Forex Trading: The What, the Why and the How
The Forex market is the most lucrative market globally. With a daily volume of over $6.6 trillion is it any wonder people from around the world want a piece of the action.
Unsure of where to start, don’t worry we have you covered. Our sweet as honey Forex guide will help you understand the market in-depth. With our help, you can become a queen bee before you know it.
What is Forex Trading?
The word Forex is in fact a combination of the terms that define it: Foreign Currency and Exchange. Therefore, if you look up Forex in a dictionary, it will state that foreign exchange is the process of changing one currency into another currency for commerce, trade, or travel. This practice has bloomed in the past decade with the advent of digital trading platforms, making Forex trading available to a wider audience across the globe. Indeed, according to the 2019 report from the Bank for International Settlements, the daily trading volume for Forex was around $6.6 trillion. And this incredible figure keeps growing.
Forex trading basics to keep in mind:
- The foreign exchange market is a global marketplace for exchanging national currencies.
- Forex markets are the largest and most liquid asset markets in the world.
- Currencies trade against each other as exchange rate pairs.
- Forex markets exist as cash and derivatives markets with forwards, futures, options, and currency swaps.
- This is a 24 hours a day market open for five and a half days a week. Currencies are traded in major financial hubs across almost every time zone.
- Another unique characteristic of the Forex market is the absence of a central marketplace. Instead, the trading process occurs electronically over the counter.
- There no brick-and-mortar buildings that operate the Forex markets.
- Participants in this market are institutions, investment banks, commercial banks, and retail investors.
Now let’s explore in more detail the features that attract so many traders to the world of Forex.
Benefits of Forex
While trading isn’t for everyone, there definitely are a range of advantages to the Forex markets. So here’s a shortlist of the most unique benefits that Forex traders enjoy.
Liquidity is the ability of an asset to be quickly converted into cash. In the Forex world, high liquidity translates into large amounts of money that move in and out of currencies with usually a small difference between the bid price and asking price.
Forex transactions generally don’t have high fees for traders. Forex brokers take the spread, which is included in the market price, as payment for their services. Some brokers may charge a commission either as a flat fee or as a percentage on the amount of the transaction.
The Forex market covers multiple time zones making trading an almost continuous activity. As such, as long as there is a market open somewhere in the world, you can trade. Therefore the markets are open 24 hours a day for 5 and a half days a week. This offers a lot of flexibility to traders, giving them enough freedom to maintain a day job and get extra income by trading from home at their convenience.
The Use of Leverage
Forex brokers give traders the possibility to buy and sell in the market using large amounts of leverage. This means that traders can set transactions with more money than they actually have. Such operations are opportunities for a larger volume of profits when your initial investment is relatively small.
In the Forex market, you can practice directional trading. So if you predict that a currency pair is going to increase in value, you may decide to buy it and profit from the price difference by selling it at a later stage. The opposite is also valid, if you think a pair is going to decrease in value, you can sell it. This is commonly referred to as going long and going short.
Effective Forex Trading Strategies
The best Forex trading strategy is the one that works for you. That’s why it is key to first figure out your expectations and then proceed to do a little experimentation. Keeping a trading journal is a technique that will help you clarify goals, emotional triggers, as well as what strategies are performing well. Thus, it is important to learn more about the various trading styles. These range from short-term to long-term methods. We’ve listed the most popular, tried-and-tested types of trading.
Short-term trading with positions that can be held for as little as a few minutes. A scalper seeks to quickly make just a few pips of profit before exiting the trade. This is considered one of the most advanced Forex trading strategies.
Many beginner traders favour day trading. These are trades that are closed before the end of the day. Thus, such trades avoid being affected by unexpected moves overnight.
Swing traders hold positions for several days and aim to profit from short-term price fluctuations.
These are long-term positions that are based on trend following. They look to make a profit from major price direction changes. For this strategy, a lot of patience, discipline, and experience is required. It is favored by seasoned investors.
While there are many strategies to trade Forex, there isn’t a one-size-fits-all plan. And a successful approach often means using tactics that match your goals and trading style. To grow your trading experience into a profitable one, there is a continuous effort and personal investment to make. Mainly, being always up to date with the news and latest trends as well as analyzing your performance. We leave you with the following steps to consider when you start trading Forex:
- Never stop learning. Trading may seem easy. However, specialized knowledge will get you to the next level and help you generate a more steady income.
- Identify your objectives and work towards them by leveraging techniques and strategies that suit you.
- Monitor, analyze, and optimize your performance. You can track your trading record using the journaling method. This is a common way to highlight patterns and allow you to avoid bad decisions.
- Finally, keep your emotions under control. Getting carried away by trading positions almost always leads to losses and stress. Practice self-discipline and train yourself to reach the right mindset for efficient trading.
Looking to see what all the buzz of the Forex market is about? Hive Markets has all the necessary tools. If you are new or simply want to test a new strategy you can open a Demo account, or simply dive straight into the markets by opening a Live account.