The foreign exchange market popularly shortened as the forex market is a transaction that involves the exchange of one currency into another. This process is performed for a lot of reasons including for commercial purposes, tourism, and in transactions involving two countries with different currencies i.e. to enable international trade.
The forex market is the most traded in the world with over $6 trillion traded daily volume. Currency traders or speculators buy currencies hoping that they will be able to sell them at a higher price in the future, this way traders go long hoping a currency pair will rise or go short hoping a pair will fall.
The forex market which is open 24 hours a day, 5 days a week, starts when traders wake up in Auckland/Wellington, then moves to Sydney, Singapore, Hong Kong, Tokyo, Frankfurt, London, and finally, New York, before trading starts all over again in New Zealand. Different trades from around the world can participate in the market trading in the timing session that best suits them.
Forex currencies are traded in pairs with one currency being the base while the other being the quote currency i.e. EURUSD. in this example the EUR shortened as EUR is the base currency while the United States dollar is shortened as USD is the quote currency.
An interesting aspect of the forex markets is that there are no physical venues for trading these markets. Instead, all buying and selling happen electronically, made through a series of connections, trading terminals and computer networks. Participants in this market are institutional traders, investment banks, commercial banks, and retail investors.
This article will be based mainly on beginner retail investors. To be a retail forex investor it is mostly required to be signed up with a forex trading brokerage, a brokerage serves as an intermediate between a liquidity provider and a retail trader. A brokerage also helps manage accounts and funds by providing a safe and secure method to save, deposit, and withdraw funds. Another good thing about signing up for a forex brokerage is the aspect of leverage, a brokerage helps in leveraging a trader's deposit thereby increasing the available margin to trade. Leverage works by potentially allowing a trader to enter a higher trade position, this helps in potentially increasing profit. Forex brokerages also provide knowledge and trading tips for their clients, all this makes trading easier and beginners friendly for retail traders to participate.
The forex market can be traded in varieties of ways which include. The spot, the futures and the forward market. Most traders trade the spot, as their trades are executed instantly at the available market price.
Trading has been made easier than ever with the innovation of advanced technologies, traders now have the advantage of trading from the comfort of their homes using a personal computer or even their smartphone. All that is needed is signing up with a broker, having a trading terminal and access to the internet.
Retail trader trade by firstly knowing what pair to trade, then speculating which direction to trade, this can be done by analyzing the chart which can be a candlestick chart or line chart, a method known as technical analysis or employing fundamental analysis, a method that involves analyzing the economic state of a countries currency. Technical analysis involves synthesizing one's chart using some tools to one's advantage such as trend lines, Fibonacci, the moving averages, marking out supply and demand zones and other technical indicators. While in the case of fundamental analysis one needs a reliable source of up-to-date economic news and events happening in countries around the world.
Trading in the forex market is a great way to diversify one's portfolio as there are a lot of instruments to be traded, this includes currency pairs such as EURUSD, GBPUSD, USDJPY, commodities such as gold, and indexes such as the nas100, among 100s of others tradable instruments. Each tradable instrument has different volatility, this should be considered when day trading. Volatility refers to how much volume or movement is expected from an instrument. Some factors move the forex market, which are mainly supply and demand. Other factors responsible for forex price changes include interest rates, central bank policy, important key speeches, and a country’s political and economic state.
After knowing the direction to trade, a trader needs to know what kind of trade they are going for either short term which means holding on to a trade for a day or few days, or long-term trading which means holding on to a trade for weeks or months. All this has to be in the trader's trading plan and strategy.
A trading plan is a written document which serves as a guide for one's trading career, a trading plan has to be well documented and should contain the kinds of trade one is going to take either position trades, swing trades or day trades. The entry and exit plan for our trades, risk management such as how much is to be risked on a single trade, and also plans for all other situations we could find ourselves when trading should all be found in a trading plan.
Forex trading comes with some potential risks of losing money, this should be managed by sticking to a good risk management plan. Having a stop loss order in place is a way of reducing drawdown, stop loss order is a set price at which a trade is automatically closed after taking a certain amount of loss. This works well if one's analysis is wrong and the market starts to move in the opposite direction of our trade.
Being a successful trader requires a lot of dedication and dealing with the emotions that come with trading all this involves having the right knowledge and mindset. Forex trading is a skill which takes time and practice to learn and master. After acquiring the right knowledge and having a trading strategy and plan, it is advisable to first practice trading the plan and strategy on a demo and risk-free account before proceeding to trade on a live account. this helps in testing out a strategy or plan, which is adjusted if necessary, till the desired result is obtained.
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