Forex trading is also known as foreign exchange trading. Learning what is forex trading includes understanding that it is an act of buying and selling currencies all over the world by using decentralized access. Forex market is decentralized because of that no one has access to control it neither a person nor an organization. In this content we will explore the history of Forex trading, how it works, why it is popular, and what is the difference between forex trading and investing. And their pros and cons. And you simply check all the reviews of Forex trading which is already listed on ClipsTrust.
Why is the Concept of Forex Trading So Popular?
In this trading world Forex is the best platform for all the traders. Because it is open for 24 hours on weekdays and closed on weekends. The concept of forex trading is popular for several reasons, and its appeal has only grown with the rise of cryptocurrencies like Bitcoin and Ethereum. Which help the forex market to become a popular career especially for investors with a financial background including:
- Leverages that forex provide
- Access tools to help you trade
- Forex volatility
- Currencies come in pairs
- Go long or short
- Hedge with Forex
- High liquidity
- Forex market hours
- Trade around the clock
What is Forex Trading? How Does It Work?
Forex trading requires you to open a Demat account with a broker who is registered with SEBI. Once you open the Demat account, you have to activate the forex trading segment using your financial documents like your ITR, bank statements, or salary slips. Then, you have to add margin to your trading account which is basically the capital that is required to maintain a position in the market. After that, you can choose the currency pairs and execute the trades.
Before actually jumping into the process of trading in cryptocurrency, you should know what cryptocurrency is, there are a few other factors that you need to know to avoid any risks and fraudulent.
What is the Forex Market? The Most Important Concept
Forex market, where you can trade in currencies. It is the largest market in the world in trading volume. The main participants of foreign exchange trading are the larger international banks. If I talk about the founder of this trading market then, there is no specific name that came into existence but, still there is one name in history of J.M. do Espírito Santo de Silva who might be the founder of the Forex market. And in history George Soros is considered as one of the most famous Forex traders in 1992. It is regulated by the Reserve Bank of India (RBI) and Securities and Exchange Board of India (SEBI).
What Are Currency Pairs in Foreign Exchange and How Do They Work?
Currency Pairs
Basically, currency pairs are the price quote between two currencies and the first currency is the base currency and the second one is the quote currency. These currency pairs compare the value of the first currency with the second currency. This helps in identifying the number of quote currency needed to purchase the base currency. Real estate companies often engage in international transactions, requiring currency exchange.
Major currency pairs are:
- EUR/USD: The Euro and US Dollar
- USD/CAD: The US Dollar and Canadian Dollar
- NZD/USD: The New Zealand Dollar and US dollar
- USD/CHF: The US Dollar and Swiss Franc
But how do these currency pairs work?
Whenever you purchase a currency pair, the base currency is used to sell the quote currency. However, upon selling the base currency, investors get the quote currency in return when the currency pair is sold.
For example: If you consider the price of GBP/USD currency pair as 1.5/1.6, you will understand that 1.5 is the ask price and 1.6 is the bid price. Meaning, if you want to purchase a unit of GBP, you need to pay 1.6 USD. Whereas if you want to sell GBP, you will get 1.5 USD.
You might purchase this currency pair if you have an intimation that GBP is going to increase in value as compared to USD. If you purchase this pair, it means that you are going long, however, selling this pair will mean that you are going short.
Now, take a quick look at the key players in the forex market.
What Are Some of the Key Players in the Forex Market?
There are major players in the forex market that include:
Central Banks: These are the market stabilizers who are basically a public organization managing the monetary policy and the currency of one or various currencies.
Commercial Banks: It is a type of financial institution which is the core of the market offering services for the checking account and accept deposits. Many Indian finance companies collaborate with banks to offer Forex-related services.
Sovereign Wealth Funds: These are the silent giants who are an investment fund that a state or nation owns. The money that government generates from surpluses in a country’s economy is what SWF is composed of.
Forex Dealers: People or firms who are considered the access providers sell and buy foreign currencies. With their help, retail and institutional investors get an online trading platform.
Corporations: A unique legal entity or the practical users who have a sperate identity unlike their owners. They are created by shareholders to operate while keeping profit generation their main goal.
Proprietary Trading Firms: Those who decide to trade in the market for their own financial profit instead of their clients. These are called the risk takers.
Brokers: An organization that provides you with a platform to buy and sell foreign exchange currency pairs. The facilitators who are also known as trading brokers.
Liquidity Providers: A crucial role player in the market of foreign exchange called as the market’s backbone. They are contributors in the market efficiency by buying and selling an asset on a specific price.
Speculators: Known as the price movers, speculators are those traders and investors who purchase assets for a short interval of time and implement unique strategies for earning profits.
Identifying the Different Types of Forex Trading
Here are the types of foreign exchange trading that are most popular:
Day Trading: It involves opening and closing a trade in the same day. These traders are looking to earn profit from short-term fluctuations in the price and get a capital on the intraday price movements.
Swing Trading: Traders are more focused on earning grabbing the medium-term price fluctuations. In this type of forex trading, investors usually hold their trade for days or weeks to get profit from market fluctuations.
Scalping: A trading strategy which is opened for a very short period of time with an aim to earn profit from an increase in small prices only over a short time span.
Position Trading: A long-term forex trading type which is held for weeks, months, or years to earn profits. It is a suitable approach for those traders who have the bandwidth to handle market volatility.
Algorithmic Trading: Also known as algo trading, computer algorithms are used to automate trading orders execution.
Forex trading companies like forex.com and interactive brokers offers platforms and tools to support these different trading styles.
How Can an Investor Start Trading in the Forex Market?
Here, we will understand the steps to begin your journey.
1. Open a trading account with an online currency exchange platform.
2. Go through the trends closely and analyze the market.
3. First, invest a small amount for your initial purchase or investment to practice.
4. After that, connect with your broker to start investing properly with a higher amount and set up a stop loss or limitation order.
How to Become a Forex Trader?
Basically, Forex traders are financially well settled who trade mostly in currencies all across the world. And most of the people enjoy it while doing trading because in this platform there are multiple risks so you have to be patient to gain profits. Forex trading platforms are heavily depends on digital marketing to attract traders. Basically digital marketing companies mostly work with clients in the finance sector including forex brokers or financial educators. Forex traders are also known as foreign exchange traders. And there are several points to become a forex trade which is mentioned below:
- Practice trading with a demo account before trading with real funds. So, set up a demo account that lets you practice forex trading with virtual money.
- Set realistic goals because it is an essential part of trading.
- Trade with specific currency pairs because you have to be in an active manner while selecting currency pairs and it depends on how much knowledge you have and on your skills.
- Seek professional advice because without advice you are not able to choose the best one for trading.
- Then you need to choose the right platforms for Forex trading.
- And keep practicing until you know which one is best for you as per your budget and market requirements.
Beginner’s Guide to Forex Trading
First thing’s, understand some of the key terminologies of the Forex trading that you should know about:
Buying and Selling
In buying and selling of Forex we need to simultaneously buy one currency and sell the other one I regard to profit. For example, if you think the Canadian dollar’s exchange rate is high in comparison to the US dollar then you should buy the Canadian dollar and sell US dollars aiming to gain profit from the market.
Leverage
Leverage in forex is a way for traders to borrow money from brokers to open a position. In which a trader deposits an amount into a margin account. And the broker lends the traders funds. And traders’ funds act as collateral for the loan.
Pips
Pips stands for points in percentage. It is a unit that measures the movement of exchange rate in a currency pair, typically it checks the movement for the 4th place decimal. Example A Pip in EUR/USD is 0.00128 and 0.00138. Pip is used by the traders as a calculator.
Market Hours
The forex market is available 24 hours a day except on Saturday and Sunday. It is used decentralized to protect their data is largely driven by different cities including
Liquidity
Liquidity, basically it defines how a market and trader is active. Because it is a simple parameter that signifies how easily currency pairs can be sold or bought without changing its price.
It is very complex, but if you have the right knowledge and strategy, then it offers various opportunities for profit. And if you are interested and want to do forex trading. So, for that you need to practice with a demo account before committing real funds.
How to Read Forex Charts and Analyze Trends?
Next topic under the beginner’s guide is to be able to read the charts of foreign exchange market and its trends:
Candlestick Chart: These charts show the pricing information of the currency pairs in long and thin bars like candles. They display four specific prices including Open, Close, High, Low. Moreover, there are long body candles as well as long shadows wherein long upper shadow and long lower shadow are included.
Dojis: Where the opening and closing prices of the currency is equal or very close which creates a black cross, known as Doji. It has an HLOC chart where high, low, open, and close prices are included.
Line Chart: This line chart only shows the closing price of a currency for the selected period of time.
Mountain Chart: Similar to the Line chart, the mountain chart has an area below the line which is shaded giving it a mountain type form.
Tips for Creating a Forex Trading Strategy
Last topic for a beginner to learn includes some important pointers for creating a strategy:
Choose the Market: It is important to determine the currency pairs that you should trade in and become an expert.
Position Sizing: Make sure to check how large every position is for controlling the amount of risk that you are taking in every trade.
Entry Points: There must be governing rules that traders should develop for entering a long or short position.
Exit Points: Create rules that help in determining when to exit your position.
Trading Tactics: Set rules for buying and selling currency pairs where selecting the execution technologies is also a part of the tactics.
What Are the Pros and Cons of Forex Trading?
There are multiple pros and cons of forex trading which you can find below:
Pros
- Low Cost of trading
- Variety of options
- Flexible schedule
- No exchange
- Low capital requirements
- High liquidity
- Ease of Entry
- Currency pairs available
- Forex market hours
Cons
- Leverage risk
- Exchange rate valuations
- High cost and fees
- Lack of transparency
- High risk
- Self-directed learning
- Volatility
- Country risk
- Counterparty risk
What Are the Examples of Forex Trading Scenarios?
To take an example of forex trading for the currency pair of EUR/USD.
If EUR/USD price at 1.11280 for trading with a buying price set at 1.11284 and the selling price set at 1.11276. This gives it a spread of 0.8 pips to the investors. In case your judgement is that euro is going to gain value in the near future against the dollar, you can purchase the market.
Now, the position size is basically measured in lots where each lot is equal to 100,000 of the first or base currency. In cases like these, purchasing one lot means trading 100,000 euros for $111,284. Here, if you decide to purchase three, you get a total portion of $333,852.
This also means that if you lose, you will lose $30 each pip.
How Do You Calculate Profits and Losses in Foreign Exchange?
Taking the above example into consideration, if you predict correctly, the value of the dollar will depreciate in front of the value of euros. Meaning, the EUR/USD currency will be trading at 1.11530 where the price for purchase would be 1.11534 and the price for selling would be 1.11526. If you reverse your trade for closing the position, you can sell your three lots at 1.11526.
Now, your 300,000 euros will be worth $334,578. The calculation is like this 1.11526 multiplied by (100,000 lot size multiplied by 3) is equal to $334,578. Your profit trade will be $334,578 minus $333,852 leaving you with $726.
If your prediction is wrong, the dollar will be strong against the euros making EUR/USD at purchasing price – 1.11030 and selling price – 1.11026.
This means that 1.11026 multiplied by (100,000 lot size multiplied by 3) which is equal to 333,078. The value of your three lots are now $333,078 which is $774 less than what you had initially opened your position with.
Final Thoughts
The Forex market is just buying and selling of currencies all over the world. And here we can trade only in pairs with INR. It is regulated by the RBI in India. Forex trading platform is a very popular trading platform for currencies because it is open 24 hours except for weekends. Here you need to be more active as the market is going up and down and you should keep checking the exchange rate of currencies. And here, you can start your trading with a minimum amount of 100. Later on, it totally depends upon you what amount of knowledge you have to buy or sell the currencies. For forex trading there are multiple factors that you should know.
FAQs
Q1. What Do You Mean by Forex Trading v/s Investing?
Ans. Trading and Investing both are related to the financial market with different goals and strategies. Trading may be for one day, one month or for a single year but people invest with the purpose of long-term profit.
Q2. Is Forex Trading Legal in India?
Ans. Yes, Forex trading is legal in India only for INR based currency pairs. Reserve Bank of India (RBI) regulates Forex trading along with the Securities and Exchange Board of India (SEBI) involvement. Only trading with non-INR pairs is illegal in India. You can simply trade with INR currencies pairs.
Q3. Is forex currency trading profitable?
Ans. It is profitable depending upon the trading costs being low, variety of markets, as well as large amount leverage being available as they play a major role.
Q4. Can part-time traders trade in forex?
Ans. Swing trading and position trading is suitable for those who are part-time traders as there is no need to manage them.
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