Forex Trading: The Nuances Simplified

366

Of all the instruments available on the stock market, forex trading is one of the simplest. Many have made tremendous profit, and many continue to make profits irrespective of the economic crisis.

The saying “someone’s mistake is someone’s profit” is true when it comes to trading in the forex market. Close to $7 billion in daily trade volumes speaks to the enormous profits that can be made in a matter of a few minutes to a few hours.

The other advantage of trading in the forex market is that you don’t have to sacrifice your day job to track and trade in the forex market. Although the market is usually open from Monday to Friday, due to time differences around the world, it is open 24 hours a day. There is always a forex market open somewhere on the globe where you can trade.

The forex market is one of the most liquid and volatile markets compared to all traditional financial markets globally.

Historically, this market was open to huge financial institutions like banks, but as there was an internet revolution in the 2000s, the forex market was opened to all retail investors.

Although a few retail investors hardly use personal computers or laptops, many rely on their Smartphone’s to access the forex market on the go. So a person in a third-world country having a Smartphone and a decent internet connection can trade the entire day to make substantial profits.

Forex Market

The stock market has several instruments to trade with, like stocks, commodities, precious metals, indices, bonds, etc. On the other hand, the forex market deals only with currencies.

The forex market adheres to all the economic rules and laws, forex traders make a profit by buying the currency in one market and selling it for a profit in another market, even though it is one of the simplest and easiest markets to enter and trade. Forex trading is the simultaneous buying and selling of currency pairs in the forex market.

Currency Pairs

Each currency is paired in the forex market, they are usually “base currency” and “quote currency.” Consider the EUR/USD pair, in which EUR is the base currency and USD is the quote currency.

So, for instance, if the rate of EUR/USD in one market is 1.46, and in another market, it is 1.50, then the forex trader will buy the currency in one market and sell it in another, making a profit of four cents. Since the forex trader buys and sells in bulk, the profit margin increases.

Types of Currency pairs

There are two types of currency pairs in the world: major currency pairs and minor, or exotic, currency pairs. The major currency pairs are those of developed countries. Since these developed nations are financially stable and any external factors have little effect on their economies, they are relatively stable.

The minor or exit currency pairs are those currencies of countries that are developing or underdeveloped. These nations, compared to the western nations or developed nations, are not as economically sound as them. Thus, any external economic factor can have a drastic effect on their currencies.

Thus, these currency pairs are highly volatile. When compared to less developed nations, the more developed the nation, the more stable the currency pair, and the more volatile the currency pair.

Leverage

Leverage is used more often in the forex market compared to other financial markets. Leverage is a tool that multiplies the chances of making substantial profits. Suppose you invest $10 and use leverage 5X; if the profit is $20, the profit after the leverage would be $100. However, if you make a mistake, you could lose five times the amount you invested. So leverage should be used only when you are sure to make a profit.

Factors affecting the forex market

Fundamental and technical factors govern the price trend of a currency pair. We have already mentioned that these factors do not have a huge impact on major currency pairs compared to minor or exotic currency pairs.

Even though it is the easiest market to read, care must be taken so that you minimize the loss potential while increasing the profits.

Strategies while trading in the forex market

Several online forex brokers or brokerage firms are available online. Choose a reputed forex broker or brokerage firm, since there are several scammers out there to rip you off.

You can start forex trading for as little as $100. You can always seek out a forex broker or a brokerage firm.

The advantage of selecting a forex broker or brokerage firm is that they have online forex trading courses that will teach you research-based trading strategies. They also offer a demo account along with a live account. You can practice your trading skills and strategies on a demo account before settling down on a live one.

As always invest the amount which you would not regret losing it.