Learn to Trade Forex – All About Forex Trading
Trading Forex is neither a video game nor a casino game. You need to know the basics of trading to be able to move in the right direction and be aware of the risks associated with trading.
This guide to Forex Trading was written for beginners, with an educational and evolutionary approach. The goal is to introduce you to how to trade Forex and what are the mistakes that the beginner trader must avoid to increase his potential for success.
What is Forex: The Definition?
Forex is the market (or FX Market) where the currency of one country is exchanged with the currency of another country.
It is also the largest financial market in the world since its volume is more than 6,600 billion dollars per day (Source: Bank for International Settlements).
Money is also extremely important in the real economy. Companies need the Forex market to carry out their international business operations, by paying an invoice in a currency other than their own, for example, while individuals use it to change their currency before traveling or to buy goods in another country on the Internet. If you have traveled to a country outside the euro zone, you must have exchanged euros for another currency at an exchange office. If so, then you have already participated in the variation of the price of a currency pair, without necessarily realizing it.
On the Forex market, currencies are traded over the counter between participants, which means that no central entity is involved. The Forex market is a decentralized market.
In Forex, the prices of currencies constantly fluctuate against each other, even at night. This constant fluctuation in currency prices has given rise to speculation and Forex trading.
What is Forex Trading?
Concretely, what is currency trading? Trading Forex involves speculating on the fluctuation of currency prices.
As currency prices fluctuate up and down, the Forex trader will seek to take advantage of these movements to make money by buying and selling a currency pair.
For example :
if the Forex trader anticipates a rise in the euro against the dollar, he will buy the EUR/USD pair.
if the Forex trader believes that the Euro should fall instead, he sells the currency pair.
Find an example of Forex gain and loss explained later in the article.
A gain is recorded when the trader has made a good prediction, while a loss is incurred if the trader is wrong.
Forex predictions for buying and selling a currency pair are made based on economic analysis and/or charts, which we will see later in this article.
One of the riskiest investing strategies is still Forex trading. Trading activity can be very lucrative, but you have to learn how to trade and control the risks.
The best way to do this is to practice on a risk-free demo account with virtual currencies under realistic market conditions while following these Forex courses.
Why Learn Forex Trading?
When retail trader is looking to invest money, they are first and foremost looking for optimal trading conditions and recognized techniques for making money. Forex allows both to trade in excellent conditions. Its popularity has allowed many traders to exhibit their techniques.
Thus, the Forex market is:
- Ability to buy or sell currencies: Whether you think a currency will go down or up, you can invest your money either way.
- Diversify your portfolio: Low barriers to entry into Forex trading. Unlike the stock market which requires a lot of capital, online Forex trading can be tackled with just a few tens of euros.
- Liquidity of the Forex market: Since this market handles the largest daily volume, investors can open and close a position extremely quickly.
- Hours: the Forex market is closed only from Friday evening at 10 p.m. until Sunday evening at 11 p.m. Yes, you read correctly. The Forex is open from Sunday at 11 p.m. to Friday evening at 10 p.m. It is therefore a market open 24 hours a day most of the time!
- FX market volatility: currencies are very sensitive to market announcements, such as a change in monetary policy or an increase in key rates. Since the economic calendar is provided every day, the volatility in the Forex market is high. Also, this market deals with a multitude of operations every second. Thus, the volatility is all the higher.
- The possibility of trading with a leverage effect: this tool allows you to invest part of your capital and have the other part lent to you by your broker. Be careful, leverage is a double-edged sword: increasing your profits as well as your losses.
- Whether you practice scalping, day trading, or swing trading, Forex trading is open to all trading styles. However, be sure to check if scalping is allowed by the broker.
What are the Risks of Trading and Forex?
- Financial risks
- Transactional risks
- Counterparts risk
Forex trading has several advantages that we have highlighted in this article, but you must not forget that this market involves risks that can have big consequences.
This is surely the most dangerous risk. Forex has a bad reputation because it is a market allowing the use of leverage. Leverage is a double-edged sword. It certainly increases the gains, but also the losses. Be careful. Invest funds that you do not need, whether for Forex Trading or for stock market investments. Under no circumstances should you invest money used to finance your daily life (bills, rent, credit, food, etc.).
When the market is extremely volatile, the price at the time the order is placed and the price at the time the position is opened may be slightly different. In trading, this concept is called Slippage.
Counter party risk
Even though the ESMA regulatory requirements that came into force on June 1, 2018, protect retail investors of CFDs, you should be careful about the signature quality of your broker. See if it is regulated to avoid scams.
To be even more comfortable in your Forex trading, remember to learn the vocabulary associated with this market.