When we travel abroad, most of us first convert the money we have in hand into the local currency of the country we are visiting. By doing so, we participate in the foreign exchange market, also known as forex trading. Let's understand the foreign exchange market in more detail!
The foreign exchange market, or forex market, is where you trade international currencies. There is no physical center of the market. Trades are conducted electronically from anywhere.
As far as the working hours of the forex market are concerned, it is open 24 hours a day, five days a week. The reason for this is that transactions take place in different time zones. Once the central market is closed, other markets are opened. As a result, it is very active at any given time and prices are constantly changing!
Even though currencies are traded globally, Frankfurt, Hong Kong, London, New York, Paris, Singapore, Sydney, Tokyo and Zurich are the main centers for forex trading.
What makes currency pairs unique?
We mentioned earlier that the forex trading market is one of the largest in the world, open 5 days a week, 24 hours a day. But this is not the only thing that makes it unique. There are also other factors that make it unique:
01. High volatility in the forex market
Imagine how many transactions take place in the forex market every minute! This actually translates into billions of dollars. Due to the high volume of trading, the price of certain currencies can be very volatile. Whether you are guessing whether the price will move up or down, there is the potential for huge returns. However, you must remember that volatility is a double-edged sword and the market can reverse itself. It is therefore important to limit your exposure through risk management measures when trading forex.
02. Transparency in forex trading
The forex market is open to all citizens who can utilize the information provided by the market to influence their trading in other liquid markets.
03. Forex is the most liquid market in the world
You can see transactions taking place in the Forex market whenever you want, with millions, if not more than millions, of buyers and sellers, individuals, banks and corporations trading large amounts of currencies. The main purpose of these transactions is to make a profit, and as a result, the foreign exchange market is the most liquid market in the world.
04. The forex market offers you the opportunity to go short or long
One of the most significant features of trading forex is the ability to go long or short. Currencies are quoted in pairs. You always sell the "quote currency" and buy the "base currency". If you think the value of a currency is going to rise, you can buy that currency pair. If you think it will go down, sell it. Your prediction is the main factor driving your profit or loss.
Different types of forex trading
01. Spot Forex Trading
As the name suggests, this type of forex trading takes place "on the spot" or after a short period of time. In this type of transaction, currency is exchanged in physical form.
02. Forward Forex Trading
A transaction that is executed at a future date or set of future dates (forward). In this type of transaction, you sign a contract to buy or sell a certain amount of currency at a specified price on a specified date or range of dates.
03. Futures and Forex Trading
In this form of trading, the contract entered into is essentially the same as in the form of forward foreign exchange trading. The difference is that a futures contract is legally binding, whereas a forward exchange transaction is not.
How to Start Trading Forex?
Now you know what the forex market is, its features and different types, or maybe you're already curious. To trade forex, you need to follow these steps:
01. Choose your favorite type of forex trading
Before you start trading, you must choose your preferred type of forex trading. As an individual trader, you can choose to trade CFDs (Contracts for Difference) or trade forex through a broker. With CFDs, you trade the difference in price between opening and closing a position. You can also trade currency pairs through a broker who speculates on movements in the price of foreign exchange. However, in this case, you cannot participate in other foreign exchange markets.
02. Opening a Forex Trading Account
As with any other form of trading, if you choose to trade forex with CFDs, you will need to open a trading account with a trusted and regulated broker.
03. Make a Forex Trading Plan
If you don't have a trading plan, then you're planning to fail. This applies to every trading style, and trading Forex is no exception. After choosing a trading style and opening an account, you need to start making a trading plan. Your trading plan defines your trading patterns and strategies. You can refer to this plan to determine when to open and close positions.
04. Choosing an Online Trading Platform
In order to trade forex with ease, choose a good trading platform. You can choose from MT4, MT5, web-based platforms or other mobile software.
05. Opening, Monitoring and Closing Positions
Since you already have a platform, you can open your first position. You can then set up stop-losses and limits. With stops and limits, your trade will be closed when it reaches the position you specify. To ensure that you maximize the benefits of your trading, use all available analytical tools to carefully study the market and monitor price movements.
Risk Management in Forex Trading
Although you do not need to set a minimum amount in your account when trading Forex and CFDs, you must be careful. Due to the high risk nature of trading forex and CFDs, traders usually recommend risking only 1% of their capital per trade. However, the amount of capital you need often depends on your goals and trading style.