, it means that prices can change quickly in response to the news and short-term events. This actually produces various trading opportunities for retail forex traders.
Skills of a Forex Trader
To be a successful trade in forex, it takes a lot of time and patience. It doesn’t happen in just one day. You need to have the skills to get there.
Here are some skills you might need in the forex trading:
- Patience – You’ll need a lot of patience in forex trading, because you have to wait for the only highest-probability trading strategies.
- Confidence – When you start trading in forex you should have the confidence in you since forex trading is not that easy.
- Realism – You shouldn’t think that once you started trading in forex you’ll be rich instantly. It takes time to be on top or succeed. You have to work hard to reach the top and to be best in forex trading.
- Devotion – If you want to do well in forex trading, you should be devoted in trading.
- Flexibility – You need to be flexible to trade in the changing market conditions.
Advantage and Disadvantages of Forex Trading
Forex trading, like most of trading activities, has its pros and cons. Here are the possible advantages and disadvantages you could find or encounter in forex trading.
It is true that there some risks to forex trading, but there are also some advantages that can help you along the way.
- Leverage – An access to leverage can actually make a difference between small gains in trading and sizable ones. The access of resources for leverage in the forex market is larger than other markets. Traders can obtain access to margin that allows leverage of 100:1 or more, for initial capital invested in a trade.
- Accessibility – Forex market is one of the most accessible markets for individual traders. Traders can create a forex account within one to three days. Trading through brokerages can be done online. In addition, with online trading platforms, traders can access the real-time market pricing, price charts, tools and strategies. The forex market is also open 24/5, meaning trading in forex can easily fit into the schedules of traders.
- Liquidity – The forex market is the biggest market globally by volume. This implies that there is typically an ample liquidity for trading, especially in major currencies. Traders who are working with the trading desk model at forex brokerages are usually offered sufficient liquidity for trading. Meanwhile, the brokerage will take up the opposite position of a trade when the liquidity is scarce in other parts of the market.
- Possible Fast Returns – The forex market is fast moving and has a deep liquidity. These characteristics plus the high leverage it would result into much faster returns in the forex market.
- Easy Tax Rules – Traders in other markets have to keep track on their short and long-term trading activities for tax reporting. But in forex trading it is often subject to more simplified tax rules that can make tax calculations easier.
Of course, if there is advantages in forex trading there are also some disadvantages that you should know about before you start trading.
- High Volatility – Without control over macro-economic and geopolitical developments, one can easily loose huge in the highly volatile forex market. Forex traders who hope for short-term profits may be exposed to unexpected extreme volatility. This can make their trading strategies unprofitable.
- Self-Directing Learning – In the stock market, traders can ask for professional assistance. While in forex market, traders are on their own with no one to assist them. That is why in forex trading, disciplined and self-directed learning is a must throughout your trading career.
- Fewer Residual Returns – Stocks and bonds are frequently making scheduled interest and dividend payments that enhance the long-term value of buying an asset. Forex trading customarily aims mostly at obtaining capital gains from appreciation of one of the two currencies in currency pair.
However, you should know that forex positions held overnight could yield, or pay, interest. That depends on the difference in interest rates practiced in the countries issuing the currencies bought and sold. This interest is referred to as “rollover” or “carry” interest.
- Lack of Transparency – Being broker-driven means that the forex market may not be fully transparent. A trader doesn’t have any control on how his trade order will get fulfilled or may not get the best price as provided only by his selected broker. The regulators may not regulate the market, but the activities of brokers are.
- Lighter Regulatory Protection – The forex market is an over-the-counter market, which means that trades are not carried out on a centralized exchange. Sometimes regulatory oversight is even limited. As a result, traders may need to do a “due-diligence” investigation of the reputation of their chosen broker before opening an account.
Being a forex trader offers the most amazing possible lifestyle of any profession around the world. It it might not be easy to get there, since it takes time and patience. But if you are determined, you can make it happen and succeed in the field.
That is why it is important for you, as a trader, to know the pros and cons if you are planning to trade in forex. It may take time to learn all of these, but we assure you that in the end it will be all worth it.
Succeeding in forex trading or any other trading takes time and hard work. It just doesn’t happen in one day. You have to work for it to reach the top. Just don’t give up easily because of the risks you are seeing beside you. You just need to learn how to conquer them.
Forex trading has some risks that will might make you think twice about it. But once you get to know more about this type of trading, you’ll be surprised at how easy it is to earn profits without needing to exert too much effort.
Remember to do your research before making any final decisions about entering the field of forex trading.
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