How To trade in the forex market
How to trade in the Forex market
Forex trading can be a tricky process especially for beginners. However, if conducted in the right manner it gives you a big profit. In this article you will learn how to trade in the Forex market with examples and get a practical understanding of different complex terminologies.
Here's a quick look at what you'll read
There are more than 170 legal currencies in the world. However, the US dollar and seven other major currencies dominate the forex market.
- The London Forex Session
- The Tokyo Forex Session
- The Newyork Forex Session
- The Sydney Forex Session
Lot size refers to the group of Currencies. Trading in currencies take place in different lots like Standard = 100,000 units, Mini lot = 10,000 units, Micro lot = 1,000.
There is no full proof plan in forex trading. Even if you follow all the procedures effectively, there are also chances of loss.
What is the Forex Market?
A Forex Market is the biggest financial market in the world where many traders buy and sell currencies to generate profit from the change in currency values.
In the FX market, currencies are traded from Monday to Friday. It is a 24-hour open market with four major Forex sessions to trade, including.
- The London Forex Session
- The Tokyo Forex Session
- The Newyork Forex Session
- The Sydney Forex Session
In Fx Market, Currencies are traded in pairs. To buy one currency, a trader has to sell another. There are more than 170 legal currencies in the world. However, the US dollar and seven other major currencies dominate the forex market.
Forex trading example
The value of currencies fluctuates based on different economic, social, and natural factors such as floods, changes in GDP, Economic reports, Disease outbreaks, changes in government, etc.
A Forex trader predicts the change in the value of the currency by studying the effect of these factors on the market. Let us understand how to trade in the forex market with an example.
Suppose a trader is dealing in USD/ EUR pair. There is a covid outbreak in the USA, and the country is facing tough times dealing with it.
Analyzing the condition of the US economy, the trader predicts that the value of US Dollars will depreciate against EURO, and therefore, he sells the USD/EUR pair to get benefit from the trade.
Steps to follow for forex trading
Forex Trading is a very complex process. It is very difficult to predict the market accurately. You can earn millions of dollars by one right prediction and lose millions of dollars by one wrong prediction. Therefore how to trade in the Forex market is a million-dollar question.
Trading in Forex involves a high amount of risk. Even experienced traders suffer losses in the market. As per the information, 90% of traders lose money in the fx market.
So it is essential for a forex trader to follow these steps of forex trading efficiently in order to get the most profit.
Study about the forex Market: Knowledge is Must
To start any trade, you have to understand first how the market works. As we have studied that forex trading is a complex process; therefore, it became more important to learn the forex market before starting trading.
The first and foremost step in how to start forex trading for beginners is research and analysis of the market. A trade needs to analyze the forex market using various technical and fundamental analysis tools to get the desired result.
Determine a currency pair: Crucial step in Fx.
As we have studied in Forex Trading, currencies are traded in pairs. So the most crucial step in FX is determining which currency pair you want to trade.
There are more than 170 currencies. It is only possible to keep an eye on some currency pairs. Therefore a beginner needs to first select a currency pair for trading.
After selecting the currency pair, a trader needs to study the market trends of that particular pair continuously. Let us understand trade in currency pair with an example. Suppose USD/EUR is 1.10. It means that you are exchanging one USD for 1.13 EURO.
Select the best forex Trading platform: Select a trustworthy Broker.
There are different ways to trade in a currency, such as Spot fx, forex options, and futures. On the basis of your needs, select the best way to trade. A trader can execute the transaction via broker, bank, or CFD trading.
There are various Forex Broking platforms available, and the market is a place where trading scams and frauds are quite common. A trader needs to select his broker wisely by keeping the previous performance, reviews, price structure, consumer, and other policies in mind.
Build a Trading Strategy: Develop a solid plan.
There is no fool proof strategy to trade in Forex. However, to decrease the chances of loss during trading, it is essential for a trader to develop a solid plan by analyzing the currency pair.
You need to prepare a trading strategy which involves things like how much money you will invest, how you can afford to lose, when you will open and close your positions, and other important details.
Read the quote: Understand the pricing.
After selecting your broker platform, open an account with a trader. You have already developed your strategy. Now it is time to execute your trading strategy.
Open your trading account, and you can find the details about both the buy and sell prices. You can decide your entry and exit point. You can also add the stops to close your trade at a certain point.
Now let us understand how to read a quote by an example. Suppose you are dealing in USD/JPY. There are two prices USD is your base currency, and EUR is your quote currency.
Determine your position: Time for Execution.
Monitor the listed price change. Now you are in the final stage of forex trading, and it is time for action. Suppose you are dealing in USD/JPY if you believe that the value of the base currency will rise in comparison with the quote currency. You will go with a Buy Position.
If you believe that the value of the base currency will fall on the comparison with its quote currency, you will sell the currency pair. You have to click buy to open a long position or sell to open a short position on the Forex Platform based on the speculations.
Ways to Trade in Forex
You have understood how to trade in the forex market now; for trading in Forex, it is important to determine the right way to trade in Forex. There are many ways in which a forex trader can execute his trade. Have a look at these ways.
Spot FX:
It is one of the most popular ways for forex trading. The spot FX market is also regarded as an over-the-counter market. The market operates per day. In the spot fx market, a trader trades directly with a counterparty.
For example, if you think that the value of USD will increase against the value of EUR, then you can trade with a person who feels the exact opposite of what you think.
Currency Options:
Under this, the broker provides the buyer the option to buy or sell an asset at a specified price on the expiry date of the option. However, it is an option and not an obligation for trade.
ETFs:
Under currency ETFs offers individual traders exposure to a single basket of currencies to trade with it. It offers a trader exposure to the market through a managed fund without placing individual trades. These are the exchange-traded funds that offer traders to gain exposure through a managed fund.
Retail Forex:
It is one of the best ways to trade in Forex for a beginner, scalpers, day traders or a trade with less money. In retail Forex, on your behalf, a service provider will execute the trade at the best available prices.
Futures:
Currency Future is a kind of contract to buy or sell at a specified price on a future date. The contract includes details about the price and other details of a trade.
Forex Terms a trader needs to know before starting trading.
We have studied how to trade in the forex market and ways to trade in currencies. Now it is time to understand the meaning of some important terms before starting trading in FX.
Ask:
Ask price refers to the lowest price at which a trader is willing to buy a currency pair. Usually, the amount of the ask price is more than the bid price.
Bid:
Bid price refers to the price at which a trader is willing to sell a currency pair.
Spread:
The value of change between the ask price and the bid price is known as Spread. Forex Broker who claims zero commission earns from spreads.
Pip:
A pip is the smallest possible price change between the currency pair. A pip is a price interest point. It is equal to 0.0001.
Lot size:
It refers to the group of Currencies. Suppose you want to buy eggs, then you will buy them in dozens. Similarly, if you want to trade in currency, you deal it in lot sizes. There are three major Lot sizes which include
- Standard = 100,000 units
- Mini lot = 10,000 units
- Micro lot = 1,000 units
Leverage:
It refers to using borrowed money to invest in a currency or any other financial instrument. Traders very frequently use Leverage in forex trading.
Margin:
It refers to the amount of money that needs to be set aside in an account for trading. It is a way to convince the broker that a trader will remain solvent and fulfill all the monetary obligations.
Bottom Line
Forex Trading requires knowledge, right psychology, research, analysis, emotional balance, logical understanding, and other skills. For a trader, it is essential to learn forex trading before putting his money in the market. Traders, on a daily basis, earn and lose money in the forex market.
There is no fool proof plan in forex trading. Even if you follow all the procedures effectively, there are also chances of loss. So for a forex trader, it is a must to learn forex trading to deal with both positive and negative outcomes.
