Forex is a global currency trading market where foreign currencies of the world are traded. Simply put it is the buying and selling of currencies. Its also called the Foreign Exchange or FX.
$4 trillion is estimated to be traded daily. Forex is the largest and most liquid market on the earth.
How does it work?
You can participate in the forex market either from your Desktop, Laptop, or Smartphone, all you need is a reliable internet connection. You also need a broker. A broker provides forex traders access to the trading platform. My personal choice currently is XM.
You also need software to access the trading platform which is Metatrader 4 or 5. The most popular one is Metatrader 4. You can download it from the internet or in the Apple or Play store. Once you have downloaded the software you can open a Demo account with your broker to practice on or a Live account.
Generated funds or profits from your live account can be withdrawn to your bank account. These profits will be converted from either US dollars, Euros or British Pounds, to you currency.
Who trades forex?
Anyone can trade Forex and quite recently it has become so easy to open a live account since brokers considerably reduced the startup required. For example, with XM you only need $10 to open a live account.
Why is forex trading a good thing?
There is a ton of reasons I could discuss under this topic, one might even write a book about it but let me give you summarised version of the most fundamental reasons:
- The market is open 24 hours, 5 days a week.
- It is the largest market with trillions traded every day.
- You can earn profits for as much as you want and as long as you want.
- It is a decentralised market which means it’s not controlled by anyone.
- You get the freedom to trade anywhere as long as you have an internet connection.
- The forex market is highly liquid.
- If you live in a country with a weaker currency you earn more cos your profits will be converted from either Dollars, Euros, or British Pounds.
- Once you know what you’re doing you won’t break a sweat to make profits.
Trading Styles
Just as people have different personalities and in terms of what they like or dislike, the same applies to forex trading styles. Every trader has his/her own trading style and trading styles can be categorised as follows:
- Technical Trading – with this style the trader uses patterns, indicators, trend lines, price action, support, and resistance to make trades.
- Fundamental/News Trading – traders base their trading on “Red News” events on the forex calendar as well as economic events and important news releases
- Position/Swing Trading – these are trades that hold positions for a long time and usually put their trades on high time frames such as daily, weekly, or monthly. These trades will typically be held for days, weeks on months before profits are taken.
Example of Technical Trading
- Trend Trading – these traders analyse the market in order to trade in the direction the market is moving.
- Scalping – for this type of trading traders will place 4 to 11 or even more trades in a day and the trader does not leave the trades to run for over night. Small profits can be made from this type of trading and this strategy is always used by impatient traders.
At this point you would be asking yourself which style of trading would best suit you. That decision will manifest itself as you learn more about trading because each trade develops his or her own style and every trader’s style is unique.
Currencies explained
In Forex trading currencies are always traded in pairs, for example, GBPUSD (British Pound and US Dollar). Currencies are grouped in pairs to show the exchange rate between them. The first currency (GBP) is the base currency and the second one (USD) is called the quote currency.
| CURRENCY PAIR | EXCHANGE RATE |
|---|---|
| EUR/USD | 1.4515 |
| GBP/USD | 1.6430 |
1.4515 is the exchange rate. The base ratio is always 1. This means for 1 Euro you get 1.4515 and for 1.4515 you get 1 Euro.
To expand on this let’s say you decide to buy 1000 Euros against the US Dollar. The current exchange rate at which you can buy is 1.4515 and so you pay $14 515. Later the EURUSD exchange rate at which you can sell has gone up to 1.5515 and so you sell your 1000 Euros and get $15 515 You’ve made a profit of $636. Conversely what may happen is the exchange rate at which you can sell the Euros goes down and is 1.4000 leaving you with a loss of $515.
Buying and Selling in forex
Buying – when you’re buying in forex, you buy the base currency and simultaneously sell the quote currency. This means the base is getting stronger and the quote is getting weaker and the graph will be going up.
Selling – in this scenario you sell the quote currency while simultaneously selling the base currency. Here the quote is getting stronger while the base is getting weaker and the graph will be going down.
Taking Profit – when a trade is progressing towards your predicted direction your trade will be in profit. Depending on the a target set, you will at some point close the trade taking a profit from it.
Stop loss – if the trade is going against your predicted direction, a stop loss will terminate the trade, or you as the trader can terminate the trade.
Basic fundamentals of trading
1) Start on a demo account.
2) Always place a stop loss.
3) Do not add to a losing trade.
4) Befriend the trend.
5) Have a trading journal record your trades.
6) Do not overtrade.
7) Not trading is also trading.
8) Look at the news every morning.
9) Always be on the lookout for patterns on higher timeframes.
10) Remember the risk-reward ratio.
11) Do not revenge trade.
12) Do not force trades.
13) Learn from your losses.
14) Be patient.
15) Remember Forex is not a get-rich-quick scheme.
You may not understand most of the above mentioned fundamentals but they will become clear as you progress with your learning and you need to refer back here as your knowledge expands.
Feel free to comment, whatsapp or email in case you have questions or suggestions.
