Forex trading in a layman term simply means exchanging foreign currencies, in order to make profit through trades. Exchanging the dollar for Euro is forex trading, furthermore if the value of the Euro climbs or increases after the exchange, it means the trader made a profitable trade. This is simply what forex is about.Going a bit deeper, profitability in forex trading stems from the ability of the trader to study the market critically, both on technical and fundamental levels before going through with the foreign exchange/ trade. Citing the above instance, before the trader exchanges his dollar for the euro, he must have observed and noticed that there might or should be an increase in the value of the euro as against the dollar.Therefore, the trader would instantly make the exchange, getting the Euro, after which the anticipated upward movement / increase in the value of the Euro happens, raking in profit for the trader. If the opposite happens, which means a decrease/downward movement in the value of the currency, then the trader would be losing some money.
Basic Principles of Forex
Forex trading has been existing for a very long time, and over the years a lot of guiding rules and principles have been developed and established. Some of these principles we would be talking about as they would be of great help as a beginner trader trying to kickstart your trading journey or a forex trader looking to become more profitable in the forex market.The forex market is a high-risk high reward market, but a lot of persons always end up losing most of their resources in the process of trading instruments in the foreign exchange (Forex) market. This is due to a lot of reasons such as psychological, lack of proper technical skills, lack of information etc. We would be looking at some of these subsequently also in the lesson. Before that, let’s look at some basic principles guiding profitable trading.
Reliable Broker
As an aspiring forex trader, you should know that to be able to navigate the forex market and trade instruments such as currency pairs, commodities, stocks, you would need to get a very reliable Broker. A forex Broker is the intermediary between the trader and the Market. It is through the broker that the trader is able to interact with the market and trade instruments using their local currencies. The forex broker is a financial services company that provides traders access to a platform for buying and selling foreign currencies. These brokers, or brokerage companies often make their money from what we call ‘Spread’ which simply means the difference between the ‘Ask price’ and the ‘Bid price’.A lot of novice traders have lost fortunes because they used the wrong brokers, mostly SCAM brokers who would allow the trader deposit their trading funds but leave them unable to withdraw the funds. Therefore, as a trader you need to make proper investigation and research before you decide to use a broker, ensure they are credible and most importantly ask your Mentor for advice regarding this. As your mentors already have experience with various brokers and would be able to give a genuine recommendation. This would save you lots of energy.
Trading Sessions
Another Basic Forex principle all aspiring professional forex traders must know is that there is different trading time for different currency pairs, therefore every trader must be aware of the time a particular market opens and the time the market closes. This is because it largely affects the price movement of the instrument you trade in as a trader.Technically there are three (3) major trading sessions in the forex market namely: Asian, European and American trading session and these sessions start at different times, although the forex market is open 24 hours a day and 5 days a week, it doesn’t mean that the market is always very active all through the 24 hours. At certain times the market can be highly volatile, meaning the price fluctuation would be serious and sometimes market price movement would be very low. As a trader, you must ensure you understand the timing and know when it\\\'s best for you to take a trade and when it’s best to opt out of a trade. You would be getting more insight on this process in the latter parts of the book.
Specialization
Another key principle all professional and successful traders consider is the In-depth study of whatever instrument they would want to trade. Every professional trader has 1 or 2 instruments which they are very familiar with and in turn make more successful trades from these instruments. Studying and understanding an instrument requires a lot such as the technical parts shown in the charts, the human behavioral patterns surrounding the instruments, the fundamental effects and so on. Studying your instrument properly before taking any trade enables you as a trader to know the best time to enter a trade and the best time to exit the trade. It also helps minimize their losses, as they are able to spot red flags or get warning signs when the trade is about to go wrong.In essence specialization in a major key to being successful in forex trade, as it helps the trader understand all he needs to understand regarding the instrument the trader would be trading. My advice always to my students is not to have more than three (3) instruments they trade on in the forex market and this method has been proven to be very effective.
Risk Management
Lastly, another important principle I would be giving is the principle of risk management. In forex trading, most novice traders are filled with the wrong notion/thought, knowledge or idea that as a forex trader, the only thing you make is profit in dollars and in turn you become a successful and wealthy individual. But this is totally wrong, as forex trading comes with a lot of risk and also involves both losses and profit. This means every successful forex trader still have losses in their books and account.What therefore sets aside the successful and professional traders from the rest, is not that they don’t make losses but that they have developed the habit of minimizing their losses and maximizing their profit. Which means the profit they make outweighs the losses they incur in their trades.Therefore, as an aspiring forex trader, you need to learn risk management skills that would enable you to overcome the bane most traders face in the foreign exchange market today. In the later chapters of this book, we would be giving some risk management skills that would help you in your quest to becoming a successful trader.
Forex Market Basics
Forex stands for Foreign Exchange market,Forex traders trade international currencies,Forex market is decentralized.This means no single individual or organization controls the forex market. As what happens in the foreign exchange market is what happens realistically all over the economical globe.
The Forex market is the largest financial market in the world whereby trades volumes of over trillions of dollars are carried out daily.
The Forex market is open 24 hours a day, 5 ½ days a week
Currencies are always traded in pairs
You can buy and you can sell currency pairs, commodities, stocks and indices.
SPECULATION
The foreign exchange market is a highly volatile market with a lot of price fluctuations; therefore, it is impossible for forex traders to determine the price of a commodity. Forex traders only have the ability to predict or speculate the market direction after studying / analyzing the instrument they want to trade with. This is because the traders are not the masters or creators of the market, therefore they can’t manipulate or make the forex market move in one direction.You should note that Forex trading is all about speculations, so no matter how much analysis both fundamental and technical that you might have carried out on an instrument, it is not 100 percent certain that the market would follow your analysis, therefore always apply risk management as you are not the master of the market.Instruments: This is the term used for what the traders trade in the forex market and there are different types of instruments which we can group into three (3) major types.
Types of Forex Instruments
CURRENCIES PAIRS,COMMODITIES,STOCKS & INDICES.
CURRENCY PAIRS:
This are the least volatile instrument which we can find in the forex market and they are easy to trade and have lower risk levels. The currency pairs are a type of instrument made up of two currencies, this means that this instrument always appears in pairs. Examples of Currency pairs are: EURUSD, USDCAD, USDJPY, USDCHF, etc.A Forex Pair Currencies are always traded in pairs. This means Currencies are traded like AAA/BBB. In simple terms, one can buy and sell currency pairs. The first currency in a currency pair is the Base Currency and the second one the Quote Currency. If there is a pair say, EUR/USD, your base currency is EUR while your Quote currency is the USD.EUR/USD = 1.4000The value of a currency pair is determined by the strength or weakness of the base currency in relation to the quote currency.The base currency is almost 1 for most currencies. This means that, when you see a quote of 1.4567 EUR/USD, its value is 1 EUR = 1.4567 USD. If the price of EUR/USD moves from 1.4567 to 1.4557, it simply means the value of the Dollar has increased against the value of the Euro.NB: You should know that the price value shown on the chart is the price of the Quote Currency against the base currency.There are 3 different classes when it comes to Forex pairs: Majors (the most commonly traded), Minors and Exotic Forex pairs.
COMMODITIES:
This has to do with natural mineral resources which we trade on the forex market, they are more volatile than the currency pairs but also gives more profit. Commodities can further be divided into three namely:Precious Metals: Gold, silver, copper, platinum, etc.Soft Commodities: corn, sugar, cocoa, wheat, etc.Energies: Wti oil, Brent oil & gas.
STOCKS & INDICES:
Government has borrowing requirements in order to run their affairs (some manage this better than others…)They go to the market place and they seek funding for fixed periods: anywhere from 1 year, 3 years, 5 years and 10 years.The market place dictates the price given the economic outlook for that particular region and the commercial outlook in general, i.e., the propensity to repay.When there is greater risk associated with a region that rate becomes higher as investors demand a greater yield to justify their acceptance of that risk. You can trade bonds via CFD’s.Every Forex instrument has 2 prices:
Ask price: The price sellers are willing to sell – The price you pay when you enter a buy trade
Bid price: The price buyers are willing to pay – The price you pay when you enter a sell trade.
The difference between the bid and the ask price is called the spread which is a cost of trading charged by the forex brokers.
Who Is Actually in This Market?
Central banks and governments — moving currency to manage monetary policy or defend an exchange rate.
Commercial and investment banks — the interbank market, where the tightest spreads and biggest volumes live.
Multinational corporations — hedging the currency risk that comes from doing business across borders.
Hedge funds and institutional investors — speculating on macroeconomic themes with serious size.
Retail traders — that is you and me, accessing the market through a brokers platform.
Why Trade Forex at All?
Three things tend to pull new traders toward currencies specifically: the sheer depth of liquidity, near round-the-clock market hours, and the ability to profit whether a currency is rising or falling, since every trade is really a bet on one currency against another.None of that makes forex easy money. Liquidity and long hours cut both ways — they also mean you can lose money just as quickly as you make it, at almost any hour of the day.
Recap
Forex is the market where currencies are exchanged, always in pairs, through a decentralized global network rather than a single exchange. Everything else in this course builds on that one idea.
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