What is Forex Trading? An easy-to-understand Guide for Dummies

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What is Forex Trading? An easy-to-understand Guide for Dummies
What is Forex Trading? An easy-to-understand Guide for Dummies. Image source: Pixabay

What is the Forex Market?

The Foreign Exchange Market, or more widely known just as the Forex Market, is where currencies are traded.

Currencies are crucial as they have to be exchanged to allow people to conduct both foreign trade as well as business.

An incredibly unique aspect of the Forex Market is that a central market place in which Forex exchange occurs is not necessary. Forex trading is conducted electronically and over-the-counter, or OTC.

OTC means that transactions are made by making use of computer networks which connect different traders from all over the world rather than have exchanges occurring in one central exchange.

The Forex Market is open 24 hours a day, 5 days of the week. Forex is traded worldwide in the major financial centres which includes London, New York, Tokyo, Zurich, Frankfurt, Hong Kong, Singapore, Paris, and Sydney.

Forex is traded across every time zone in the world. When one market closes, another opens, or they overlap.

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What do traders need in order to start trading Forex?

Understand the terms and definitions

Before traders take to the Forex Market, ready to trade, they need to have a basic understanding of some of the most common terminologies and their definitions that they will come across while trading, some of these include:

  • Base Currency – is the currency that the trader is currently holding. A trader from the United States will most likely have the US Dollar as their base currency. This currency is always the first one in a currency pair
  • Quote Currency – this is the currency that the trader will purchase and is to the right of the currency pair.
  • Bid price – this is the price that the trader’s broker is willing to either “bid” or “buy” the base currency in the possession of the trader.
  • Ask price – this is the price that the trader’s broker will “ask” the trader in exchange for buying the trader’s quote currency of choice. Traders should note that the ask price will always be higher than the bid price.
  • Spread – this is the difference between the bid price and the ask price expressed as pips. The spread is the commission that the broker receives for rendering their services.
  • Pip – stands for “Percentage in Point” and it is the smallest measurable value of currency movements. One pip is equal to 1/100th of the trader’s base currency.

Choosing the right broker

Before traders can embark on trading Forex, they will need to select a broker through which they will trade. The broker helps the trader execute trades in addition to several other services that they offer.

Before selecting a broker, traders will need to understand what their trading objectives are along with their budgetary provisions and limitations, the time they can dedicate towards trading and what they will need from the broker with regards to educational tools.

As soon as traders understand their needs, they will be able to choose a Forex broker that will more efficiently and sufficiently cater for their trading needs.

When looking at any broker, it is important that traders look at the following factors:

  • Whether the broker is regulated through a reputable authorizing entity and whether security of client funds is ensured through making use of segregated accounts.
  • The fees involved with trading such as spreads, commissions, and overnight fees, to only name a few and broker fees such as inactivity fees, deposit fees, withdrawal fees, and several more.
  • The trading platform that the broker provides, whether it is user-friendly and easy to navigate, whether it has enough technical indicators and other tools to conduct technical and fundamental analysis (which is imperative for trading strategies)
  • The availability and the provision of both educational and research tools.
  • The quality and the availability of customer support.

Apart from this, traders need to look specifically at Forex brokers as not all brokers offer Forex as a trading instrument, although most do, it is imperative for the trader to first evaluate their trading instruments to be certain.

When looking at different Forex brokers, keeping the abovementioned important factors in mind, traders can visit the following broker websites to evaluate their offering:

  • Markets.com
  • Admiral Markets
  • Naga
  • FpMarkets
  • FBS
  • OctaFX
  • XM
  • Exness
  • Forex.com
  • Pepperstone

Analyzing the World Economy

To be able to profit from Forex trading, traders will need to be able to accurately predict the movement pertaining to the world economy.

To become profitable, traders need to convert their base currency into that of a quote currency set to rise in value followed by converting the trader’s quote currency back into the base currency as soon as the value is at its peak.

Traders will need to research different trading positions along with GDP and the political climates of the countries that traders would like to purchase currency from. By making use of this, traders will be able to conduct a fundamental analysis.

Fundamental analysis is aimed at understanding why prices move and technical analysis is done using a variety of technical indicators and analytical tools to develop a trading strategy that takes advantage of these movements in bringing in profits to the trader.

Trading strategies will also be able to tell the trader when the best time is to enter a trade and when it is time to exit a trade to minimize and prevent losses.

Conclusion and Writer’s Opinion

One of the important factors to consider is whether the broker provides enough educational tools to beginner traders that will greatly assist them in trading activities and will help traders gain further knowledge, skills, and experience.

Before starting to trade, traders should make use of their broker’s demo account to practice their trading skills and strategies in a mimicked live environment that is risk free but still has the same features as a live account.

As soon as traders have more confidence, skills, and knowledge, they can move over to a live account to start trading in a live trading environment.

The only way to become a more advanced trader is through practicing in allowing theory and practice to come together.

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