‘Forex’ – the term actually stands for foreign exchange. In simple terms, forex trading is the trading of currencies from various countries like the Euro against the US dollar. Anyone who has to deal with a foreign country, for any reason has to use the currency of the respective country. If you’re in Dubai, being a resident of India, you have to pay the fees in UAE Dhirams as INR won’t be accepted there. One of the best things about this market is that there is no physical office where currencies are traded and every transaction is done electronically. Unlike the stock market exchange, the forex market stays open round the clock. Isn’t it fascinating?
Real-life example of forex trading – To understand the trade
As long as forex trading is concerned, it lets you speculate price movements in the foreign exchange market all over the globe. The values of different currencies rise and fall against each other and based on this, there is a corresponding change in international, national, financial, economic and political events.
While trading the forex market, you would purchase a currency when you believe that the base currency will rise in value against the counter currency. On the contrary, you will probably sell a currency pair when you believe that the base currency will weaken against the counter currency.
Selling GBP/USD in the form of spread bet
As the traders are bracing themselves for Brexit, the pound will fall against the dollar or the vice versa. This is when you decide to go short or sell £5 a point at 1.22262. In this example, the margin and P&I can be deduced in pounds.
The winning trade
Suppose you were right regarding the suspicions on the movement of currencies and the Pound drops against the Dollar. When the rate drops down to 1.22045, the point where you close down the trade, thereby making 108.5 in terms of profit.
The losing trade
Suppose the market didn’t move as per your expectations and Brexit revitalized the Pound and increased it. The Pound climbs to 1.22489 before even you select the position.
Trading the forex market – How to start off with the process
Though forex trading might seem to be complicated, the truth lies in the fact that most can get started with a new account. What are the steps that you can take? Here are some few steps:
- Know the lingo
There are few phrases and words that you’ll come across like base currency, quote currency, ask price, bid price, spread or pip. You need to understand the meaning of these phrases so that no one can deceive you while trading.
- Select the apt broker
The next thing to take into account is the brokerage firm that you choose. It is the firm that can let you make trades and can offer several other financial services. Working with a reputable broker can make or break your future success as a trader.
- Know the bigger picture
You can only make money by trading currencies when you can successfully predict the movement of the economy. In order to become a profitable trader, you can convert the base currency into quote currency and again convert the quote currency into base currency. Research the GDPs, trading positions in which you seem to be interested.
- Make your initial trade
As you decide which currency you’re going to purchase, it’s time to place an order as your initial trade. The brokerage firm can provide trading software that lets you sell or buy a currency.
Forex trading strategies
This is a long-term trading approach where trades can be held for months. In this case, you’ve got to rely on fundamental analysis in your trading and also use technical analysis to time out your entries. Here there is less stress as you don’t have to worry about short-term price fluctuations.
This is a medium-term trading strategy where you can hold trades for several weeks or days. The time-frame through which you can trade is 1-hour or 4-hour. As a swing trader, the focus is to capture a single move which is called ‘swing’. Hence, you’ll most likely sell resistance, buy support, trade pullbacks, trade breakouts, and trade the bounce of moving average.
Day trading is a short term strategy where you can hold trades for hours or just minutes. The timeframes through which you can trade are usually 5-15 minutes. As a day trader, the main concern is to capture the volatility intraday. You’ll likely sell resistance, buy support, trade pullbacks and breakouts.
Therefore, if you’re a forex trader who is wondering about the best strategies to win the forex trading market, you may take into account the above-mentioned strategies to become a successful forex trader.