In This Article
- What is Forex Trading?
- How to Start Forex Trading?
- How to Set Up A Brokerage Account
- Basic Forex Trading Strategies for Beginners
- The Pros and Cons of Forex Trading
- Why Do People Trade Currencies?
- Are Forex Markets Volatile?
- Are Forex Markets Regulated?
- Which Currencies Can I Trade In?
- How Big is the Forex Market?
- How do Currency Markets Work?
- What Makes the Forex Markets Move?
- Forex Trading Terms to Know
- Risks in Forex Trading
- Forex Effect on The Economy
- The Effect of Forex on the Dollar
- Forex Trading Best Practices
- About Us
- Why Choose Us?
Forex trading is an international market to buy and sell currencies. It is worth $6.6 trillion, 25 times larger than all the stock markets worldwide. Forex stands among the most actively traded markets globally, with the average daily trading volume reaching $5 trillion. Forex’s daily trading volume reached $6.6 trillion in April 2019, according to a 2019 triennial report from the Bank for International Settlements.
The forex market is the largest one on the planet, the trades taking place in the market affect everything from the sock you import from China to the amount you pay for drinks while vacationing abroad. So let’s dive deeper into Forex, what it is, how markets work, etc.
What is Forex Trading?
Forex is an amalgamation of foreign currency and exchange. Exchanging one currency for another through forex trading platforms is forex trading; it can be commerce, trading, or tourism. Currency trading makes the call on the exchange rate for all flexible-rate currencies. If you have been to a foreign country, you might have already made a forex transaction.
The exchange rate of currencies fluctuates constantly based on supply and demand. The foreign exchange market is where currencies are traded; it is a global marketplace open 24 hours a day, Monday through Friday.
Forex trading takes place over the counter. There is no physical exchange. Banks and financial institutions worldwide supervise the market, not a central exchange like the NYSE.
Most of the trading activity occurs between institutional traders such as bankers, fund managers, and multinational corporations. These traders do not aim to have physical possession of the currencies; usually, at times, they are just simply speculating about or hedging against future exchange rate highs and lows.
Rates keep changing for currencies like Mexican pesos, Canadian dollars, European euros, British pounds, and Japanese yen, which are most likely to be used by Americans.
How to Start Forex Trading?
Forex transactions were traditionally made through forex brokers, but now with the introduction of online forex trading, you can use derivatives like CFD trading to take advantage of forex price movements. They act as your online forex brokers.
With CFDs, you can open a position for only a fraction of the full value of the trade. With CFDs, you take a position on your predictions rather than taking ownership of the asset. While it is true that leveraged products can magnify profits, they can also magnify losses if the market does not abide by your predictions.
Forex traders might buy US dollars and sell euros if they believe for the dollar to strengthen. An American company with European operations, on the other hand, can use the forex market as a hedge if the euro weakens, their income earned falls.
Wondering where to get started? And which is the best forex trading platform? Blockchain Tradein is your answer. We proudly stand amongst the most renowned forex trading brokers in the industry.
How to Set Up A Brokerage Account
Find an online forex broker that caters to all your needs as a trader (hint: Blockchain Tradein). The broker should operate in a well-regulated jurisdiction overlooked by a reputable regulator such as the Financial Conduct Authority (FCA) in the UK and in the US, the Commodity Futures Trading Commission (CFTC). Once you are sure of the broker, you can proceed with depositing funds into a trading account.
You will also need to download or access an online forex trading platform supported by your broker. They will either offer a proprietary trading platform or support 3rd-party platforms.
You can also, and this is a smart way to get started, open a demo account funded with virtual money to get your hands on the trading without actually losing anything. You can test your trading strategies without the risk factor.
Develop a trading strategy
Developing your trading system and testing it can be time-extensive. But this is the system with which you have to stand the test of time and make big bucks; you can build one up for yourself with some basic steps.
Time Frame of Your Trading
What resonates more with you? Day trading or swing trading?
This depends on how often you would like to look at charts, daily, weekly, monthly, or yearly, and how long you will hold your positions.
New trends through indicators
Finding trends is the goal, but with what?
One is Moving Averages which helps identify new trends and is the easiest way to spot a new trend.
Indicators to confirm the trend.
In order to not fall for whims and false trends, you will have to confirm the trend with other indicators. As you become familiar with various indicators, you will start preferring some over others, and you can then go on to add these into your system.
Define what you can lose
Decide how much your trade is allowed to move and not lose much on one trade. Think about how much you can lose before thinking about how much you will make.
Define the entries and exits
While some traders enter when indicators match and give a green signal, even if the candle has not closed, some wait until a candle closes before entering. Coming to exits, you can trail your stop by moving your stop by ‘X’ amount in case the price moves in your favor by ‘X’ amount. You can also have a set target and exit once the price hits the target.
Don’t deter from your trading system.
Make a rule book for your system.
Be disciplined and stick to your system and always follow the rules you make.
Test Your Forex Trading System
Record every win, loss, average win, and average loss. If the results are satisfying enough, you can start trading live on a demo account and check how your system works out when the market is moving if the results make you happy, trade from a real account!
Basic Forex Trading Strategies for Beginners
Pin Bar Trading Strategy
The pin bar makes it easy to identify a chart and is one of the easier strategies to trade. The market started towards resistance during a rally and soon broke through it. Former resistance becomes new support when it comes to technical analysis. And so, the market found support at former resistance and formed a bullish pin bar in the process. This strategy is best traded as a reversal pattern towards a major trend.
Inside Bar Trading Strategy
The best way to trade with the inside bar is as a continuation pattern. Here, you use a pending order to trade a breakout in the direction of the major trend.
Forex Breakout Strategy
There are many conventional breakout strategies, but you can also wait for a pullback and retest before entering and only look for wedge patterns. You should use this strategy after a break and retest of support or resistance.
The Pros and Cons of Forex Trading
Pros of Forex Trading
- Room For Fast Returns
- Easier Short Selling
- Technical Strategy
- Lesser room for Insider Price Manipulation
- Fewer Fees and Commissions
- Simpler Tax Rules
Cons of Forex Trading
- Small Traders have Some Disadvantages
- Lighter Regulatory Protection
- Fewer Residual Returns
Why Do People Trade Currencies?
Foreign exchange is largely done for practical reasons, but currency conversions for profit have a big market as well. The amount of currency converted each day can make the price movements of currencies extremely volatile. This volatility makes it attractive; it makes a bigger room for profits while increasing the risk.
There are many reasons to trade currencies,
Speculative trades are carried out by banks, hedge funds, financial institutions, and individual investors for profits. Central banks drastically move forex markets with their monetary policy, exchange regime setting, and also currency intervention. Corporations do currency trading for global business operations and also to hedge risks.
Are Forex Markets Volatile?
Forex is a liquid market and tends to move in smaller increments since its high liquidity lowers the volatility. Traders trading at the same time makes the price go up and down in small amounts. However, the forex market is not invulnerable to drastic and sudden movements. Many political, economic, and social events impact currencies making the prices volatile. And hence, you should be updated with current events and financial news to find potential profit and to avoid losses better.
Are Forex Markets Regulated?
The largest and the most liquid market has its own unique challenges when it comes to market regulations due to its size and scope.
How does one regulate a market that runs 24 hours a day globally? The currency trading market does not have any centralized body governing it. It does have several governmental and independent bodies overseeing it around the world, though.
Some of these bodies respective to their counties are:
- United States- Commodities Futures Trading Commission (CFTC) The National Futures Association (NFA)
- United Kingdom- Financial Conduct Authority (FCA)
- Australia- The Australian Securities and Investments Commission (ASIC)
These global bodies regulate Forex by living set standards that all brokers under their jurisdiction must adhere to. The standards involve being registered and licensed with the regulatory body, audits, communicating certain changes of service to their clients, and more. This ensures that trading is ethical and fair for everyone.
Which Currencies Can I Trade In?
The foreign exchange market is often characterized as a banker’s game, but currencies can diversify a portfolio that might have hit a roadblock. The market also offers tremendous opportunities when global forums enter the doldrums.
There are some currencies every trader or investor should know,
- The US dollar is the home denomination of the world’s largest economy, also referred to as the greenback.
- The Central Bank of Europe holds the right to issue euro banknotes while policymakers can intervene during bank or system failures.
- The Bank of Japan looks after the monetary policy and currency issuance, data/economic analysis, and money market operations.
- The Bank of England has a governing body appointed by the Crown.
- The Swiss franc, the Australian and New Zealand dollars, the Canadian dollar, and the South African rand are among the top tradable currencies.
How Big is the Forex Market?
Approximately $6 trillion is traded every day in the forex market, making it the most liquid market in the world. In 2020, the Forex market was worth $2.4 quadrillion. This also indicates that you can buy any currency you wish in high volumes. The market is open 24 hours a day and five days a week, Monday to Friday. The market opens in Australia, then Asia, and then follows Europe and the US market until they close on the weekend.
How do Currency Markets Work?
Forex trading occurs directly between two parties; the market is run by a global network of banks situated across four major centers for Forex in different time zones, London, New York, Sydney, and Tokyo.
The three different types of forex market:
Spot Forex Market:
Physical exchange of a currency pair is done on the same spot as the one where the trade is settled.
Forward Forex Market
A contract is agreed upon to buy or sell a set amount of a currency at a fixed price, to be settled at a specified date in the future or within a range of future dates.
Future Forex Market
In contrast to forwards, a futures contract is legally binding. Here, a contract is made to buy or sell a set amount of a given currency on a fixed date and price in the future.
Traders often speculate on forex prices and do not take the delivery of the currency itself; they make exchange rate predictions to cash in on the price movements in the market. Market participants use Forex to speculate on geopolitical events, diversify portfolios, and also hedge against the international currency.
What is a base and quote currency?
The first one quoted in the pair is the base currency which is quoted in terms of the second, the quote currency. The currency pair indicates the value of one currency against the other. This simply indicates how much quote currency can buy one unit of the base currency.
What is margin in Forex?
Forex margin rates are typically expressed as a percentage, the requirements starting at approximately 3.3% in the UK for major currency pairs usually. Your FX broker’s margin requirement indicates the leverage you can use while trading with the broker. Trading with leverage is not free. Traders should put down some money upfront as a deposit, the margin.
What is leverage in Forex?
Due to the large lot sizes, traders, at times, do not put up that kind of money to execute a trade. Leverage is borrowing money to participate in the forex market without the money required. Spread betting, and trading CFDs need you to deposit only a certain percentage of the full value of the position to open a trade, also referred to as trading on leverage. This type of trading, however, can magnify your losses.
What Makes the Forex Markets Move?
The abundance of currencies worldwide makes rate predictions difficult as many variables are at play when it comes to price movements. Forex is driven by supply and demand, and it is paramount that you learn of the influences that drive price fluctuations.
Supply is in the hands of the central banks, which can announce measures that can significantly affect the currency’s price.
It’s natural for commercial banks and other investors to put their capital into economies with a strong outlook. So, positive news hitting the market about a region will increase investment and the demand for that region’s currency.
If the demand is not accompanied by an increased supply for the currency, the distinction between supply and demand will increase its price.
Market sentiment is often a reaction to the news; it can dictate the currency prices surge at times. If traders expect a currency to move a certain way, they will trade accordingly and persuade others to do the same, affecting the demand.
Economic data plays a significant role in price movements as it indicates how an economy is performing. It also offers insight into future movements of the central bank.
Investors aim to maximize the returns from the market and minimize risk. So considering credit ratings becomes an integral part when deciding where to invest. A country’s credit rating indicates if it will repay its debts.
Forex Trading Terms to Know
Percentage in points(pip) is the smallest possible price change in a currency pair. Since forex prices are quoted out to at least four decimal places, a pip is 0.0001.
Exchange rates depend on the maximum amount the buyers are ready to pay for a bid (a currency) and the minimum amount the sellers need to ask (sell). The difference between the two and the value the trades will get executed at is the bid-ask spread.
Forex is traded by a lot, a standardized unit of currency. The typical lot size is 100,000 units of currency; there are also micro (1,000) and mini (10,000) lots for trading.
Risks in Forex Trading
Foreign exchange traders often consist of spot transactions, forwards, foreign exchange swaps, currency swaps, and options. But there is always a catch; there are many risks associated with forex trades since leveraged products can trigger magnified losses.
- Leverage leads to losses that go beyond a trader’s initial investment.
- The differential between currency values led by interest rate risk can lead to dramatic changes in forex prices.
- There are transaction risks, too, the exchange rate risks associated with time differences between the opening and settlement of a contract.
- Then there is counterparty risk, the default from the dealer or broker in a certain transaction.
- You should assess the structure and stability of an issuing country and consider the country’s risk for a particular currency.
Forex Effect on The Economy
Forex trading affects the economy in the short term as well as the long term. The economic developments in a country determine the demand for a currency, affecting the value of the currency. If the currency has a constant demand driven by increased tourism or increased earnings from manufactured goods, the economy is bound to grow.
Sometimes, short-term adjustments become imperative when the demand has been stable for a long time. Countries that focus on adding value to their goods consistently attract that kind of revenue in the forex market. The forces of demand eventually decide the forex market’s performance and hence the economy as a whole.
The Effect of Forex on the Dollar
When talking of taking a position in the dollar, you, the trader, need to assess the various factors that affect the value of the dollar to determine a trend. The US dollar has for long been the backbone of the global economy and a reserve currency for international trade and finance.
Not unlike other fiat currencies, the dollar’s relative value is dependent on the economic activity and outlook of the US. Other than fundamentals and technical factors, market psychology and geopolitical risk also impact the dollar’s value on the world market.
Forex Trading Best Practices
Hone your skills through practice and discipline. Perform self-analysis to check what drives your trades and learn to steer clear of fear and greed. Forex trading helps you diversify your portfolio is a great way to profit from specific FX strategies. Knowledge, practice, and discipline are key to getting and staying ahead.
- Define your goals and trading style
- Keep a consistent methodology
- Determine your entry and exit points
- Calculate your expectancy
- Focus and deal with small losses
- Do weekend analysis
- Keep printed records
Blockchain Tradein brings the financial world to your fingertips. We manage your wealth with our renowned expertise. We firmly believe that every individual has the right to make a successful investment and get a professional portfolio manager.
You can choose from an array of financial products and hundreds of different ways to trade and invest. We bring to you the best of the financial world; we are independent of any entity and provide you with unbiased support. We make navigation of markets easier by giving you accurate information, uniquely designed investment themes, expert commentary, and charting tools.
Curate a portfolio you desire and put it into action with the help of our experts.
Why Choose Us?
- We offer you ultra-competitive FX spreads in the industry with surprisingly low commissions and even lower spreads for active traders.
- With Blockchain Tradein, you subscribe to the best execution possible; our tier 1 liquidity gives higher fill rates, decreased premature stop-outs, and essential price improvements.
- We give you integrated Trade Signals, news feeds to keep you updated, and exceptional risk-management features.
- New to the trade? We make it simpler for you with our expertise and guidance.
- Our expert service offers world-class trading experiences; we are here for you round the clock.
Frequently Asked Questions
The National Future Association (NFA) works to protect the investors and ensure its members respect their regulatory responsibilities for enhanced market integrity and battling scams through best financial practices.
A spot FX contract specifies the delivery of the underlying currencies that happen after the set date.
The difference is when the trading price is set and when the physical exchange occurs.
There are two ways you can trade in the exchange-traded currency derivatives: Exchange-traded Currency Futures and Options.
Exchange-Traded Currency Futures is a legal contract where a party agrees to sell a certain amount of any currency at a predetermined price on a set future date. These contracts are traded in currency exchanges and do not mean that the currency will be delivered to the investor. The investor can settle the contract before it expires and realize profit or loss.
The documents that are acceptable but not limited to:
- Valid, current passports (national or international)
- Valid, current driver’s license
- Valid, current national ID Card
Other types of ID may be acceptable; it depends on your case after review. Birth certificates, marriage licenses, and insurance cards are not permitted. Also, additional documentation may be required for internal periodical reviews at any time.
Aim for success, create a trading account with Blockchain Tradein now.