Forex trading – this article is basically written to teach you the basics of the Forex market and Forex trading in a more succinct and explicit way. After reading this article, you’ll have a solid understanding of the Forex trading and forex market.
A brief history of the Forex market
Before we jump into frying a fish, let’s take some time out to know how the fish came into existence. If you find this part boring to you, go ahead and skip it, but I recommend you be patient and read everything in order to get the complete basic knowledge of what Forex trading is truly about. This part is going to be a short one.
Something called the gold exchange standard was introduced in 1876. This system was designed with the sole purpose of backing all paper currencies by solid gold. The main idea was to stabilize all currencies by pegging them to the price of gold. In theory aspect, it was a good concept but in the real world it led to some boom-burst patterns which caused the extinction of gold standard.
The gold standard was put out of place at exactly the beginning of World War 2; this is because most European countries at that time did not have enough gold to support the paper currencies they were using to pay for their large military projects. Worth knowing, even though the gold standard was put out of place, it never lost its place as the ultimate means of monetary value.
The Bretton Woods System
Subsequently, the world decided to have a fixed exchange rates which led to the U.S dollar as the primary reserve currency backed by gold – this is referred to as the “Bretton Woods System,” and it took place in 1944. Then in 1971 the U.S decided to no longer exchange gold for U.S dollars which were held in foreign reserves, this led to the extinction of the Bretton Woods System.
The extinction of the Bretton Woods System resulted to the global acceptance of floating foreign exchange rates in 1976. This subsequently gave rise to the current foreign currency exchange market (Forex) which was not widely electronically traded until around the mid-1990s (due to the proliferation of the Internet around that period).
What is Forex trading?
The word Forex is gotten from the two words Foreign Exchange. It is a global market (24/7) where investors can speculate, hedge, or just exchange currencies for cross-border investments. So, see Forex as a marketplace where you can speculate or exchange currencies.
On the other note, Forex trading is the speculation on the price of one currency against another. Take for instance, if you believe the Euro will rise against the USD in a particular period of time, then you can buy the EURUSD currency pair and when the time comes, you’ll sell it at a higher price and make a profit. But if your speculation comes out to be wrong, then you’ll lose. So, before you jump into trading forex, it is best you get yourself acquainted with the risk attached because there is no business that does not involve losing. To some extent, Forex trading is similar to Binary options trading.
Who trades Forex?
The inter-bank market allow commercial forex transactions and speculative trading every day (large amount of it). Some big banks trade billions of dollars on a regular daily basis. Forex trading carried out by these banks are either done on behalf of their customers or for proprietary traders who are trading for the banks’ account.
Most companies around the globe use the foreign exchange market to pay for goods and services from foreign countries, and also to sell goods and services in foreign countries. Take for example, if you’re living in the UK and wish to patronize an online shopping company in the US, the transaction must go through Forex.
A lot of companies around the globe trade the Forex market on a daily basis because in one way or the other, they want to exchange currencies in order to be able to transact in other countries.
Countries’ Central Banks play an important role in the foreign exchange markets. They can cause the increase or decrease in the value of their currencies by trying to control the supply of money, inflation or interest rates. Using their substantial foreign exchange reserves, they can be able to stabilize the market.
70 to 90% of all foreign exchange transactions are naturally speculative. Hence, the institution or person that bought or sold the currency doesn’t have any plan of taking delivery of it; the exchange was carried out with the intention of speculating on the price movement of that exact currency. The hedge funds control and speculate with billions of dollars of equity on a daily basis in the foreign exchange markets.
Investment firms that have large portfolios to manage for their clients use the Forex market to make transactions in foreign exchange securities easy. Let’s take for example, an investment manager that controls an international equity portfolio will need to use the Forex market to buy and sell several currency pairs in order for them to pay for the foreign securities they want to purchase.
As an individual, exchanging your money to another currency one way or the other – either at the bank or airport makes you a participant in the foreign currency exchange market.
Retail Forex Traders
Retail Forex traders are you and I. This industry of Forex trading is growing stronger day by day because of the easy accessibility on the internet. This category of traders do not have access to the market directly – they either access it through a broker or a bank.
There are two main types of retail Forex brokers that make the accessibility of the forex market possible for us. Through the brokers and dealers we can speculate on the currency market. Just like in Binary options trading, the brokers work as agents to the traders by assisting them in finding the best price in the market and carrying out other necessary activities on behalf of them. Hence, they charge a commission on top of the price obtained in market.
The dealers act as the counter-party to the transactions – they quote a price they are willing to deal and are compensated through the spread (the difference between the buy and sell price).
Advantages of Forex trading
-Forex being the largest market in the world currently has a daily volumes of $4 trillion per day. This means high liquidity.
Trade anytime of the day
You can trade the forex market at any time of the day from any part of the world. You have the privilege to enter or exit a trade at any time from Sunday (5PM EST) to Friday (4PM EST).
Ease of accessibility
It is quite easy to fund your trading account. And with small money like $200 you can fund your account and start trading the same day.
There is fewer currency pairs to focus on
You won’t get worked out trying to analyze thousands of stocks.
Trade from any part of the world
As long as you have a laptop that is connected to the internet, you can trade Forex from any part of the world.
- Many market-maker offer commission-free trading and low transaction cost than that of stocks and commodities.
- Even though the market is volatile, traders can profit in any market condition. Also, the volatile nature of the market provides opportunities for high probability weekly trading. Finally, the market is not bias like the stock market, hence, traders have equal privilege and opportunity to profit when the market is rising or falling.
How to trade Forex
Now that you’ve learnt some of the basic of Forex trading, it is time to gird up you loins and make your first trade.
How the Internet Democratized Forex Trading
Before the advent of the Internet, Forex trading was only patronized by big banks and institutional investors. They did this with the sole purpose of buying one currency for another so as to be able to import/export goods and make foreign investments. However, the coming of the Internet made way for virtually anyone to trade Forex as a good number of Forex brokers started opening online trading platforms.
Gradually, online Forex brokers started offering low initial deposit and high leverage – this gives anyone with a few hundred dollars the privilege to open a Forex account and trade huge amount of currencies. This has led to the numerous trading of Forex by small retail investors as they currently make up a significant portion of the overall global Forex market.
Beginners’ guide on how to trade Forex
As you’ve learnt earlier, Forex is a highly liquid market – the price of most Forex pairs fluctuates virtually every minute of the day. The price of highly volatile Forex pairs move so swiftly that you can open a trade and close it within the next few minutes and still rake up a reasonable amount of profit by using substantial leverage.
Let’s take for example, in the current Forex industry, a Canadian Forex trader can open a live Forex account with a 100:1 leverage by depositing only $200 and start trading up to $200,000 with this account.
Like I earlier mentioned, the major way to trade Forex market is by speculation of currency prices – you as a trader will buy one currency and simultaneously sell another currency. For instance, if you buy the EUR/USD, and the rate of Euro rises against the US Dollar, you’ll make a profit from the price difference. However, if your speculations doesn’t come out right, you’ll lose.
Apart from price speculations, you can also trade Forex to hedge your investments in the stock markets. Worth knowing, there is a method called “carry trade,” you can use it by playing the interest rate difference between the currencies and earn a profit from the differences of the currency swap.
The risk in Forex trading
Forex trading is just like Binary in this aspect – every trade you make is nothing but a well-informed guess. There is nothing certain in the Forex trading market because there are a lot of factors that can lead to the adjustment of a particular currency. The fundamentals can shift the environment of trading sometimes, whereas, there are other times when there are limitless factors, such as daily exchange rate fixing, central bank buying, option barriers and many more.
To be on the safer side, prepare for the uncertainties by taking out time to do a comprehensive market research before jumping in to trade.
The rewards of Forex trading
One major rewards of Forex trading is making profits from your investments. Also the liquid nature of the market makes it easy for one to opt in and out at any time. The market is always open for trading and many more.
Some tips that will help you trade safely
Choose the right bet size
Over trading is the first thing you must try to avoid. After carefully choosing the live currency rates, the next thing is to choose the perfect bet size. Avoid trading a position that is too large compared to the size of your account.
Limit the forex trade
According to experts, as a small investor, it is best not to devote more than a few percentage points of your entire portfolio to Forex trading. That way you’ll be able to minimize your potential damage.
Set some limits
One way to minimize the damage caused is to set a stop-loss order. This will help you to exit a position when a specific price has been hit.
This is just like Binary options trading, as a retail trader, you have to trade with technical analysis – this means you have to get yourself acquainted with price charts reading. Just like in Binary, if you’re serious about learning this business, you need to invest your time to understand how the global economy works, that way you’ll be able to trade rightly.
Understanding the basic fundamental indicators of economies like employment rates, interest rates, production level and the role of central banks in regulating inflation, and the likes will give you an edge in the industry.
The beginning is always the toughest. As time goes on you’ll have more experience and discover various platforms you can utilize to tap the gold mine of Forex massively.