When it comes to investing, the foreign exchange market is a great option. It is growing so fast that Compare Forex Brokers reports it to be worth $2.409 quadrillion this year.
You have probably thought about trying out forex trading, too, especially now when everyone’s trying to find means to work from home.
But what is a forex, and how do you go about it?
If you’ve been asking yourself that question, here is a quick guide to provide you with the most important answers.
What is Forex Trading?
Forex trading refers to buying and selling of currencies to make profits. These transactions are based on predictions of changes in the exchange rates. Since this kind of investing is quite risky, you need a good understanding to begin.
To learn, you should consider an online forex trading course to help you gain the necessary knowledge and experience. You can even get a diploma in professional forex trading taught by experienced bankers and currency traders. Such education exposes you to the market, forex guidelines, potential changes, and risk management.
You should also find a reputable forex service provider with learning software and trading simulations. With such tools, you can test your knowledge at a practical level without using actual money. Once you are confident that you have enough skills, you can begin your journey into forex trading.
Benefits of Forex Trading
Forex comes with several benefits. First, it is a twenty-four-hour market of opportunities. Therefore, you can trade whenever you want, depending on the market’s timeline. It is also huge; thus, you are not limited to specific currencies.
Secondly, you get your money immediately after the transaction is complete. Unlike in investments where you hold actual property, forex is entirely liquid. You can therefore access your funds anytime you want.
How to Trade: The Basics
In forex, you trade currency pairs. For example, USD/CHF, here USD, the US dollar, is the base while CHF, Swiss Franc, is the quote. For transactions, you will buy when you predict that the currency base will increase in value and sell when you expect a drop.
Whom to Trade Through
Since this is a broad market, there are many ways you can deal with currency exchange. The first is trading through a broker. In this case, you don’t take actual ownership of the assets; rather, you open a position and complete the transaction. The broker deals with the bank on your behalf. While this reduces your workload, it keeps you from accessing other markets.
Another option is trading through a Contract for Difference (CFD). Once the deal is closed, you get your cash settlement. In addition, trading through CFD lets, you take advantage of leverages. Here, you only pay a small upfront percentage while your provider ‘loans’ you the rest. This helps you increase your exposure for higher returns.
When to Trade
Spot forex is where you trade in a particular instance over-the-counter. You make a decision, and you complete the transaction immediately. It could either result in instant profit or loss. You can take a short position when you feel the base currency might lose value in the nearest future.
However, if you feel that the base currency could increase in value, hold a long position. You can then trade at a later time for a specific price. This is called the forward forex. If you wish to make the transaction legally binding, you can draft a contract that makes the arranged transaction forward forex.
Risk management
The forex market is highly volatile. This is because many drastic changes occur all over the world that affects the market. For example, currency fluctuation in one country can force their central bank to increase interest rates. This causes sudden changes in the forex market. Since these are issues you cannot control, you need to have a trading plan.
Keep Yourself Updated
Once you have decided to join the market, you need to keep up with international business and political matters. Business news from the currencies you wish to trade will inform you of expected changes that could impact rates. For example, if a country is facing an imminent fluctuation or if there is an investment rush. Even fiscal policies by governments can impact the forex market.
Use Loss-prevention Measures
First, you can use leverages when trading with CFD. Using leverages means that you can invest up to 1% of the total bid while your provider covers the rest. Therefore, in case of a loss, the impact on your side may not be significant. It is, however, important that you keep leverages manageably low to minimize potential loss.
Secondly, set limits for yourself. Unlike as popularized in the media, forex trading calls for a lot of patience. You should set limits that control how and when you transact. For example, when the forex market closes for the weekend, changes can occur in the prices since big companies and governments are still working. Such a market gap could either result in huge profits or losses. Therefore, you ought to keep your investment safe by either closing your position or placing a “stop loss.” You can then resume from a more informed standpoint when the market opens.
If you’re interested in forex trading, then keep the tips and steps we’ve just discussed in mind. Take time to learn about forex trading and how to mitigate market risks. How you approach forex trading will determine your success.
