What Is Forex Trading
What is Forex Trading? A great question to start with.
Forex is also known as the Foreign Exchange Markets. It is also referred to as FX for short.
This is a hugely speculated market which is known for its deep liquidity and 24 hours trading periods, 5 days a week.
By participating in the Forex markets you are buying and selling from a wide range of entities; companies, banks, individuals, speculators etc.
The premise of forex trading is simply buying one currency and selling another.
The magic number that is thrown about is that Forex has a volume of around $5 trillion dollars traded every day. This is not just traders speculating, but people and business exchange currencies.
To put things into perspective of how much retail traders contribute to the $5 trillion dollar daily volume, retail traders volume is only worth 5-6%… Or around $250-300 billion dollars each day.
This is still larger than the stock market for sure.
For example, a company in the United Kingdom want to pay its employees in the United States – the UK company would exchange Great British Pound to United States Dollars. This is the exchange and then the employees would be paid in their local currency.
As you can imagine, the majority of the volume in forex are these transactions.
Just like normal assets, you can speculate on the price moving up or down and profit by guessing the correct move.
The popularity of the forex markets soared since leverage trading was introduced by brokers and the accessibility to the markets through computers and the internet.
Before this, you would need to invest at least £100,000 to achieve a modest return.
What Is Forex Trading? Why Trade It?
Investing/trading forex opens up many more doors for traders, whilst trading stocks – unless you are day trading, you will have to pay more in commissions and other fees.
Due to the sheer size of the Forex markets, the barrier to entry is lower than any other asset – however, this does not mean it should be the reason to trade Forex.
With stocks, you are looking to achieve growth by looking at:
The company’s performance – is the company’s earnings matching or outperforming their expectations?
The sector’s performance – is there growth/higher demand for the company’s products/services in the sector?
The local economy’s performance – is the economy expanding/wages rising to afford and increase consumer spending?
These three factors impact the stock’s price individually.
Now to an untrained eye, there is a lot to consider and therefore some investors look for an “easier” asset to speculate with.
Forex is not easy.
Far from it.
You are essentially investing in the growth of an economy.
Or; speculating that one country’s economy will outperform another’s.
For example, the USD/JPY.
If you wanted to speculate that the United States’ economy will outperform Japan’s economy, you would buy this currency.
This will be noted as buying USD and selling Japanese Yen.
If you felt that Japan’s economy would outperform the United States’ economy, then you would sell this currency.
This would be considered as selling USD and purchasing Japanese Yen.
In addition to the above, another reason why traders are attracted to the Forex markets is that it allows them to short-sell the market.
This allows traders to profit when the market falls.
In a world where we are better connected, information is at our fingertips and any major news can have a major global impact in the Forex markets – short-selling allows the traders the freedom to profit off these events.
What Is Forex Trading? How To Trade
For you to succeed in how to learn forex trading, you must know what is needed and how to trade forex.
Forex can seem rather complex and require higher education in economics just to grasp the forex trading basics.
However, that is the front the professionals want to give you, so you don’t take your business and trade for yourself.
In reality, the skills required for forex trading for beginners already have, it is time to develop them.
To be able to trade Forex, you must have:
A trading computer and/or mobile phone — ideally you have both because using a computer makes trading and analysis SO much easier.
A forex broker account — to either demo trade on or trade live with.
Patience & understanding — these qualities alone will get you in the right mindset for trading. You must be patient to watch out for the trading opportunities and not trade everything in sight.
You must also understand that you WILL LOSE money. This will 100% happen.
BUT… by learning how to trade and understanding that you will NOT PROFIT from every trade you make, will allow you to excel in this arena.
If you are unwilling to lose money, then that should tell you this:
Forex Trading / Investing is not for you.
If you are able to tolerate losing money, with the knowledge and understanding that you will profit overtime – then this is certainly for you.
To trade the forex markets you essentially buy (go long) when you believe the currency pair will go upwards. This allows you to profit as the markets rise.
e.g) You buy EUR/USD at 1.1355 and close your position for 1.1455 – this is a 100 pip profit.
Or sell (go short) when you believe the currency pair will go downwards. This allows you to profit when the markets fall.
e.g) You sell the EUR/USD at 1.355 and close the position for 1.255 – this is a 100 pip profit.
What Is Forex Trading? It’s Not Easy!
A huge misconception with Forex trading is the ability to amass huge amounts of wealth which have plagued the internet and the public for years due to leveraged trading.
Yes, with £1,000 it is possible to control £500,000 worth of currency.
There are plenty of “whizz kids” who have “invested” £250 and amassed a Ferrari, huge mansion, a yacht and a private plane all in one year…
This is false advertising and good photoshop skills at it’s finest.
If you are still thinking it is possible to do the above, then, unfortunately, you have been susceptible to their advertising.
We agree it can seem lucrative but the issue isn’t the fact how easy it is advertised to make money with Forex, but the real issue is how can you learn to trade the Forex markets and what plans you can generate and grow to build your capital.
It is possible to earn money through Forex but it has to be gradual.
Later on, in this course, we will discuss what this means and how you can future pace your trading like a professional.
To put things in perspective now – in order to make a million, you have to spend a million – this is ever so true.
Top tier private banks, for example, give their Forex traders a target of making £100,000 or so a day. Did you think they give them £500 to play with?
These guys are trading millions in volume to achieve this sort of return.
Once you understand that investing / trading should be considered more like a business; plan, prepare, execute, reflect, expand; you will begin to think less about your capital as money you are risking and more about the ideas you are generating and valuing whether or not it is a money-making opportunity.
By now you should have an understanding of what is forex trading, in the next few pages we will get you on track on getting to grips of the markets and what exactly to look out for!