Forex, also known as foreign exchange, or FX, is the buying and selling a country’s currency in exchange for another. Being one of the most competitive, most liquid and largest markets in the world, the forex market has an estimated trading volume exceeding $6 trillion daily.
If you are interested in learning how your clients can benefit from trading in the forex market, then you will find the following step by step guide on how to trade forex very useful. You can also visit our educational What is Forex page to find out more.
6 Easy Steps to Forex Trading
Getting into forex trading is easy. Simply do your own research, choose the right forex broker, connect to the internet and finally open and fund an account with them. You will then start trading through their Forex trading platform. Here are a few steps you can follow to place your first trade.
- Choose a Currency Pair
In Forex Trading, the value of one currency is exchanged for another, as currencies are always traded in pairs. A currency pair consists of a base currency, which is the first listed currency, and a quote currency, the second currency. The currency pair EUR/USD is considered the most liquid and most popular currency pair in the world, followed by the USD/JPY. When you buy a currency pair, you buy the base currency while indirectly selling the quoted currency. Likewise, when you sell a currency pair, you sell the base currency while buying the quote currency.
- Analyze the Market
Researching and analysing the markets is another crucial step when trading Forex. You need to also put your emotions aside, in order for your decisions to be rational. While searching, try to find a variety of Forex resources and use both technical and fundamental analyses, so that you are aware of any chart, both current and historical as well as any daily political and economic news. In this way, you can speculate on the various currencies’ movements.
- Buy or Sell
Another major step is when buying a currency pair whose base currency you believe will rise against the quote currency, or the quote currency will fall against the base currency. If everything goes as predicted, then your trading journey will be successful. However if not, then risk will be increased as well as the possibility of loss for every point the exchange price drops.
Bearing in mind that the Forex market is a volatile one, then one needs to understand and use orders to hedge against currency fluctuations. Orders refer to stop and limit orders which are ways to automatically trade in the future when prices reach a desired level you have determined prior to the trade. For instance, using a stop-loss order can help you can manage risk and minimise loss while using a limit order can close a trade at a price which is better than the current market level.
- Monitor and Close Trades
Trading through the standard MT4 trading platform, gives you the opportunity to track market prices, check your trades, add new ones or close older ones.
Last but not least, your attitude and behavior when trading will determine your overall success. You should never let your emotions guide your judgement, therefore you should cultivate patience and discipline. As long as you trade carefully, have the knowledge and right attitude, you will find that trading Forex in a responsible manner is a rewarding experience.
Why Trade Forex
There are many reasons why traders prefer to trade forex. If you are intrigued about the many benefits of trading in the forex market, then you are at the right place, as we will give you a wide range of insights.
- No commissions: Forex trading involves very low transaction costs since Forex brokers are compensated for their services through the spread (the difference between the bid and ask price).
- Low spreads: Spreads are very low for Forex pairs because liquidity is high.
- Multiple FX pairs to choose from: Traders have the ability to speculate on the price of currencies going up or down.
- Leverage: Higher leverage gives the opportunity to trade bigger volumes and earn significant profits without having to use just their own limited trading funds. This, however, includes potential losses. To avoid increasing the risk, this needs to be addressed with discipline and risk management.
- Ability to go long or short: In forex trading you are always selling (going short) one currency to buy (going long) another.
- Foreign Exchange market hours: the Forex market is open 24 hours a day, five days a week.
- High liquidity: Transactions can be processed quickly and efficiently as the FX market is the most liquid market in the world.
The Forex Market
What makes the Forex Market unique is that although being global it is decentralized, meaning that it has no central marketplace. Instead, currency trading happens electronically, over-the-counter (OTC), meaning that all transactions occur online among traders globally rather than via one centralized exchange. Having approximately $6.6 trillion USD traded every day, the foreign exchange market is the most liquid in the world. Therefore, currencies in high volumes can be bought, while the market is open.
What is also important, is that the forex market is open 24/5, Monday to Friday while currency trading happens in the major financial centers of London, New York, Tokyo, Zurich, Frankfurt, Hong Kong, Singapore, Paris and Sydney. As a result, the forex market can be active at any time, depending on the time zone since when one trades in the U.S, another one does so in Tokyo. Prices are constantly changing and there is always someone to buy or sell.
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All trading involves risk. It is possible to lose all your capital.