Forex Trading – What Is It
Forex trading has been in vogue since times immemorial. Trading and exchanging currency helped people to buy and sell goods and services to one another. In the olden times, if one place had a currency that was more valued in terms of the amount of gold that it held, then a larger number of a less valuable currency could be exchanged in lieu of a smaller number of these. Material goods for an equivalent amount could also be exchanged.
Forex today expands to foreign exchange and the forex market denotes the over-the-counter marketplace where currencies of different nations are traded. Foreign currency is used when one has to conduct business/trade across the borders of a country. While trading on the forex market, a trader sells the currency of one nation and instead buys the currency of another nation. The value of one currency is not traded with respect to the other. Instead, the market price of one currency is fixed in terms of the market price of the other. This is done based on the demand of the two currencies.
The forex market is not one in which currencies are sold or bought from any centralized location but instead bought or sold over electronic networks or the telephone. The currencies can also be traded with help from online forex brokers. The forex market is the most liquid financial market in the world with daily worldwide turnovers grossing about $5 trillion.
In the forex market, currencies are traded in pairs such as these: USD/JPY and EUR/USD. Some of the important currencies of the world that are traded include the Euro, Canadian Dollar, Swiss Franc, US Dollar, Japanese Yen, Australian Dollar and the British Pound. These most liquid currencies are traded as a means of making money. Another reason why currency trade happens is when companies or corporations buy or sell products in foreign countries. There are also other companies that convert foreign currencies to domestic currency when they convert profits earned from the company’s operations that take place in a foreign country.
Forex Trading: Different Types of Markets
Different methods are used by individual traders, companies and corporations to carry out forex trading. There are different forex markets that have different characteristics. They include the spot, forward and futures markets. Of the three, the spot market is the largest. However, the forward and futures markets are derivative markets. The futures and the spot markets trade closely together.
Why Trade Forex
With the basic idea about what is forex now becoming clear, it is important to realize the fact that the forex trading market is growing increasingly popular in these today’s times. Let us look at some of the reasons as to why it is so.
Reason #1: The forex market is open throughout the day
Trading of different countries’ currencies take place in various markets during the trading hours. This means that the forex market is practically open all 24 hours in a day. For the traders, this is an advantage as they can trade at any time during the day or the night from their own house. Forex trading can be done either on a part-time or a full time basis according to the time and knowledge that is available to the traders.
Reason #2: Traders can assume a long or short position
Though short selling is a difficult proposition in many of the financial markets, this factor does not limit trading in the forex markets. A trader can buy any currency if they believe that its price will go up or sell any other currency if they believe that its price will go down. Therefore, there is no question of a bearish situation in the forex market. A trader can make money through trading whenever the market is open.
Reason #3: Cost involved in trading currencies is low
Two major factors that contribute to the low costs in trading currencies are that there is no brokerage charged by a majority of the forex brokers and there are no exchange or data license fees that are to be paid. The trading costs are usually factored into the spread between the ‘bid’ and ‘ask’ prices quoted by the brokers. These prices are usually seen displayed on the currency trading platforms offered by an online forex broker.
Reason #4: Forex trading comes with very high liquidity
With a worldwide gross trading volume of over $5 trillion in a day, the forex market is definitely the largest of the financial markets. In this context, it is interesting to note that all the forex trading in the world takes place with only a few pairs of major currencies. However, there are many traders throughout the different parts of the world that trade in these pairs and that contributes to the large volume. Therefore, it is seen that large volumes of these currencies can be bought or sold easily at any point in time.
Reason #5: Leverage helps the trader to maximize profits
One of the main attractions of trading the forex market is the availability of leverage for the traders. This means that a trader can use more money to trade than what he/she has actually invested or deposited into the trading account for the purpose of trading. Many brokers offer a leverage ratio of 200:1. This helps the trader to make sizeable profits even when the market moves only a little in a specific direction. It is also important to understand that higher leverage means a higher risk. Therefore, leverage has to be used with a considerable amount of caution while trading.
Reason #6: The trader can enjoy the benefits of margin-based trading
Forex brokers allow traders to open margin accounts. These are different from normal accounts in that after deposition of a specific amount into the trading account, the trader can borrow an extra of up to 50 percent of the buying price of an asset. The trader’s contribution to the purchase price is referred to as margin. Margin-based trading gives the advantage of being able to earn higher profits for the trader by investing smaller amounts.
Reason #7: The traders get true international exposure
With globalization and the development of the communication networks, traders can hunt for profitable trading opportunities at any market in the world. For anyone that wants to invest money in foreign nations, the easiest and the best way to start would be to trade forex. Another major advantage with forex trading is that the trader does not have to comply with financial regulations in foreign countries or prepare financial statements in foreign languages.
Top and Best Brokers – Why You Need Them to Succeed In Forex Trading
Though the forex markets are among the largest financial markets worldwide and are widely accessible, there are only a few forex traders that are successful. There are many traders who barely make a profit in the forex trading world. Though there are many reasons that contribute to this result, one of the major factors is the online forex broker that the trader works with.
Retail forex traders have to work with an online forex broker who would handle their trades. They act as intermediaries between the traders and the currency market. The broker can be an individual, a company or a firm that helps the trader to buy and sell currencies through its trading platform. However, the results are best for a forex trader that works with the best online forex broker in the market. Read on to find out why traders need to engage with the top and best forex brokers to successfully trade currencies in the forex market through online means.
Fact #1: The top and best forex brokers give the most profitable and real-time quotes and advice based on the latest news feeds that would help the forex traders to make their money. The small differences between the real-time quotes and the regular ones can have a high impact on the profitability.
Fact #2: The top and best forex brokers pass on the traders’ orders to liquidity providers such as major banks or financial institutions and this puts the trader in an advantageous position.
Fact #3: Good forex brokers provide the trader with data feeds from different trading platforms.
Fact #4: The best forex brokers offer reasonable leverage ratios. This has the capacity to multiply the traders’ profits. However, the traders have to be careful in that it increases the risk during trading by an equal measure.
Fact #5: Forex brokers with a good reputation always offer better currency rates to their clients than others.
Fact #6: Top-of-the-line forex brokers always know the use of good training/educational material for their clients. This is especially essential for new traders who require a thorough understanding of how the currency market works. They need to know the different strategies of forex trading that will help them to improve their profitability. The forex markets change on a daily basis and the best forex brokers make it a point to keep their clients updated with adequate market information.
Fact #7: The best forex brokers supply their clients with all important news feeds related to the political, economic and general conditions of a nation. This will enable the trader to take correct and timely decisions.
Fact #8: The world currency market is an over-the-counter marketplace that operates all 24 hours. When some of the currency markets are closed down for the day, others start their operations. Top brokers ensure that their services are available in multiple languages when trading goes on no matter what the time is.
The top and best brokers are therefore tuned to providing traders their advice as well as help them at every step of their trading.
How To Choose An Online Forex Broker
Recently, the market has been flooded with a number of forex brokers and it has become difficult to choose the best forex broker from among them. Here, it is to be noted that each forex broker offers different features on their trading platforms. For a trader, it is important that he/she works with the best online forex broker to increase the profitability when trading in the currency markets. Given below are 10 critical factors that need to be kept in mind by a trader before they entrust their money to an online forex broker.
Factor #1: Regulation
This is the most important one of all the critical factors that follow. An online broker that complies with regulations ensures safety. Online forex brokers that duly comply with regulations have to submit account statements and show the concerned authorities that their firms have adequate capital. This is to ensure that they do not go bankrupt when trading losses occur. They are also compelled to hold clients’ money in separate accounts and follow fair dealing practices. For the trader it is important to choose an online forex broker that complies with regulations so that their investments are well protected.
In many of the developed countries, there are well drafted regulations for online forex brokers. However, these regulations are varied. There are also many forex brokers that operate in different nations other than the one they set up initial operations in. In such cases, they register with the regulatory authorities of the country that they operate in. Genuine online forex trading brokers display most relevant registration details on their websites. It is also possible to cross-check these details on the websites of the concerned regulatory authorities.
Forex Regulation – US
It is a known fact that the regulations are strict and of high standards in the United States. Forex brokers and their professional activities are monitored by bodies such as Commodity Futures Trading Corporation (CFTC) and the National Futures Association (NFA). These agencies take forex brokers to task if they operate without completing proper registration procedures. The capital that is needed to register a firm as a forex broker is $20 million. This amount was changed in the light of the recent global financial crisis. Many forex brokers that have not complied with this rule have been forced to shut down their operations.
US forex brokers are also bound by other rules. As an example, a forex broker operating in the US cannot offer leverages greater than 50:1 and 20:1 on the major and minor currencies pairs that are being traded. It is known that most forex brokers in Europe offer a leverage of up to 200:1. Forex brokers in the US are not allowed to accept deposits via credit cards, and offer CFDs or off-exchange derivative contracts to retail clients. This means that retail clients in the US can only deal in exchange traded derivatives. This consequently places a limit on the number of parties that they can place trades with.
Forex Regulations – Europe
In the year 2004, regulations pertaining to financial organizations that operated in the entire European Union were harmonized. This translated to the fact that forex brokers that were licensed to operate in one member country could operate in the other member countries of the union without having to obtain additional permits and licences. Each of the members of the European Union also has their own regulators. However, it has been noticed that the forex brokers tend to have their operations in those countries where the regulations are comparatively lenient.
It is a well-known fact that the Cyprus Securities and Exchange Commission (CySEC) offers a broker-friendly environment. The costs are lighter and regulations are less stringent. Therefore, forex brokers in Cyprus have been able to offer more benefits to their clients in terms of spreads and leverages when compared to others operating in other member countries. However, clients may have to be satisfied with lower levels of protection. As an example, whereas the regulatory authority in the UK (FCA and FSCS) offers up to GBP 75,000 as part of the investor compensation scheme to cover up losses, CySEC’s scheme offers only EUR 20000.
Regulations – Other Markets
Japan has the Financial Services Authority (FSA) that acts as its regulatory body. It is considered to be as strict as the corresponding body in the US. The FSA has the reputation of taking stringent actions on broker firms that do not operate with the required licences and those that solicit Japanese nationals for business. In Japan, the leverage ratio that brokers can offer to their clients is restricted to 25:1.
Countries like Belize, Malta, British Virgin Islands, St. Vincent and Seychelles have their focus on offshore business and aptly offer a lenient regulatory environment that calls for low capital investment and easy reporting compliance systems. As far as Israel is concerned, regulations have been put in place only since the year 2015 and there are still many other countries that do not have any forex regulations or authoritative bodies whatsoever.
Factor #2: Data Security
Factor #3: Execution of Trades
When choosing online forex brokers it is important to pick one that executes the trades at the right time and at the same time provides the best rates. Brokers are of two kinds: dealing desk brokers (also called market makers) and straight-through processing brokers. It is important to know in detail how each of them functions before making a choice. The trader usually makes a choice depending on his/her trading style and risk appetite. Other actors that can be considered include re-quotes, negative balance and the stop loss features that are offered by the broker.
Factor #4: Products Offered
In the recent times, it has been noticed that forex brokers allow the trader to trade in products other than currency pairs through the trading account. Precious metals, stock indices, commodities, Bitcoins, bonds, equities, and major and minor currency pairs can be traded with. In case the trader is interested in trading with instruments other than forex, it is important to take stock of the different products that the broker has placed on offer.
Factor #5: Spreads, Fees and Commission
The profitability of a broker is always affected by the trading costs. Even if it is matter of just a couple of pips, this tends to compound in cases where the trader trades high volumes. It is also important to keep in mind the fact that choosing low cost traders is not the right solution always. Expensive brokers sometimes provide a high quality of service in terms of providing more learning material, up-to-date market research and analysis material, efficient customer service and technologically advanced trading platform. Therefore, before choosing an online forex broker, it is important for the trader to analyse the fees, spreads and commissions as against the facilities provided by them. The trader should choose the one that fits their budget and suits their trading style.
Factor #6: Trading Platforms
It is vital that traders choose trading platforms that are loaded with technologically advanced features, are user-friendly and easily navigable. Newbie traders should choose trading platforms that allow them to practice on demo accounts before placing their money on real trades. MetaTrader 4 is a popular forex platform. For traders on the move, web-based and app-based platforms (for mobiles/smartphones) are also available. Social trading is an emerging trend that many forex brokers offer.
Factor #7: Trading Style
An important aspect to be kept in mind when choosing an online forex broker is the trading style. If planning to use scalping techniques, the trader should choose a broker that allows scalping. Such brokers usually offer tight spreads. However, if you are planning to stay on in the trading zone for a longer term, then the speed of executing the trades and the spreads offered do not really matter. However, in such a case, the overnight interest rate charged by the broker may be a matter of concern.
Factor #8: Account Options
Forex Brokers offer different types of accounts for the trader. The type of account that the trader wants to opt for should be decided depending on the amount that the trader is ready to invest. Other considerations that need to be factored in when choosing the account include the minimum deposit that is to be made with the broker to start trading, the account types that are on offer, the base currencies that can be traded, trading lot sizes, leverage offered and payment and withdrawal terms of the broker.
Factor #9: Customer Service
It is essential that the forex broker with whom the trader wants to work with provides reliable and good customer service. It is an important factor that contributes to the success of a trader. Supportive staff members help out the trader in their queries concerning opening of accounts, using or navigating the software, and other aspects of the learning process. Some brokers offer customer service 24/7 and in more than than one language if their operations span different countries. Efficient customer service also includes live chat, email and telephone support.
Factor #10: Educational Material and Tools
It is important to choose a forex broker that offers a lot of educational material for a starter trader and advanced trading tools that will help the trader to succeed in their forex trading endeavor.
Forex Trading Strategies
Forex traders who are new to the field can employ a number of strategies in trading that will help them to succeed. Some of the strategies rely on numbers and charts and others rely of the effect of happenings on the economic and political fronts in the country. The different strategies have different levels of complexity. In spite of the many strategies that are available, the best chance for traders to succeed is when they acquire adequate knowledge in the field. Read on to know some of the trading strategies that traders can use to hone their skills.
Main Forex Trading Strategies
The main forex trading strategies can be divided into Fundamental strategies, Technical strategies and Popular Strategies that are used by traders.
Fundamental Forex strategies are based on a few fundamental events and the impact that they have on the market. Technical trading strategies are based on mathematical and statistical analysis of the market rates. The popular strategies are based on both fundamental and technical analysis.
Fundamental Trading Strategies
These are difficult for a new trader to master. These strategies are an outcome of the global economic and political happenings and their impact on the currency markets. Explained below are some of the trading methods that use the fundamental analysis.
#1: Trading the News
This method employs studying the important news on different fronts and understanding their effect on the currency market. The trader then trades accordingly. The market, in such cases, moves in a very unpredictable fashion.
#2: Trading the Market Sentiment
This primarily refers to the momentum of the market. The net market sentiment is the sum total of the traders’ sentiments. This causes the market to move in a specific direction.
#3: Market Volatility
The forex market is known for its volatility. In a volatile market, traders learn to minimize risks, acquire diverse portfolios, widen targets and look for low leverage to make the most of the market condition.
Arbitrage is primarily a form of speculation and the trader tries to make gain from the small differences of the currency in either the same or different markets.
#5: Interest Rates
The central bank of a country keeps adjusting the interest rates with a view to helping the economy tame inflation. This has a definite impact on the currency market and the traders trade accordingly.
Technical Analysis Trading Strategies
This method assumes a lot of importance in everyday trading. This analysis gives a clue to the traders as to when to enter or leave the market and how to take advantage of the current market situation. Some of them are explained below.
#1: Fibonacci Indicator
This method is a well known long-term strategy and mainly uses the ‘Pullback’ and ‘trend’ which is more fundamental in nature.
#2: Horizontal Levels
Horizontal levels help to analyse charts and can be used either as a singular strategy or as a tool for other strategies.
Divergence is an indicator that helps a trader to learn the behaviour of the price of an instrument. It helps to form patterns that will indicate in which direction the currency will move.
This strategy is commonly used by retail investors. Candlesticks do not reveal details about past price action and works well when the market is both volatile and not so volatile. It works best when used with certain other indicators.
#5: Wedges and Triangles
Prices of currency pairs do not go up or down in straight lines. Generally, when prices are in upward trend, the price goes up first, consolidates before making the next surge. This is repeated when following a downward trend. The consolidation period is when a wedge or a triangle is formed. These effects are more visible when the charts are viewed using smaller time frames.
Popular Forex Trading Strategies
Some of the most popular trading strategies used are explained below:
#1: Multiple Time Frames
This strategy involves tracking the price of a currency pair over different time frames. This helps to establish the different high and low points and therefore work out a price trend. Different time frames help the trader to observe patterns and changes that is not possible with a single time frame.
Scalping is a strategy that a trader uses to make a lot of money in a short span of time during intraday trading. The risk involved is low. However, a lot of alertness and attention is involved when using scalping as a strategy to trade.
#3: Support and Resistance Levels
The upper limit that occurs at the end of a bullish trend is called the resistance level. The lower limit at the very bottom of a bearish trend is called the support level. Resistance and support levels do not last a long time. The strategy is to be able to identify the levels, especially just before the break.
#4: Trend Trading
Trading currencies along with the existing market trend is by far the safest way to maximize the profits. The most important aspect in trend trading is to identify a top or bottom point.
#5: Moving Averages Trading
Moving averages is an indicator that can be easily placed on a chart. The strategy involves waiting for the currency price to get close to this level. At this point the trader can decide whether to buy or sell a currency pair.
Tips to Succeed in Forex Trading
Forex trading is both an art as well as a science. Only talent does not spell success for a trader. However, discipline and practice can help a trader to be successful. The trader should make an effort to keep both greed and fear out of the way to prevent huge losses. Read on to get some tips on how to maximize profits and make the most out of a forex trading endeavour.
Tip #1: Understand requirements with clarity
Understanding the self is important for the trader. This also makes it easier for him/her to understand the markets completely and act in a manner that would fetch maximum returns. The trader should ensure that the capital investment and risk tolerance are not either lacking or in abundance. The trader should have a clear idea of his/her financial goals before stepping into forex trading.
Tip #2: Work out a plan according to financial goals
The trader should be able to define with clarity what they want from forex trading. A timeframe within which the goal is to be achieved is to be set. A structured working plan should support the goal in mind and this would make it easier for the trader. The time required by a new trader for learning and committing errors should be factored into the goal and time for achieving the same. The trader should decide goals on the basis of whether the trading is to be done as a part time or full time activity. If all these details are worked out with clarity, it is easier for the trader to abandon the exercise if the income does not rise up to the goals that have been set.
Tip #3: Choose the right broker
It is easy for the newbie traders to undermine the importance of working with a broker that would help to meet the intended financial goals. The expertise of the broker should be in line with the financial goals set by the trader. They should offer a technically advanced platform that would help to execute the best deals on time. The forex broker should provide 24/7 reliable customer service. These are some of the factors that need to be considered before choosing a broker to trade with.
Tip #4: Choosing the correct type and leverage ratio matter
It is vital that the trader chooses an account type that suits the set financial goals. The many types of accounts that are offered by a forex broker can confuse the trader considerably. As a beginner trader, it is important to choose an account with a lower leverage ratio. This reduces the amount of risk to a large extent. A beginner trader can choose a mini account which allows for practice and the initial study of the market by the trader. Conservative choices are always recommended for the new trader.
Tip #5: Replenish investment with gains from trading
It is recommended that the trader starts trading with small sums as capital outlay and with low leverage. Further investments should be made only after profits are generated. It is also true that large sums of money if invested will bring in large profits. The best method to increase the investment is by adding profits that are generated.
Tip #6: Start trading with a single currency pair
For a newbie trader it is best that they start trading with a single pair of currency that they understand well. It is not a good idea to attempt to learn about all the currencies that are being the traded in the market as a whole. Trading the currency of the country that the trader is resident in is recommended. If that is not possible, the trader can opt to trade in the most liquid currency pair. This is applicable to both beginner and advanced traders.
Tip #7: Trade only when the implications are clear
The trader should not be tempted to trade in the market based on hearsay and rumors. It is best to trade when the market is completely understood and the implications are clear. It is important for the trader to be clear whether the results are likely to be positive or negative before assuming a position.
Tip #8: Be in control of emotions
Four emotions that are not helpful for a forex trader include panic, greed, fear and excitement. It is not easy to remove them completely. However, attempts should be made to keep these emotions to a minimum while trading. This is why new traders are advised to start trading with small amounts. It is easier to lose money when the trader is not in control of these emotions. Logical approach combined with emotional restraint is the best combination that will help a trader to succeed.
Tip #9: Make notes
It is important for a trader to make notes as they learn so that they can be referred to at a later date when similar situations occur. It gives an anwer to what works and what does not.
Tip #10: Do not use forex robots for trading
Though they seem to be getting more popular, it is best not to use automated robots for trading. Individual experience and expertise cannot be easily replaced by a machine.
Following some or all of these tips may help the trader to make smart and profitable trades in the longer term.
Forex Trading Articles
Forex is a fascinating market. It is not only the world’s largest market but it is also the biggest market in terms of the volume of trade. The market remains...
Forex is a fascinating market. It is not only the world’s largest market but it is also the biggest market in terms of the volume of trade. The market remains...
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