The forex market is very dynamic, and those who become a part of this space get a lot of profitable opportunities as well. However, when you decide to become a forex trader, you must be prepared to deal with the risk. The risk is due to the unpredictable nature of currencies and adds complexity to market analysis and decision-making. Hence, those exploring the forex world for the first time will often feel intimidated and overwhelmed due to its rapid movements. But you can still find your way out of this puzzle by sparing enough time to learn and understand the workings of forex trading.
This complete guide for beginners can be a good starting point to dive into the realm of currency trading and learn how forex trading operates in a simplified manner.
Meaning of Forex
Forex is a short form for ‘foreign exchange’ and is often abbreviated to ‘FX’ too. In the earlier days, forex was simply the exchange of different national currencies. The foundation of forex is based on currency conversion and exchange rates to this date. But if we try to trace the roots of foreign exchange, then they will go back to many centuries ago. Many believe that forex in its ancient form existed in the Babylonian period. Amsterdam was actually a major forex hub in the 17th and 18th centuries.
However, a turning point that led to the evolution of forex to its modern form happened in the 19th and 20th centuries with the establishment of the Gold Standard Monetary System and the floating exchange rate system. All of these events lead to the growth and development of the forex market as the world’s largest trading market. The Forex market is a decentralised and global market where currencies are traded with the intention of making profits, and this is what we refer to as Forex trading. This takes us to the next section, where we will talk about the meaning of forex trading in layman’s terms.
What is Forex Trading?
In simple words, Forex trading is the exchange of currencies. In all financial markets, you get a bunch of options to choose from as trading instruments. In the forex market, the trading instruments are presented as currency pairs. Two international currencies will be a part of the pair. There are a lot of different currency pairs, and they are categorised into three: Major, minor and exotics. Major pairs are the most liquid and produce the majority of the trading volume in the forex market.
The world’s reserve currency, USD, paired with any other major currency like Euro, GBP and more, are traded as major pairs. Minor pairs come 2nd, but they are also quite liquid as they include all major currencies except USD paired with one another. Exotic pairs are the least liquid and most volatile, with major currencies paired with currencies from developing or emerging economies.
It is important to mention the fact that Forex trading has a wider scope, and it goes beyond making profits from trading. It serves the purpose of facilitating international trade and investment. For instance, an American car dealer wanting to import cars from European countries would need to exchange USD for Euro to make the payment. Similarly, a European tourist in the US would exchange Euro for USD to pay for the expenses.
Now, let’s move on to the next section to understand how forex trading operates in the forex market.
How does Forex Trading work?
In the previous example, we talked about exchanging USD and Euro in international transactions. The conversion rate or exchange rate of Euro and USD will be the basis for these transactions. In forex trading, you won’t be trying to buy any goods or services but will buy and sell these currencies to profit from favourable exchange rate fluctuations. A currency pair like EUR/USD represents the exchange rate between 2 currencies, and traders who are able to anticipate the potential price movements will be able to make profits from the forex market.
For this, you will have to gain knowledge about market fluctuations, trading concepts, market analysis and more. You also need to understand the fundamentals and technicalities and must be able to come up with a solid trading strategy to follow. Your strategy or trading system will be used like a map to navigate the currency market. It tells you about the direction that needs to be taken and will also guide all the actions with predefined rules. But the end results you get in trading will depend on your skills and real-time performance.
The market is operational 24/5, with 4 different forex trading sessions based on timezone differences. The only time you can’t place trades is the weekend. Except that, you can freely engage in trading by logging into a trading platform with a live trading account provided by a forex broker. The broker offers access to the forex market, and the platform will have all the relevant tools and features required for analysis and trading. You can begin with MT4, as it is the most suitable platform for beginners. Finally, anyone with a compatible computer system or device with an internet connection can quickly enter the forex market. All of the trading activities happen online, removing the constraints of location and time.
Ways to Learn Forex Trading
As I said before, attaining success in forex trading requires sound knowledge and skills. A complete beginner will have to learn trading from scratch, which is not that hard in the internet age. There is a lot of learning material that you can freely access online, and those who prefer offline learning can turn to books. There are a lot of books written by professional forex traders, and you can refer to them for theoretical knowledge.
For practical learning, you need to open a demo trading account where you get to experience trading without any risk. It is the perfect place for practising and developing trading skills. I recommend everyone open a practice account or demo account and trade there. Spend some time trading with virtual currencies to understand the market and its movements and build strategies to help you succeed in live trading.
Things to consider while choosing a Forex Broker
Once you learn about forex trading, you need to make an important decision to start your trading journey: choosing a brokerage platform. Different traders have different requirements, and each broker will also be different when it comes to the services provided. For instance, a Muslim trader looking for a swap-free account will have to sign up with a broker who offers Islamic accounts. Hence, we have to be clear about our own preferences, and that will make the selection process easier.
So, let’s look at a few things that you can consider to make a wise choice.
- Regulations – There are 2 types of forex brokers in the market: regulated and offshore. Regulated brokers conform to the standards set by top-tier authorities and are constantly monitored by these bodies. Hence, trading with a regulated broker gives you a sense of security. So, check your broker’s regulatory status before going live.
- Trading Conditions – The primary function performed by forex brokers is providing market access and offering solid trading conditions. Solid trading conditions include fast execution, tight spreads, low commission and high leverage. So, you can filter your broker options using this criteria.
- Forex Trading Platforms – MT4 and MT5 are the most commonly used forex trading platforms. They are very user-friendly and loaded with all the basic and advanced tools you will need for a seamless trading experience. Almost all brokers offer MT4 as a trading platform, which would be ideal for a beginner.
- Funding & withdrawals – Another important aspect that you need to consider is the method for funding and withdrawals, along with processing speed. Consider brokers who provide a bunch of options for secure and fast withdrawals.
- Customer support- It is normal to have doubts when using a platform for the first time. A responsive customer support team should be there to clear these doubts and solve any issues. So, you need to look for a broker who provides this.
Making Profits as a Forex Trader
Being good at risk management is the first prerequisite for forex trading success. Those who can’t limit their losses won’t be able to become truly profitable in the long run. Building trading discipline and having emotional control is also essential for making rational trading decisions throughout your journey. So, making profits as a forex trader requires patience, persistence, psychology, and skills.
With that, we are wrapping this beginner’s guide to forex trading. I hope you were able to learn something new, and I will also encourage you to keep learning more while exploring the profitable opportunities in forex trading.