How Does Forex Trading Work

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Is Forex Trading?

The value of currencies changes on a daily basis. When you compare the fluctuation of prices in one currency to another, the difference allows you some room to earn profit. Fiat currencies are exchanged in the online forex trading market which operates for 24 hours, Monday-Friday. It is known to be the largest financial market in the entire world offering unmatchable liquidity.

Of course, trading is not the only reason why currencies are exchanged. There are several practical reasons why governments and banks would actively exchange currencies but it is also true that earning profit is a big reason for currency conversion. Given that every day, a large amount of currency is convert, this can directly affect the price of currencies. What attracts traders to the forex market is its volatile nature. The price movements are so frequent that there are a lot of opportunities to make profits but also incur losses at the same time.

The Forex Market for Beginners

The basics of the forex market and how it functions are fairly simple but that doesn’t make forex trading any easier. This industry has a steep learning curve, meaning the probability of failure among amateur traders can be very high, especially if they enter the market without proper research. It helps to know that forex trading was once an exclusive territory of institutions and large organisations and it has recently opened up to retail investors. Therefore the market is structured in a way that you should be an ‘insider’ to comprehend it fully.

As a forex trading beginner, you should aim to study the market deeply enough to be able to understand the nuances that affect its day-to-day functions. Once you thoroughly understand the market and create your own trading strategies, you can be one of the insiders!

Who is a Forex Trader?

Currencies are always trade in pairs and currency traders also referred to as forex traders bid on currency pairs. When a bid is in progress, it is term a ‘position’. To say a position is open implies that a trade has been expos to the market and the trader may choose to hold the position in order to make a profit. There are two main types of positions in forex trading: long position and short position.

When a trader enters a long position, they do so hoping that the value of the currency would rise. On the basis of this speculation, the trade is complete or the long position is closed when the trader sells back the currency at a higher price than what they bought it for.

If a trader speculates a downfall in a currency’s value, they will want to buy the currency at a lower rate. This is known as a short position which is complete when the trader buys the units at a lesser price.

Understanding Currency Pairs

To complete a transaction in the forex market, you must buy a currency by selling another. Every currency pair consists of a base currency and a quote currency. So if the currency pair is EUR/GBP, the base currency would be Euros and the quote currency will be Pound Sterling. To buy a unit of the base currency, you have to pay a certain amount of the quote currency. In order to earn a profit, you should be able to predict the price movement of the currency pairs.

Forex and Leverage

Developing the ability to use forex trading leverage right could have a life-changing impact on your forex career. Forex traders can earn more with less investment using leverage as it allows traders to buy more and magnify their profits.

Let’s assume that the leverage you have is 2:1. The funds in your brokerage account are only worth $1000 but with leverage, you would be able to trade $2000 in the forex market. You will come across hundreds of brokers who offer leverage up to 50:1. As tempting as that could seem, new traders often tend to overlook the risks involved. Having a 50:1 leverage means you can trade $50,000 with just $1000 in your account so every single pip would roughly be worth $5. So if your currency pair’s price moves from 70 to 100 pips on average, you could be losing up to $350 daily!

As a forex trader, you may feel that you’re strong-willed enough to remain undeterred by the price fluctuations and unpredictable volatility. But when you come to terms with the fact that you might be actually losing your money, it is likely that you would want to immediately make amends and get your money back. To do this, you may happen to make an impulsive decision that could do more harm than good.

The Market and Your Emotions

So if you’re safe from the temptation of using leverage, let’s move on to the other challenging aspect: your emotions. When you’re a forex trader, keeping a strong grip on your emotional response to market fluctuations is important. The forex market can have numerous ups and downs so therefore you should know when to exit a trade. The philosophy of holding on to traders for too long may not always be true, especially when we’re talking forex. You require a proper set of functions, strategies, and formulas to be consistently successful in forex trading.

It is only natural to feel tense when the market movements aren’t in your favor. After all, your money is riding on it quite literally. The key is to not doubt your trading methodology and know when to close the trades to avoid loss. Amateur traders would on the other hand continue to stay in the market hoping for a miraculous market recovery that may happen only in rare cases. Imagine this, you’re losing money and that’s already stressing you out. Hoping that you will gain back again, you take an impulsive decision to leverage a trade that simply cannot be save. You will only end up losing more than you may afford to payback!

The only fool-proof way to keep yourself steady in forex hours is to create, test, and put to use a good trading strategy.

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