Forex Trading Basics | Basics of Forex Trading
Trading has a history as old as human beings. In conventional trade, an economic concept is being involved by which we buy or sell goods and services. In earlier times trade was performed by the exchange of goods, afterward currency notes were issued by governments and were used as equity by the buyers and sellers at the time of trading. With the modernization of the world, it became necessary to exchange currencies by two or more different residents of countries for inter trades.
As the modernization of the world continued there arrived a new concept of trade which is named Forex Trading. What happened here is that trade between the different currencies (two at a time) is performed by buying one currency and selling in reference to other currencies. They are also named as currency pairs or instruments. Like EUR/USD is an instrument.
In Forex Trading, a position needs to be opened for buying or selling to trade. For example, if you are trading in an instrument USD /JPY, and you open a position for buying it means if the market level goes up from your position you are in profit. if you open a position on the same currency by selling then and if the market level goes below then your open position level you are in profit and if it goes opposite as per your open position then it will make you lose money.
In the forex market when an instrument is being traded, it is quoted with two prices one is for sell and the other is for buy. Generally, the buying price is a bit more than the selling price. The difference between the buying and the selling price is called “spread”. This spread or gap varies from broker to broker. less spread allows swing traders to get in and out of trades in a short time.
In the forex market, an instrument is known as high-level liquidity if that instrument is bought or sold easily. So easily buying and selling capabilities of an instrument declares its level of liquidity in Forex Trading. Forex market is known as the most liquid market of the globe because here instruments can easily be traded without worrying that your equity will get stuck while trading.
The daily turnover of the forex market is about 6.6 trillion dollars per day. This market is regarded as the world’s largest financial market. As per the survey from various financial experts, it has been observed that from the last two decades the volume of the forex market has increased by 40%.
MetaTrader 4 and MetaTrader 5 are the most common tools which are used for Forex Trading but there are a significant number of brokers that are offering their software that assists while Forex Trading.
How to do Forex Trading
From the above explanation, it seems quite simple that if you open a position following the market you can earn profit easily. But in reality, 99% of the Newbies are not able to earn profit for most of the time they lose their money while trading. Forex Trading follows the same principle as of other trades, You can trade successfully only when you know how to trade. Being a successful trader requires a lot of knowledge and patience. Your luck can bring you one, two or maybe three successful trades but in the long run, it’s not practical and will be disastrous.
There are some rules which need to be followed if you want to be a successful trader.
Be Realistic and Logical
When a new trader enters into real Forex Trading after experiencing the demo, most of the time he has an obsession for chasing huge profits. These feelings and emotions can lead him to overconfident tradings which end in loss most of the time.
The very first rule for Forex Trading is to stay realistic and keep in mind that chasing high profits with just a few quick trades is practically impossible. Unrealistic objectives will drain you emotionally and financially. Most successful traders do believe in earning money from Forex Trading and don’t stress by earning more.
Make a Strategy
After entering into Forex Trading the next important thing is to make a strategy. There is nothing right or wrong while trading but the thing that is needed is to have a strategy that can be used in different scenarios.
While trading it can be observed that a strategy that is effective for one instrument will not be successfully applied to other instruments. So making different strategies and harmonizing them can bring some good results. Studying the different instruments and their behaviors will be another effective way of building a better strategy.
If you want to be a successful Forex trader keep your emotions aside while planning your trades. some traders start thinking that Forex Trading is like a game and whenever they lose they feel disappointed and get emotionally unstable. To be successful start learning the mechanics and follow the analysis according to your strategy. it’s the most effective way to get profits in your trades but on the other hand, emotions will ruin your trading.
Before entering into the live forex market it is suggested first practice the demo accounts which almost all brokers offer.
Stop-Loss( S/L ) and Take-Profit ( T/P )
In the forex market stop loss and take profit are the points on which you are trading. This operation is working by the software that you got from the broker. By markings stop loss, Trader feels relax if something unpredicted happens then it will save your account to be blown off.
but in some cases even stop loss doesn’t provide the guarantee if the market behaves erratically and some price gap is observed (Slippage) then stop loss will not be commissioned. But will be activated when the price again reaches the stop loss point.
If you are into the business of Forex Trading then the news is the most important thing for you to predict the movement of instruments. This thing is also known as Forex news. Political events and Central Bank announcements are very important information. This type of trading is known as fundamental trading.
Even if you follow technical trading by studying the market’s movement, still you have to study the forex news. Like if you have a better strategy based on some indicators but still fundamentals are important as sometimes fundamentals change the whole game so knowing Forex calendar and an Eagle eye on Fox news can lead you to be a successful Forex Trading.
Never Do Overtrading
If a trader sets his trades while seeing opportunities for making more and more money while there isn’t any. Also when somebody seeks an opportunity for making money with every movement of the market, what actually happening here is they are risking their capital with the above discussed two cases of overtrading.
If somebody is trading very frequently without analyzing the scalping strategies will surely end his trades by losing money. Also in some cases, people involve too much volume with more leverage in their trades and if unluckily their analysis goes wrong they will lose that volume or maybe there is a chance they blow out their whole account.
According to most successful “traders trading like a machine-gunner is not wise but trading like a sniper is a key to success”.
Planning for Trades
According to the above discussion, it’s clear that discipline in Forex Trading is very important, being more organized trader needs better planning for your trades. Sometimes traders Get Lucky with trades and they earn a big amount but this thing develops and negative habit of setting all things just based on luck. but in reality, trades need better planning by strictly watching the instrument movement and the market study concerning the Forex calendar.
Choose Broker Wisely
Nowadays many brokers offer you the opportunity for Forex Trading. However, if you don’t feel relax with the selection of broker and feel insecure to transfer capital to broker. So it’s an important thing for selecting a broker wisely.
Always seek for one who gives the choice of leverage and instruments required to you. Also, check their services like helpline and withdrawal methods.
Additionally confirm their legal documentation, permission from government and insurance for the traders’ capital.