Everything About Forex Trading
Almost everyone has dreamt of a situation where they wish to make profits just by sitting at home without putting in any special effort. Sounds impossible? Well, not at all; become a forex trader and everything is possible! You might say, “But I don’t know how to trade currencies.” It’s relatively easy; you have to make yourself aware of how the forex market works, and you are good to go. As a beginner, let’s go through those aspects and learn more about forex trading.
Meaning of Forex and Forex Market:
Firstly, you must be clear about what the forex market is. To put it simply, it is a place where currencies are exchanged between the buyer and the seller irrespective of which corner of the world they live in. These currencies can be exchanged between market participants such as individual investors, companies and banks at an agreed price. Most of the currency conversions that happen are for commercial reasons. Since the forex market is highly volatile, currency prices can fluctuate daily during conversion. This volatile nature of the forex market has merits and demerits for investors, meaning it can either lead to profits or increase their chances of losing everything.
Anyone who has exchanged currency at any point in time is considered a forex market participant. With respect to the trade volume, the most prominent participants of the forex market are central and commercial banks. Along with them, large companies also have a vital role in the forex market. Besides, brokers are crucial as they act as a mediator between buyers and sellers. Lastly, individual traders are also significant players in the forex market. This includes people who exchange funds for non-commercial purposes and those who speculate on currency fluctuations to earn profits.
Basics of Forex Trading:
If you are considering opening a trading account, there are certain key forex concepts that you must understand:
Bid and Ask
A currency pair is represented in two prices, known as bid and ask prices. Ask price refers to the price you must pay to purchase a currency unit. On the other hand, the bid price is what you receive when you sell a currency unit.
In forex trading, brokers profit from the spread, which is computed by subtracting the ask price from the bid price. A trader should always opt for a broker that offers the lowest spread for maximum benefit.
In forex trading, currency pairs are always traded in specific quantity sizes, known as lots. The most common lot sizes are:
- Standard Lot= 100,000 base currency units;
- A Mini Lot = 10,000 base currency units;
- A Micro Lot= 1,000 base currency units;
A forex broker is an individual or company that connects a trader with the currency through a trading platform. Every forex broker is different in terms of trading conditions, so a trader should always choose who can work in his/her best interests.
Leverage is a powerful tool for traders to make more profits using a relatively smaller capital amount. Simply put, it refers to the money borrowed from third parties to utilize in trading with the main motive of multiplying income. Leverage has the potential to boost your potential profit. But, it can also multiply your risk of financial losses. To protect himself from blowing his account, a trader needs to have a risk management strategy in place before using leverage.
Steps to Become a Forex Trader
Today, anybody can become a forex trader due to the advent of technology. However, your knowledge also plays a crucial role in becoming a successful forex trader. Follow these steps to become a forex broker:
- Select a Forex broker
You must select a reputable forex broker that can offer good trading conditions, efficient trading tools, excellent customer support and reliable features.
- Follow a trading trainer
If you are just beginning your forex career, you must take all the possible measures to minimize your potential losses. One such way is to have a trading mentor who can offer your professional guidance to trade with a certain mindset. Additionally, you must explore all the resources available with the broker, such as videos, tutorials, articles, etc.
- Open a demo account
A demo account is an excellent opportunity to increase your confidence while trading and developing relevant skills. It can help you develop your trading strategy by practicing trading with virtual money. This will also help you get an idea about the functioning of the trading platform.
- Always trade with a small amount at first
- To become a successful trader, start with a small amount. Practicing on a cent forex trading account for a few months is an excellent option to protect yourself from significant losses.
- Follow the discipline
Discipline is a vital component of forex trading. One of the most effective ways to practice discipline is to maintain a trading journal where you summarize your trades to get a better perspective of where things could go wrong.