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What is Forex trading and how does it work?
Well, the number of investors who are generating a good sum of money through trading the forex market inspire people who are looking for ways to make more money to follow the same path.
If you are one of the individuals who want to learn how to trade the forex market, you must remember that the success in trading is not determined by luck.
If you are serious about making money out of trading in the forex market, you must remember that luck is not the thing that matters here.
The key to start trading forex for a living is to fully comprehend the forex market and everything about forex trading basics and practice what you learn on a forex trading platforms for beginners.
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Let us begin by discussing the forex market itself. The forex market, also known as foreign exchange market, currency exchange or FX market is best described as a market wherein participants are able to speculate on, exchange, buy and sell currencies at determined prices.
Simply put, the FX market is a global decentralized market for currency trading. It is made up of huge international banks, central banks, commercial companies, investment management firms, retail forex brokers, hedge funds, and investors.
By far, this market is the biggest market in the world where the main participants are huge international banks. It processes trillions of dollars’ worth of forex transaction every day.
The forex market operates on numerous levels and works through financial institutions. Behind the scenes, huge international banks turn to “dealers” or smaller number of firms that work in the finance field and are actively involved in huge quantities of forex trading.
The majority of the ‘dealers’ are banks; hence this behind-the-scene market is also referred as “interbank market”.
Though banks are the major participants, there are also other types of financial firms such as insurance companies involved. Trades between these “dealers” can be massive, involving a hundred million dollars and more.
The forex market assists international investments and trades through enabling the currency conversion.
For an instance, it permits US-based businesses to import goods from the states that are a member of European Union and pay Euros even if its income is in US dollars.
The forex market also supports speculation relative to the currency value and the carry trade.
The speculation is dependent on the interest rate differential in between 2 currencies.
In comparison to other markets, the forex market has unique characteristics. Primarily, the huge trading volume represents the world’s biggest asset class, which hence leads to high liquidity.
The forex market also features a geographical dispersion, constantly operating 24 hours per day, except during weekends.
In addition, numerous different factors exist that bring an impact to exchange rates, and investors can use leverage to increase profit as well as loss margins.
With such characteristics, the Forex market is hence considered as the market closest to the idea of a perfect competition.
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- Trading is one of the most rewarding ways to make money online – we cannot think of any profession as rewarding as trading.
- You are your own boss – you do not have to answer to anyone else and you decide when and why you do what you do.
- There are many different strategies you can use to become a great trader – there is not only one-way to make money on trading.
- It's your choice how many hours per week you need to trade – you can trade either part-time or full-time.
- You can trade from wherever and whenever you want – you are in control.
- You do not need a lot of money to get started – if you want to start trading forex, you can start with as little as $500-$1000 in your trading account.
- You do not have to deal with face-to-face contact and depend on others – your success is on you.
- Low transaction costs – think of how much the transaction cost is when you sell and buy houses; many real estate agents take 5 %, that is $5.000 on a one $100.000 deal. In trading, using a good broker with low transaction cost, you can pay less than $4 per transaction.
- You are instantaneous paid when you convert trades for cash – where else can you make money that fast?
- You can work in your nightwear – no need to dress up if you do not want to.
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Okay, now you know what the forex market is, what is next?
Perhaps, you cannot wait to generate money and become a forex trader.
To start your journey in the forex market, one of the things you must learn is how to do market analysis.
The forex market analysis comes in three types: technical analysis, fundamental analysis, and sentiment analysis. Mostly, traders and investors ask what the best among the three.
Each of these three has particular purposes and characteristic but all are helpful so you can thrive in trading. Hence, it is needed to have an understanding of all three. It is kind of like standing on a stool with three legs – if one of those legs is weak, surely, the stool will not be able to handle your weight.
You sure know what will happen next.
The same truth applied in trading.
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The theory behind technical analysis is that an individual can determine the potential price movement and current trading conditions through looking at the historical price movements.
To perform this type of analysis you need charts, so try this free forex analysis charting software you can use to do technical analysis.
Since the forex market is a 24-hour market, participants can gauge price activity in the movement through the aid of the huge amount of data available.
Hence, this increases the forecast’s statistically significant. This makes it an ideal market for the traders who use charts, indicators, trends, and other technical tools.
Forex trading for dummies - range or trend – one of the biggest goals that technical traders have is to determine whether the given pair will trading sideways, remain range-bound or will trend in a particular direction.
Usually, to determine such characteristics, traders draw trendlines that link historical levels that have stopped a rate from heading higher or lower.
These levels of resistance and support are utilized by technical traders in order to determine whether the lack or trend or the given trend will continue.
Reading candlestick charts is one of the best methods to use for technical analysis.
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Fundamental analysis refers to how you look at the forex market through analyzing social, economic, and political factors that may affect the asset’s supply and demand.
Utilizing supply and demands to predict where the price direction is easy. What makes it hard is analyzing all the factors affecting the supply and demand.
You can also analyze supply and demand by technical analysis analyzing charts.
The concept of fundamental analysis is that, if a nation’s future or current economic stance is good, their currency will likely strengthen.
More foreign investors and businesses will invest in a country with a better economy, which then results in the need to buy the currency of that nation to acquire those assets.
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The sentiments analysis focuses on determining and measuring the general psychological state of each and every market participant.
This analysis attempts to determine what percentage of the market participants are bearish or bullish.
After identifying the majority sentiment, the sentiment analyst will usually take up the position on the other side of the assumption that the mass is wrong.
Simply put, sentiment analysis determines how the market is feeling.
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Each of the three is important. Technical analysis, fundamental analysis, and sentiment analysis work hand-in-hand-in-hand to aid traders to come up with a good forex trade.
When learning to trade forex, I recommend you start with technical analysis.
There are many forex trading for beginners books you can read to accelerate your skills.
All the historical price action are there, all you need is to put those analytical skills to test.
The importance of these three is the significance of the three legs of a three-legged stool. One weak leg can affect the ability of the three-legged stool to carry your weight. Hence, it is important not to overlook any of the three analyses because each one affects your trading.
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I'm a family guy in my late 20's who learned how to trade the markets in a simple yet effective way. During university I studied investing and graduated with a master's degree in risk management. Quickly, I realized that I was onto something. I started helping friends and taking students. My students started getting results, spent less time in front of their screens, and their accounts grew consistently. Learn more about me here.
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