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Does forex trading seem lucrative but intimidating at the same time?
Many investors may feel reluctant to enter forex markets due to their high liquidity and complex nature. But if you’re interested in forex trading, here’s an overview of forex trading and how you can start trading.
Forex is short for “foreign exchange” It’s the largest financial market in the world, with more than $6.6 trillion traded each day. Simply put, forex trading is buying and selling currencies. For example, if you think that the value of the U.S. dollar will go up against a foreign currency like the euro or British pound, you can buy those currencies and sell them later when their value goes up (or vice versa).
You might also want to trade in another asset entirely: gold or oil, for example. The main point is that any type of asset can be traded on this market as long as some buyers and sellers agree on its price at any given time—and there usually are!
It is the process of speculating the price movements of international currencies with the motive of making profits. While there are many individual traders and businesses, the major players in forex markets are central banks, financial institutions, hedge funds and major corporations.
Here’s a list of basic forex terms you must understand before starting trading:
Pip stands for Price Interest Point or Percentage in Point. A pip is the lowest and the smallest increment in the price of the currency pair. It is approximately 0.0001 of the quote price.
Pips help measure the price movements in a forex pair. For instance, if the bid price of EUR/USD changes from 1.16667 to 1.16677, it represents the difference of one pip.
It is the capital provided by a broker to amplify the volume of trades their clients can make. Leverage allows traders to trade larger values far higher than the amount of capital they have. Using leverage, you can significantly increase your profits, but it also puts you at risk of increasing your losses.
When trading any currency pair like EUR/USD, it’s important to understand the trading concept of leverage.
Put simply, leverage is a way to increase the amount of money you can invest in a trade by borrowing from your broker or financial institution.
Leverage is typically expressed as a ratio, where the numerator (top number) is the amount of capital used, and the denominator (bottom number) is how much money you are actually investing. The actual amount of leverage you get will depend on the specific trading platform and your broker, but it’s typically shown as this ratio, like “100:1” or “200:1.” This means that for every dollar of your own capital, you have $100 or $200 worth of buying power.
For example, a leverage of 1:50 means you can use 200 Euros in your trading account to trade a currency pair with a position size of 10,000 Euros. If the trade is successful, leverage will increase your profits by a factor of 50.
Spread is the difference between the buy and sell prices of a currency pair offered on the trading platform. When the spread prices are lower, traders enjoy a smaller buy and sell price difference of the forex trading pair. The spread is often as low as a pip for popularly traded currency pairs. For those that don’t trade as often their spread is generally much higher.
The price at which traders/brokers or the market is willing to buy the currency pair is known as the bid. The bid price is affected by the value of the underlying currency pair and set against the ask price — the price at which sellers are willing to sell their shares. It represents the price a trader can sell their base currency at.
For instance, in USD/CHF 1.5722/32, the bid price is 1.5722, and the base currency is USD. This means you can sell one USD for 1.5722 Swiss Franc.
It usually describes the stock market or a financial market when it’s moving in a downward trend, meaning the prices are falling. Bearish traders favor a declining market. If a stock price falls fast and deep, it is considered very bearish.
For instance, when traders say they are bearish for KWD/USD, it means that they think Kuwaiti Dinar will weaken against the US dollar. A bearish market indicates there is going to be more short selling.
A bull market is the opposite of a bear market as it describes a market that is experiencing rising prices or moving in an upward trend. Bullish traders favor rising prices and a strengthening market. A bull market means an increasing number of long trading activities or going long.
For example, when traders say we are bullish for KWD/USD, it means that they think Kuwaiti Dinar will strengthen against the US dollar.
It is when traders open and close trades within a day. It is a common trading strategy used by traders to buy and sell the same currency pairs in a day.
Traders place a number of forex trades each day and close them at the end of the day rather than holding them overnight.
There are several order types you can use when trading any pair in Forex.
You can place a buy or sell order at the market price, which means that your order will be filled immediately. Alternatively, you can place a limit order, which allows you to set the price at which you want to buy or sell.
The difference between these two is that if an order is executed at the market price, it may take some time for a transaction to complete; whereas if an order is executed at the limited price on your behalf by your broker, it will be done so quickly.
Orders can also be placed with various expiry times. For example, you can place an open position that lasts until you close it (i.e., until you execute another trade). Or you can place an open position that lasts until expiration; this means that once the expiry date passes without being filled, your order expires and must be canceled or replaced before it can be used again.
Starting forex trading can be a daunting process. So, here are a few tips and tricks to help you in your trading journey:
Learn Your Markets
You can become a successful forex trader when you dedicate time to understanding and learning about the markets. Educating yourself about the forex market is a crucial step. Take time to gain knowledge about the currency pairs, forex markets and the factors affecting them. Investing your time and effort in learning will help you in trading.
Start Gradually
Just like learning any other skill, trading requires starting from the basics and then going forward. Starting gradually and taking small steps at a time will help you go a long way in forex trading. Many people are tempted to jump straight into big money trades to make massive profits in lesser time. But, starting with smaller trades and going upward will help you become a successful trader. Learn from each step and increase your position sizes only when you’re comfortable with it. Take your time to adjust to the markets.
Make a Plan and Stick To It
Before starting trading, you must create a clear trading plan. Many people are too eager to trade without setting out a comprehensive plan, which lands them in trouble. Your forex trading plan will act as a set of rules for you to follow and lay the strategy you’ll use to implement them. These rules will help you stay on track while trading. Your forex trading plan should contain information about:
Developing your trading plan can prevent you from overtrading, which results in reckless trades, and revenge trading and ultimately takes you off track. While creating your trading plan, set a limit on the maximum number of trades you’ll be making daily or weekly.
Keep Your Emotions Away
While trading, it’s essential to keep your emotions under control. When you have a losing trade, trying to make it back all in one shot will hardly end well. Even if the market’s not going your way, keeping a clear head and rational thinking is crucial to getting the results you want. Keep your calm and reduce your stress levels. It will help you better assess your next trading move and stick with your trading plan.
Be Patient
The key to forex trading is to be patient. Many beginners in the trading world have an unrealistic expectation of becoming rich and making exponential profits within a few days. However, the reality is different. You require consistency, dedication, effort and lots of time to become a successful trader. If you maintain a positive edge and remain patient while testing your plan, you’ll have a better chance of coming to the top. So, take your time and be patient to enjoy your trading journey.
Choose the Right Trading Partner
It’s crucial to select the right trading partner, especially if you have little experience in trading. Don’t just opt for the first forex broker you see online. Conduct some research and learn about different brokers, their reviews and strategies. Factors like trading style, trading instruments, quality of customer service, reliability, pricing and execution will affect your decision of selecting a forex broker. Also, you must ensure that you choose a broker that is regulated and authorized by an internationally recognized authority.
You can start trading forex with these easy steps:
Find a Reliable Middleman
Forex trading is always done through an authorized and regulated middleman or forex broker. Before starting your forex trading journey, you must research and find a reliable forex broker worthy of handling your funds. Your broker will assist you to open a forex trading account and add funds to your account.
Research To Find the Pair You Want to Trade
You can either open a live or demo account on a trading platform to experience the real-time prices of different currency pairs. Researching in-depth about the price movements will help you find a currency pair that you’ll like to trade.
Start Buying or Selling
Place Your Forex Trade
You should follow your trading strategy, which will govern your next steps and stay in the market. Place your forex trades with well-defined entry and exit points. Sticking to your trading plan and having patience are crucial in forex trading.
Try New Strategies
You can explore the market and apply some new strategies for different trades. Many traders learn new strategies during forex tutorials and use them in the real environment to see their effect on various currency pairs.
Close Your Trade and Evaluate
Your trading plan will guide you when it’s time to leave the market at its forecasted limits. Evaluate how you performed and how you could have improved the results. This way, you can learn from your mistakes and keep growing.
Ready to start forex trading? Open a demo or live account with Baxia Markets today and get expert assistance.
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