What Is Forex Trading :
Forex is short for foreign exchange. The Idea to make money in trading forex comes from buying and selling but it is largely based on the games of speculation since the market is 100% decentralised. Trading in forex is done via margin. Margin is nothing but a fraction of the total investor’s capital that is put upfront for making bets in the market. To make money trading forex, it is important to understand the terminologies related to the market.
A lot of people go through forex trading. When tourists from China travel to the US, they have to get their currency changed into the currency that is prevalent in the US. This is where they exchanged the currency. That is a prime example of forex trading. Trader’s sometimes found it hard to make money trading forex. That is because they do not have the correct orientation of information in front of them.
Below given is a basic idea of the things you need to know before you begin to make money trading forex.
Why should I trade forex?
Just like any other investment that a person does, trading in forex can be used to grow in terms of personal wealth and also, hedge the personal finances against any persisting market risks. Although it has to be kept in mind that trading forex also has its own risks. But as the trader starts being consistent in the market, the experience outgrows risk with time.
Trading in forex also has its own benefits. Being the most liquid market ever, forex is something that can make money for you instantly but also keep in mind that the way it makes money, is also the way it won’t make money or will dry you out of your capital.
Pre-Requisites for forex trading:
To trade and make money in forex, it is crucial that you understand the basics of forex trading because, without them, it is a waste of time to invest money and more importantly, invest time in such a thing.
There are a few prerequisites that you need to understand before you begin to make money trading forex. Let us read about them in brief:
1. Currency pairs:
The foreign exchange market works in a certain way. You cannot trade one currency just in the exchange of the other, trading is done in currency pairs. For example,CAD/USD is the pair for Canadian and US dollars. Here, CAD is the base currency and USD is the quote currency. This is what you have to know. This is the amount of the second currency that is necessary to buy the first.
In this particular case, the price of a CAD/USD pair is the amount of US Dollars needed to buy one Canadian Dollar.
To understand spreads, you have to understand the bid and ask the price first. The bid price is lower than the asking price and their difference is called the spread. Spreads are what the brokers earn from since they don’t have commission-based trading.
3. Margin and Margin call:
Margin, as discussed above, is the small amount against the larger amount that is used to place bets in the market. Margin has a different calculation. Understand it this way.
Assume that a trader is trading on the USD/JPY pair and the position that he or she is trading on, is worth $400,000.
If the trader were to exercise leverage, which they mostly do, then the money that they’d use to enter that position would be probably $400 ( in the case of 1:100 leverage, brokers provide 1:500 leverage too, in some cases.)
Now, say that the price movement of the currency pair is large. If that is the case, then it will reflect on the capital that the trader has put in. Again, assume that the price of the asset has plunged and the trader has lost almost $320 of the margin he put in. That is a staggering 80% loss. Here, the broker is liable to put a margin call.
If the traders push money as soon as they get the call, they can stay in that trade. If not, then the broker exits the trade in place of the trader. And exiting the trade from the broker-end representing the trader is completely legal. In fact, a lot of brokers ensure that the traders know this.
Trading in margin does not mean that the business can be done with little money. Trading on currency pairs needs a lot of money because here, trading is done in lots. The traders have to buy lots of currencies so that they can have a substantial price movement. The bigger the lot, the bigger the profit/loss.
There are a lot of different ways by which traders can trade in the forex market. Speculations and Futures hold the top spots, and trading can also be conducted via hedging.
The 1:500 mentioned earlier is an example of what leverage can be in terms of the broker being able to put forward as its “helpful gesture” for the traders who are low in terms of capital. The position earned by exercising the leverage of 1:500 by putting a capital worth $50 will be $500.
If the trade goes right, then everything is well and good, and if the trade goes wrong, then the trader is liable to fill up the money lost for the position and not the money used to enter the position. This is the correct definition of leverage.
Pip is the smallest fraction of price movement and also the only scale to measure profit/loss in the forex market.
These are by far the most important technical terms that you need to know before you enter the forex market. There are other things as well that are prevalent in the market and the ones that are introduced due to the integration of different assets and different instruments with forex itself.
Now let us address the elephant in the room:
How to make money trading forex:
To make money trading forex is an easy thing to do. Most of the places you stumble upon will tell you that forex is hard when it comes to making money, and it is a big-money game. The statement is subjective. For the people who think that making money is tough while trading forex, the market treats them in the same way.
Since they are already sceptical about the fact that whether the market will earn them money or not, they don’t research well, and the ones who are aware of the magic the correct research can create, are always looking for new things that they can use for trading in the market.
The process of taking small profits in regular intervals of time is called scalping. The professionals do this by making a lot of trades in one single trading day. They are looking at price movements that range from 1-10 pips typically. Traders have to capture a lot of right trades to make that happen. Making so many trades in one day can be a tedious task.
The traders can do it independently or via an algorithm that directs the system when and why to open a position or close it.
When traders switch to scalping, they prefer the most exotic currency pairs because the spreads are tight there. This makes the whole idea of short-term trading fit into the money-making concept part of the market.
The length for each trade in scalping can range from a few seconds to a few minutes. If that is done only then, can traders make the window to study each trade and then execute them in large numbers.
To enter and exit the trade properly. The scalpers use indicators like MA’s so that they can verify the trend. These levels are then further used in creating the resistance and support bands. Scalpers can then use these bands to trade in smaller time frames with the help of oscillators like the relative strength index (RSI).
The stop losses are placed a few pips away so that the large movements can be avoided. The idea in scalping is to capture the price movement and, generally, the ones with a little smaller size. The MACD(Moving average convergence divergence is another indicator that the traders can use to enter or exit the trade.
2. Position Trading:
Position trading is bigger than day trading and outside the spheres of scalping. When traders are trading in positions, they look at massive trend changes and aim to book their profits as those trends grow. The whole idea of position trading is to enter the position before the market trend changes, trade over the change, and ride the market with fluctuations.
The position traders are not interested in pullbacks or market corrections. These are the people who look at forex trading from an investment point of view. They want to earn in the long run.
This type of trading strategy needs extensive research about the market and how the trends are about to change in the near future. After the position is decided, there is not much left for the traders to do. Mostly, they enter the trade after making concrete calculations about the market speculation they think is persistent.
Since the position traders don’t need any significant activity from their end at regular intervals, these are the ones who are out of the whole day trading loop.
3. Trend Trading:
One of the easiest strategies for trading with any asset, let alone forex, trend trading is something that can be easily learnt and integrated with indicators to bore the best results. Trend trading is simply studying the market, looking for a possible point of a trend change and making bets before that happens so that the maximum profits can be booked.
When the traders are trading in forex, they can pick on the news to understand why a volatile pair moves to the levels they want it to. News like changes in the interest rates, a big name on the index declaring itself public or bankrupt are the announcements traders are looking at if they want to make money over the market.
4. Timing the pair:
This is not much of a strategy but more like advice. The good thing about trading in forex is that the market is forever open. But this does not mean that the trades can be made whenever you feel like it. Specific currency airs are volatile for specific periods of time throughout the day. Look for that window for the currency pair you are trading with.
If you are correct in doing that, then the profits can maximise and if you are wrong, the profits will barely cover the commission you need to pay to the broker.
5. The correct broker:
The correct broker is something that every forex trader needs. It is as important as looking for any other thing in the market before entering. We recommend our readers to trade with HFTrading. The broker is a trading name for CTRL investments Pvt. Ltd. The parent firm is regulated with (CySEC) Cyprus securities and exchange commission. The traders can trade over 300+ CFD tradable Assets with the broker via three different trading accounts.
The assets include forex. Cryptocurrencies, indices and a lot more.
For trading in forex, the broker provides the MT4 trading platform to its users. MT4 is thought of as one of the best trading platforms ever created to entertain trading in forex.
Trading in currency pairs can be hard, make sure that you know what you are putting yourself into. Forex trading does need money and the correct use of leverage. If that is absent, no trade can make money in the market. However, if the research is in order, the leverage is used for benefits with a sane state of mind then there can be money flow that the trader does not anticipate in terms of what he or she would earn in the first few years of trading.