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 open 24 hours; hence, providing numerous opportunities to trade and make a fortune. There are countless stories about how people made enormous profits over a short period of time. At the same time, stories related to people losing all their money in forex are no lesser either. All this discussion makes it extremely interesting to understand the forex market. Many people aim at learning the science and art behind this particular trading but it is not an easy job to find simple but important material in this regard. This article will discuss basics about how forex trading is done.
In simple terms, forex trading is all about buying and selling of different currencies with the aim of making profits. However, it can be very complicated to practically trade these currencies as a lot of different things are involved. There is no end to learning as professional traders are always looking to learn and master their skills. Broadly, basics of forex trading can be divided into three steps. These steps are discussed below in adequate detail.
1) Learning analytical and technical tools:
It is practically suicidal to start forex trading or to even think about it without understanding major concepts and tools used in the market. There are hundreds of technical and analytical tools which can be used to anticipate future price movements. As a beginner, however, you are expected to learn at least a handful of these tools. The exact technical or analytical tools you learn will depend on your trading strategy, your aptitude and your mentor (or guide which can be in any form).
Chart pattern analysis is usually considered to be an important analytical tool and it is almost essential to learn fundamental chart patterns before practically making forex trades. The head and shoulders, double top and rising wedges are some of the famous chart patterns.
Similarly, there are various other theories, models and tools. It is important that you do your detailed research and understand at least a few of these tools.
2) Open a forex account:
It is not possible to just buy and sell currencies everyday from a shop. A trader needs to open a brokerage account with a regulated forex broker in order to make trades. Even though it may seem a very simple step, it can prove to be one of the most sensitive steps. There is no perfect forex brokerage account and the choice of selecting any particular firm can be dependent on various factors. For example, you should consider leverage.
Leverage provides a trader with an ability to make larger bets than actually invested capital. High leverage means high risk but it also means opportunities for higher profits. Nonetheless, it is an important factor and should never be ignored. Similarly, Different types of commissions and fees are involved as brokers make money from these commissions and fees. These costs should also be considered and analyzed. Moreover, it is important to understand that forex is not a highly regulated market. Therefore, reputation of individual companies also matter.
3) Practical trading:
By now a trader is all set to make trades. Before formally starting trading, however, it is required to get yourself familiar with few basic concepts. For example, what does it mean by taking long position (buying with the hope of prices rising n future) and short position (selling first and buying later) on any currency pair? Similarly, there are different types of orders which can be placed, such as market order (buying a currency at any price) and limit order (buying a currency at a certain price only). Stop-loss order is another popular order type which can come very handy when limiting your losses in the trading. It is important that you get familiarized with all these concepts before practical trading.
Lastly, it is strongly recommended to try a demo account (Which is offered by many forex brokers) before making actual trades. It can be extremely helpful in providing adequate amount of practice and understanding of the market and can save you from certain avoidable losses.