Forex Trading Essentials

Jul 8, 2020 06:55 PM ET
Forex Trading Essentials

What is Forex?

Forex stands for Foreign Exchange which is a process of buying and selling of one currency in exchange for another. Foreign Exchange or FX is a global market place for currency exchanges and is carried out for several purposes, mostly for investment purposes, trading, or commerce. It is one of the most heavily traded markets in the world because uncountable businesses, people, and even countries participate in it without having to start out with large capital.

A Brief History of Forex

Forex has been around since the day Nations started minting currencies. Unlike stock markets, the foreign exchange market is fairly new which involves people converting one currency to another for financial benefits. Modern-day Forex markets are a modern invention. Right after the Bretton Woods accord in 1971 several major currencies were allowed to float freely against one another. The values of these individual currencies differ which initiated and rose the need for Forex trading and services.

How Currency Pairs work

Currencies are always traded in pairs in the FX market. To understand which currency you are purchasing and which one you are selling look at how the currency pairs work:

  • A currency pair is listed in an order

  • The 1st currency which is listed is the ‘base’ currency

  • The 2nd currency which is listed is the ‘quote’ currency

  • The action you take on the pair has a direct effect on the Base currency. It affects the Quote currency inversely. 

  • When you are trading, you are buying one currency and selling another.

There are specific names - ticker symbols created for each currency pair. For example, USD stands for US dollars; Euro is denoted by EUR. That is why the Euro/US dollar pair is denoted by EUR/USD. Some of the other commonly traded currency symbols include GBP (British Pound), JPY (Japanese Yen), CAD (Canadian Dollar), AUD (Australian Dollar), CHF (Swiss Franc) and NZD (New Zealand Dollar).

Forex Speculation Haven:

Forex markets are highly volatile and there are several reasons responsible for this. Economical data like GDP growth, consumer confidence, manufacturing activity, interest rates, trade flows & geopolitical risk have an influence on the supply and demand of a given currency. It may change immediately, causing up/downside price swings.  This volatility creates a perfect opportunity to gain from changes using your trading skills. 

There are some currencies that are considered safe havens when compared to others. When markets are volatile, currency traders and investors can think about converting holdings of cash to these currencies for protection. For example, The Swiss Franc is a safe haven currency. Considering the stability of the Swiss government and the financial system, the currency faces upward pressure due to an increase in foreign demand.

How to Start Trading Forex:

Try paper trading first: 

Paper trading is a term that comes from the stock exchange market where for practice investors would write down their investments on a paper and follow the market movements. As a new trader, it is a great way to get your feet wet in trading to kill the feeling of hesitation and the concern of losing money. This is because every type of trading has a risk factor but paper trading lacks risk and allows new traders to practice new strategies and learn the basics. Now, this is commonly known as trading on a “demo account”.

Forex Trading

Learn Technicals and Fundamentals: 

Traders should educate themselves on both the fundamental and technical elements which affect the forex market. They should take into account various factors such as inflation rate, interest rates, GDP, and other economic data to assess the well-being of a country and as a result its currency. Technical aspects such as pattern recognition on a price chart and being aware of the different indicators and oscillators are also important. 

Use Indicators: 

Use indicators and learn how to use them properly to avoid losing money. They help to foretell price changes on the currency market which you can use to determine your market entry and exit. The ideal indicator or a group of indicators will be the one that suits your trading style and psychology.

Choose a reliable broker: 

It is extremely crucial for you to opt for a reliable broker or you may lose large sums of money. This is so because Forex does not operate using a centralized market like other markets. If you wish to trade Forex you will have to employ services of any of the many brokers available to you. Make sure the broker is reliable and best suited for your needs and objectives and they will handle your money with care even if it is a small sum.

What is Forex EAs and does it make sense to use a trading robot?

If you’re are a newcomer searching for help - look for trusted and reliable tools, such as EAs,  that can help you on your way. In the Forex industry, EA stands for Expert advisor. This is a software that informs you of the best time and price to carry out trades or just carry out a trade automatically in accordance with the programmed instructions.

EAs are nothing but trading robots that are designed to help you make profitable trades. So yes it absolutely makes sense to use trading robots. They offer several advantages that can back this claim. Some of them include:

  • Forex markets are open 24/7 somewhere in the world, 7 days a week. You can use an EA to trade even when you are sleeping or can’t be physically present. Therefore no opportunities lost.

  • It reduces your stress levels if you are a full-time trader who needs a break at times.

  • Using an EA means the elimination of human emotions which results in unbiased trades and higher profits.

The Bottom Line

Forex traders with limited funds can try swing trading or day trading in small amounts. Those with larger funds and with long-term trading desires must understand the macroeconomic fundamentals which drive currency values. To trade profitably, they should ideally gain experience in technical analysis from experts. 

Therefore, a trader needs to first have a big-picture knowledge & understanding of the economies of different countries. They should also know the inter-connectedness so that the fundamentals are grasped which drives currency values.

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