Forex trading, in simple words, is trading of another set of instruments just like stock trading. While in stock trading, you trade the shares belonging to a company, in forex trading, the trader trades the currencies of specific countries. While stock prices fluctuate depending on the performance of the company, the currency prices fluctuate depending on the performance of the economy of a country against the other. While from a technical analysis point of view, FX trading is just another set of instruments that need study and analysis, from a fundamental analysis point of view, this presents a different and bigger challenge.
How Forex Trading Works
So how does forex trading work? Many people do not know how to get started in forex trading. In FX, the forex traders trade one currency versus the other. Like for example, if it’s EUR/USD, the trader would be evaluating the euro versus the dollar. If the trader buys this pair, then it means he would be buying one and selling the other. If the value of the forex pair is said 1.2, then it means that the value of the currency is 1.2 times the value of the base currency. In the case of EURUSD, it means that 1 euro is worth 1.2 USD.
Like other trading instruments, the forex pairs also fluctuate all through the day and the trader should aim to buy low and sell higher or vice versa. As you can see, fundamentally, the trading logic is the same which is to buy low and sell higher and vice versa and it is just that the instruments are very different in the forex market.
Forex traders should be careful about the trade sizes though, as they are likely to be very different from what they have seen in other markets. The currency pairs are bought and sold in lots of 100,000 units and so the traders need to be careful. They can buy smaller sizes of lots as well but they need to be aware of this so that they don’t get trapped in a bad position.
What is Margin in Forex Trading?
Margin is one of the forex trading concepts that one should keep in mind and make use of correctly. If you have traded, then you might be aware of the concept of margin trading. While doing day trading in stocks, the broker may have given you some margin of say 5x or 10x which means that if you have $100 in your account, you will be allowed to buy stocks worth $500 or up to $1000. This increases the potential of your profits as you can buy more and hence make more profits but it can also work oppositely as you can lose all your money as quickly as well.
So, it is important to remember that margin can be a double-edged sword and hence needs to be used carefully by the traders to make optimum use of it as and when it is necessary as one wrong move could be enough to basically blow up the account.
Risks of Forex Currency Trading
When you start trading forex, you must understand the risks involved and the types of forex market conditions that you are likely to face. Just like any other trading, you need to make sure that you trade with a stop loss. You need to be aware of when specific economic news, that moves the market very quickly, is going to be released and you need to be aware of what impact it can have on your open positions. The general advice is not to have any open positions when important news that have a big impact on currency movements, is released.
One of the main attractions of the FX market is the margin that is offered by the brokers as some brokers even offer a margin of 1:1000. Though this may sound very attractive, it is surely a path to destruction of accounts especially for new traders and it is better to be aware and make use of the margin correctly.
The traders also need to make sure that they choose the right brokers to trade with. Unlike the stock market, there is no central place where all the settlements happen and each broker settles the trades in the ways that he deems fit and this is also a risk. So the trader needs to be very careful in choosing the right brokers and platforms to trade-in.
Best Forex Trading Software
Once you have learned what is forex trading, the next step would obviously be to begin trading. For this, you need to have the right tools. Trading in itself is a difficult thing and you do not want to make it harder for yourself by choosing the wrong tools.
Most of the time, the forex broker would give all its users a set of software to trade with. This software would not only help the trader to make trades but also have tools like education, charting, etc. It is up to the trader to choose the right ones for himself. Most of the retail brokers nowadays offer the platforms MT4 and MT5 for trading for their retail traders and these are very good as far as charting and trading are concerned. They are very user-friendly and make trading very easy. Some brokers offer other software also for trading and it is totally up to the trader to trade and use those that he is comfortable with. The best person to teach you how to trade forex is yourself. No one can be better.
How to Develop a Forex Trade Plan
Experienced traders would tell you that you need to have a strategy or a trading plan before you start trading with real funds. This trading plan should have fixed and clear rules for entry into a trade and exit from the trade both for buys and sells as well. The plan should have a strategy for stop loss and when to take profits and it should be clear and objective as well. This will help to keep things clear and concise.
Developing the trading plan is one thing while sticking to it is a totally different thing. While many traders don’t even have a plan to start with and so end up trading as they please and ultimately lose their account, there is another set of traders that have a plan but do not stick to it. They find it difficult to control their emotions when they trade and so are not able to follow the plan though it may be profitable in the long run. For such traders, it may be advisable to make a bot or a robot that will trade according to their strategy which they can just allow it to run on their accounts and let it do its thing knowing that it will be ultimately profitable.