With over 3.2 trillion every day turnover, Forex market has become one of the hottest and most liquid trading markets in the world. This market’s liquidity charm is not just attracting first time traders with no financial background but also experienced, traditional market traders.
If you also wish to try your luck at Forex trade, then this article is a good read for you! It covers all you need to know about successful Forex trading.
What is Forex?
Forex stands for foreign exchange. It is the market where traders speculate the value of one currency against the value of another. Unlike the traditional financial markets where equities are traded such as bonds and stocks, foreign exchange exclusively deal with trading currency pairs through online foreign exchange brokers.
The most commonly traded pairs in the Forex exchange market are EUR/USD, GBP/USD, USD/JPY, EUR/GBP, AUD/USD and USD/CAD. These pairs are known to generate about 85% of the total Forex trading market.
How Does It Work?
To trade in this world, you first need to choose a currency pair and then predict the strength of currencies against one another. The first currency in the pair is called the base and the second is known as the quote. The trading pair is expressed in the units of the quote.
Let’s take an example to understand it in a better way. Suppose you choose GBP/USD pair to trade. Here GBP is the base and USD is the quote. If the quote is 1.5673 units, this means you need 1.5673 USD to acquire 1 GBP.
Here are some interesting features that make it different from the traditional security markets.
To buy and sell pairs in this marketplace, you don’t have to pay a commission to the online broker. The broker is remunerated through a bid spread on each trade whereas in the bond marketplace on every purchase of a bond, the investor has to pay a commission to the broker.
The leverage offered in this arena is outstanding. You can easily control a large total contract value and enjoy high profits. The broker offers you a margin trading ratio. This enables you to leverage your small deposit immediately into large returns. However, you should know that the leverage ratio differs from broker to broker. Some brokers may offer a margin ratio of 200:1 while some may offer 300:1. You can choose a broker according to your needs.
Let say a broker offers you 200:1 margin ratio and you make a deposit of $500. This means you have a chance to leverage your small deposit sum into a total value contract of $100,000.
This is one of the many features that have significantly contributed to the booming popularity of this arena. Unlike stocks and bond markets which are centralized and have limited trading hours, it is not centralized and trades are carried 24/7 and 5 days a week. It is closed only on the weekends. This enables you to go long and short anytime you want and secure successful trades and earn juicy profits.
Foreign Currencies Buying and Selling Psychology
To buy and sell currencies successfully on this ground, you need to make smart investment decisions with your mind by keeping your emotions at bay. Greed and fear are considered to be two psychological emotions that often make traders make bad investment decisions. Due to fear of losing, traders often let go of some of the best profit maximizing opportunities while the greed factor often entices traders to take higher risks more than they can bear and eventually when they lose they have to suffer from a big loss and eventually quit the game.
To ensure you make intelligent buying and selling decisions, you need to master the art of risk management. This will help you manage and mitigate risk and amplify profits quickly.
Fundamentals of Money Trades
For profitable trades, you need to know the fundamentals of money trades. This includes all those factors that impact the value of the paired currencies, be it directly or indirectly including factors like the macroeconomic scenario, monetary policy, interest rates, economic growth trends, GDP, CPI, employment factor and commodity prices.
By keeping abreast of these factors you’ll be able to perform a better market analysis and speculate the money trends with precision.
Word of Advice
For beginners, it is advisable to create a demo account and practice on it first. This is a good way to test the waters, experience the real world volatility, learn a few basic strategies and gain some skills before committing real money.