If you have been hearing about Forex, you may want to ask what is Forex? What does it entail, and is it an opportunity to make money? So many questions like this run through people’s minds whenever they hear of forex trading because they do not know what it is about; if you are someone like that, then this is your best chance to learn about forex trading and even how you can begin trading.
In 2022, The Bank for International Settlements estimated that the daily global volume for forex trading is about $7.5 trillion, which should tell you that millions of people are benefiting from this market already, and you can be one of them.
What is Forex Trading?
FX is a portmanteau of the words foreign and exchange, so Forex trading is the buying and selling of foreign currencies to make profit. Forex traders are speculators who predict a price movement in the value of currencies, so they buy one currency with another, and when the price goes up, they sell it and make a profit.
For example, if you think Euro will increase in value against the Dollar, then you can buy Euro with Dollar. When the value of Euro increases relatively (Euro/Dollar), you will sell it and get more Dollars, thereby making a profit.
Aside from this speculative trading, businesses and individuals also use hedging in Forex to protect their finances from adverse currency movement (currency risk). For example, if you are doing business in another country, you can use hedging in Forex to protect your business against potential losses due to fluctuations in the exchange rates.
What is the Forex Trading Market
The forex market is a constantly moving, and non-stop platform where people buy and sell currencies. The interesting part is that it has no physical location or buildings; instead, it relies on a series of connected computer networks and trading terminals.
In the past, the market was dominated by large banks and institutional firms which acted on behalf of their clients. This is because currency trading was tough for individual traders, and forex trading required a lot of capital until more enlightenment came through the internet. So now it has become more retail-oriented; individuals, traders, and investors of different sizes can participate freely.
Types of Forex Market
There are mainly 3 types of forex market: futures, spot, and forwards. The spots market is the largest, and the underlying assets for forwards and futures are based on the spot markets.
Spots Market
The spot market is the largest forex market available to every investor and trader; in this market, currencies are bought and sold based on trading prices determined by supply and demand. Trading prices can be calculated based on different factors, including current interest rate, geopolitical sentiment, economic performance and price speculation.
Trading in the spots market is done through bilateral transactions in which one trader delivers an agreed-upon currency amount to another trader and receives a specific amount of another currency at an agreed-upon exchange rate. It is simply an immediate exchange of currencies between two parties based on an agreed-upon exchange rate.
Futures Market
The futures market is an exchange where traders can buy and sell futures contracts. In a futures contract, there is a standardized legal agreement between two parties to purchase and sell a currency at a predetermined price, and the currency will be delivered at a future date.
So if, before the delivery date, the value of the currency increases, the buyer will make a profit, but if the value decreases, then it will be for the benefit of the seller because the fluctuation will not affect his selling price. The seller profits from a price drop, while the buyer profits from a price increase.
In the futures market, a third party facilitates the trading, such as an exchange platform or clearance house, which will monitor the transaction so there can’t be any default from both parties in meeting the agreement of their contract.
Forwards Market
In the forward market, forward contracts are entered where two parties make an informal over-the-counter currency exchange agreement. The contract also includes a future delivery date and predetermined price, and every other term of the agreement is made solely by the two parties involved. There is no third-party or legal regulation, so the risk is higher than in the futures market, where there is third-party regulation.
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How to Become a Forex Trader
Now that you have a basic understanding of what forex trading entails and how the market works, you may also want to know how you can become a forex trader; here are some steps that can get you started.
Learn About Forex
Although forex trading is not so complex, it requires in-depth knowledge and a commitment to learning. You will have to keep learning and building your expertise to enjoy all the benefits of the market and avoid forex trading scams. So, just as you have started with this guide, learn all you can about forex trading and get a mentor who can guide you through your forex trading journey.
Set up a Brokerage Account
To begin forex trading, you will need to set up a forex trading account, also known as a brokerage account, so first, find a good broker and set up your account with your basic information like name, contact info, DOB, currency type, etc.
Develop a Trading Strategy
It is not always easy to predict and time market movements, and you may not always get the correct prediction. However, developing a trading strategy will significantly help you create a road map for your investments and set guidelines for all your trading activities.
Always be on Top of Your Numbers
Some trading platforms provide a daily accounting of trades, so make sure you check your positions at the end of every day, do not leave any pending positions to be filled and always leave adequate cash in your account for trading.
Cultivate Emotional Equilibrium
Forex trading has many ups and downs, especially for beginners; sometimes you will make so much profit and other times you will make unexpected losses. So, it comes with an emotional roller coaster, but you must try to control your emotions at all times. Making losses shouldn’t cause you to quit likewise when making profits, you should have the discipline to know when to close your positions; don’t be greedy, or else you may lose everything.
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Forex trading is a very lucrative way to make money and protect your finances, but as a beginner, it might not be rosy and smooth; you will need time to learn and develop better strategies but don’t be discouraged. Remember that the best forex traders today all started as amateurs.
in addition, forex trading will always require you to re-evaluate your strategies occasionally and develop new methods of achieving your goals. Still, you must keep sentiments and emotions aside and stay focused on your goal.
