The foreign exchange market is the most liquid market in the world which attracts an increasing number of traders looking for opportunities to earn living on price fluctuations. The global foreign exchange trading averaged $7.5 trillion a day in April 2022.
This article is an introduction to forex trading. It is worth to invest some time and effort and learn forex trading both as a main source of income and a supplement to a day job. There are many guidebooks and video tutorials that can be tapped for learning to trade successfully. Below are some forex trading tips with forex trading tips, chief among them being practice, knowledge, and discipline are key to successful trading.
Understand What is Forex Market and How It Works
The foreign exchange market, known as forex market, is the global market for trading currencies of different countries. The global forex market is organized as a network of over-the-counter markets connected by computer systems.
In forex markets prices are quoted by forex brokers and transactions are negotiated directly with the buyers and sellers. The rate that is agreed upon by the two parties in the exchange is called exchange rate.
The answer to the question what is forex trading and how does it work is straightforward: it is the trading of one currency for another at an agreed upon exchange rate. Currency pairs are traded by what’s known as a lot, or a standardized volume of currency. The typical lot size is 100,000 units of currency.
Brokers usually offer leverage to traders – another term for borrowing money. By engaging in leverage trading traders borrow money from a broker to participate in the forex market without the full amount of money otherwise required.
Brokers require that traders put down some money upfront as a deposit for leverage trading – what is known as margin.
In order to engage in forex trading a trader must open an account with a forex broker. After opening his account and depositing money into the account (which is called funding the account) a trader gets access to a trading terminal which displays the exchange rates for currency pairs and allows to place trading orders for these pairs. All this can be done online.
Trading terminals are equipped with plotting and analysis tools that allow the study of price charts for currency pairs. Studying price charts is known as technical analysis. There are numerous guidebooks written by successful traders on how to analyze price charts that will help predict successfully future price movements based on past price behaviors.
Stick to Your Trading Plan
Successful traders advise to prepare a trading plan before actually placing an order and then stick to it as market moves. Preparing a trading plan essentially means deciding what trading strategy will be used.
A trading strategy defines specific conditions when a trade can be entered and when it can be exited. Based on their risk tolerances traders also must decide sizes of their trades.
Studies show the major reason for losing their capital for most beginning traders is the inconsistent trading without definite trading plan or failure to stick to a trading plan.
Define Your Trading Goals and Strategy
There are many strategies traders use for successful trading plans based on their trading goals. Below are some widely used strategies.
The most used strategy preferred by both professional traders and beginners is buying during an uptrend or short-selling during a downtrend. Trend trading involves the lowest risk among all strategies as it does not rely on market timing.
Big profits can be earned when prices break out of certain price levels initiating a big move in the direction of the breakout. Opening a position in the direction of the breakout allows capturing of sizable profits in short period of time. But quite often these breakout attempts fail.
The forex market often reacts forcefully to economic and geopolitical news. Anticipating correctly news from around the world allows to trade news releases and earn significant profit. However successful news trading requires good understanding of world economy.
Forex Trading Risk Management
Determining how much money you are willing to risk in each trade is the second most important part after choosing which strategies to use. A popular method is limiting the risk to a few percentages of your capital. For example, if you are trading a $10,000 account and you choose a risk management stop loss of 3%, you could risk losing up to $300 on any given trade.
Choose a Broker Platform That Works for You
You need to choose which forex broker best suits your needs and trading style. It is very important to make sure that the broker ‘s activities can be monitored by a regulatory agency. Below are some of the issues worth considering when choosing a forex broker.
- Does the broker provide a trial (demo) account?
- What is the minimum amount that is required for opening an account?
- What order types are supported?
- How much slippage (when your order gets executed at a price different from what you were expecting) do you get when trading during news releases?
- Are spreads fixed or variable?
- How many different currency pairs can you trade?
- Is the order execution instant and efficient?
- Does the trading platform come with any charting interface and can you trade from the charts?
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