WHAT IS A FOREX? & HOW TO TRADE FOREX?
12 Mar 2021
WHAT IS A FOREX?
Forex is the marketplace where various world currencies are traded. The forex market is the largest and is the easiest to liquidate within the world, with trillions of dollars changing hands a day. there’s no centralized location, rather the Forex market is a network of banks, brokers, institutions, and individual traders Many entities, from financial institutions to individual investors, have currency needs, and should also speculate on the direction of a specific pair of currencies movement. They post their orders to shop for and sell currencies on the network in order that they can interact with other currency orders from other parties. The forex market is open 24 hours each day, five days every week, apart from holidays. Currencies should trade on a vacation if a minimum of the country/global market is open for business.
3 SIMPLE STEPS TO MAKE YOUR FIRST TRADE IN FOREX
- Select a currency pair
When trading forex you are exchanging the value of one currency for another. In other words, you will always buy one currency while selling another at the same time. Because of this, you will always trade currencies in a pair.
Most new traders will start out by trading the most commonly offered pairs of major currencies, but you can trade any currency pair that we have available as long as you have enough money in your account. For this walkthrough, we’ll look at EUR/USD (Euro/ U.S. Dollar).
- Analyze the market
Research and analysis should be the foundation of your trading endeavors. Without these, you’re operating on emotion. This doesn’t typically end well.
When you first start researching, you’ll find a whole wealth of forex resources – which may seem overwhelming at first. But as you research a particular currency pair, you’ll find valuable resources that stand out from the rest. You should regularly look at current and historical charts, monitor the news for economic announcements, check indicators and perform other technical and fundamental analyses. We’ll talk more about specific types of research later on.
- Pick your position
If you’ve traded stocks, bonds, or other financial products, you know that you can usually only speculate on the one direction of the market: up.
Forex trading is a little different. Because you are buying one currency, while selling another at the same time you can speculate on up and down movements in the market.
WITH A BUY POSITION you believe that the value of the base currency will rise compared to the quote currency. If you’re buying EUR/USD, you believe the price of the euro will strengthen against the dollar. In other words, you believe the euro is bullish (and the US dollar is bearish).
WITH A SELL POSITION, you believe that the value of the base currency will fall compared to the quote currency. If you’re selling EUR/USD, you believe the price of the euro will weaken against the dollar. In other words, you believe the euro is bearish (and the US dollar is bullish).
ADVANTAGES OF FOREX TRADING
A. Ability to go long or go short
While you’ll go short on other markets by using derivative products, like CFDs, short sale is an inherent part of trading forex. This is because you’re always selling one currency (the quote currency) to shop for another (the base currency). The price of a forex pair is what proportion one unit of the bottom currency is worth within the quote currency.
● For Instance:– within the forex pair GBP/EUR, GBP is that the base currency and EUR is the quote currency. If GBP/EUR is trading at 1.12156, then one pound is worth 1.12156 euros. If you think that the pound goes to extend against the euro, you’d buy the pair (going long). If you think that the pound will decrease in value against the euro, you’d sell the pair (going short). Your profit or loss will depend upon the extent to which you get your prediction right, meaning it’s possible to profit whichever way the market moves.
B. Forex market hours
The foreign exchange market is open 24 hours a day, five days a week – forex can be traded from 9pm Sunday to 10pm Friday (GMT). These long hours are because forex transactions are completed between parties directly, over the counter (OTC), instead of through a central exchange. And because forex may be a truly global market, you’ll always cash in of various active session’s forex trading hours.
It is important to recollect that the forex market’s opening hours will vary in March, April, October and November, as countries shift to sunlight savings on different days.
C. High liquidity in forex
The FX market is the most liquid market within the world, meaning there is an outsized number of buyers and sellers looking to form a trade at any given time. Each day, over $5 trillion dollars of currency is converted by individuals, companies, and banks – and therefore the overwhelming majority of this activity is meant to get a profit.
The high liquidity in forex means transactions are often completed quickly and simply, therefore the transaction costs – or spreads – are often very low. This creates opportunities for traders to speculate on price movements of just a few pips.
D. Forex volatility
The high volume of currency trades each day translates to billions of dollars every minute, which makes the price movements of some currencies extremely volatile. You can potentially reap large profits by speculating on price movements in either direction. However, volatility may be a double-edged sword – the market can quickly turn against you, so it’s important to limit your exposure with risk-management tools.
E. Leverage can make your money go further
CFDs are leveraged, which can make your money go further. Leverage in forex enables you to open an edge on the currency market by paying just a little proportion of the complete value of the position upfront.
The profit or loss you create will reflect the complete value of the position at the purpose it’s closed, so trading on margin offers a chance to form large profits from a relatively small investment. However, it also can amplify any losses, meaning losses could exceed your initial deposit. For this reason, it’s important to think about the entire value of the leveraged forex position before trading CFDs.
F. Trade a good range of currency pairs
Forex trading gives you the chance to trade a good sort of currency pairs, speculating on global events and therefore the relative strength of major and minor economies.
With IG, for instance , you’ll choose between over 90 currency pairs, including:
Major currency pairs, eg GBP/USD, EUR/USD, and USD/JPY
Minor pairs, eg USD/ZAR, SGB/JPY, CAD/CHF
Emerging currency pairs, eg USD/CNH, EUR/RUB and AUD/CNH
Exotic pairs, eg EUR/CZK, TRY/JPY, USD/MXN
G.Hedge with forex
Hedging may be a technique which will be wont to reduce the danger of unwanted moves within the forex market, by opening multiple strategic positions. Although volatility is a component of what makes forex so exciting, hedging are often an honest way of mitigating loss or limiting it to a known amount.
There are a spread of strategies you’ll use to hedge forex, but one among the foremost common is hedging with multiple currency pairs. By choosing forex pairs that are positively correlated, like GBP/USD and EUR/USD, but taking positions in opposite directions, you’ll limit your downside risk.
●For instance, a loss on a brief EUR/USD position might be mitigated by an extended position on GBP/USD.
Alternatively, you’ll use forex to hedge against loss in other markets, like commodities.
●For instance, because the USD/CAD generally has an inverse relationship with petroleum, it’s commonly used as a hedge against falling oil prices.
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