Trading Forex Profitably
The world of forex (foreign exchange) trading can appear quite intimidating initially. It involves understanding the various terms used in the trading circles e.g. currency pairs, interest rates etc. It also involves gaining an insight into the ebbs and flows of various currency pairs and the factors that affect them.
What is Forex Trading (or Currency Trading)?
Forex Trading is nothing other than simply trading the currency of one country with the currency of another country. For example, the currency used in the United States is the US Dollar (USD). Similarly, the currency in circulation in Europe is the Euro (EUR). Therefore, you are trading in forex if you purchase the Euro while selling the US Dollar at the same time.
In forex trading, you could speculate that the US Dollar might reduce in value as compared to the Euro. Therefore, you buy the EUR/USD and wait for the value of the US Dollar to register an increase. Forex traders refer to this as ‘going long’ on a currency. Similarly, you might feel that the value of the US Dollar could increase in comparison to the Euro so, you purchase the EUR/USD and wait for the value of the US Dollar to drop. Traders refer to this as ‘going short’ on a currency.
By going long, the trader stands to profit if the price of the currency increases. This is the conventional method of investing. In contrast, by going short on a currency, the trader benefits when the price of the currency decreases.
Why Do Currency Values Appreciate or Decline?
Typically, currency values appreciate or drop because of various reasons such as:
- Political events
- Economic news
- Volumes of speculative trading
- International business flows
How Does Forex Trading Work?
Traders indulge in forex trading through brokers. Brokers do not usually offer all the currency pairs available. Therefore, you select a currency pair offered by the broker, which you expect will increase in value. Thereafter, you place a trade on the selected currency pair. Unlike investing in stocks, there is no centralized market for forex trading. As a result, not all forex brokers will offer the same rates for a currency pair at any given point in time.
Placing a trade does not require more than a few clicks. On receiving your order, the broker passes it to a partner in the Interbank Market for filling your position. The Interbank Market comprises the largest commercial banks and securities, dealers. When you decide to close your trade, the broker closes your position on the Interbank Market. Then, the broker credits your account with the gain or the loss.
Learning the Ropes – What You Need to Know Before You Enter the World of Forex Trading
At its core, forex trading follows a simple process. You identify a currency pair, where you feel that one currency will appreciate against the other. Then, you wait for an appropriate time to purchase that currency pair. After making your purchase, you wait until the value of the currency appreciates. Thereafter, you sell the currency pair for a profit.
Forex trading can be quite profitable. However, several traders enter the market expecting to get rich quick and end up burning their fingers. Therefore, if you’re keen on venturing into forex trading, here is a list of things to watch out for:
- There is No Formula: Avoid looking for that magical formula when you begin forex trading. It doesn’t exist. Forex trading works on probabilities and not certainties.
- New Forex Traders Have a High Failure Rate: Estimates suggest that about 90 percent of forex traders fail within the first year of trading. Therefore, you need to hit the ground running to avoid having a similar fate.
- Find the Trading Method that Works for You: There are several trading techniques. Review each one and understand their nuances. Test each one to see which one you’re comfortable with. Once you find a trading method that suits you, stick to it.
- Do Your Homework: Forex trading involves knowing the market, knowing yourself and your reactions to the actions taking place in the market. Therefore, do not focus on what makes you feel comfortable. Instead, stay focused on what is most important for the trade and act accordingly.
- Choose Your Broker Carefully: An unreliable broker could negate all your gains. Therefore, ensure that your expertise and trading goals match the details of the offer made by the broker. Check the client profiles the forex broker aims at. Check the levels of customer service provided. Evaluate the trading software. Scrutinize your broker before you even begin considering the intricacies of forex trading.
- Control Your Emotions: Many forex traders get nervous or emotional once they come across negative figures in their accounts. These negative figures cloud their ability to think logically. Therefore, follow your trading strategy, fine-tune it and be patient. Panicking could turn a profitable position into a loss-making one.
- Chalk Out a Trading Strategy: Make a trading plan by visiting any forex forum or video sharing site i.e. YouTube, Dailymotion etc. Specify your trade setups. Define your levels of risk tolerance. In addition, detail your plans as to how you will interact with the market i.e. your entry and exit points in market movements. The time you invest on creating this plan could determine the degree of your success.
- Start by Investing Small: Make small investments at first, with low leverage. Thereafter, once your account starts generating profits, keep adding to your account. Focus on increasing the size of your account through your trading choices.
- Patience and Perseverance: These traits are worth their weight in gold. Do your due diligence before you invest in currency pairs. Do not let the short-term ebbs and flows distract you. Stay focused. If required, review your strategy. Eventually, your efforts will yield the dividends you seek.
Forex trading is a good way to make money. However, it will not make you rich instantly. Making profits through forex trading will take some education and patience. If you can keep your head together in what is a complex situation, you will reap the dividends before long.
Want to understand world economy and the dynamics behind foreign currency better? Read about how China Keeps the Yuan Undervalued.
Learn more about the world of investment and gain all the knowledge and tools needed to get your start in trading with our Fundamentals of the Stock Market course.
If on the other hand, you are interested in trading the stock markets instead, you can read this excellent blog post on Stock Market Trading For Beginners which will offer you the basics you will need as a beginner trader and set you off to a profitable career in trading the stock market.