What is Forex Trading? A Detailed Guide Part 1 | A recap of the basics
Many people come to me with questions concerning currency trading, forex trading, and forex trading tactics. They hear all kinds of rumors and form opinions about it that are either excessively "optimistic" or, on the other hand, "something truly terrifying and impossible." I'll discuss strong forex trading techniques and what a solid forex trading system looks like, as well as how currency trading works, what the risks are, and what the trader's obstacles are. Read on if you're interested, even if you know nothing about it, finance, or economics.
A Review of the Fundamentals
I won't go over all of the basics because they've already been discussed in an earlier post and are widely covered on numerous websites. I'll just offer a quick summary. To trade currencies, you don't need to be a financial guru or an expert economist, but you do need to be willing to learn and "understand what's going on" at the very least in order to generate long-term profits.
It is feasible to make money trading currencies, and it is possible to make a lot of money. On average, 90 percent of retail forex traders lose money... However, another 5% make respectable profits, and another 5% make unreal gains month after month, typically to the tune of 10% to 20% monthly returns, month after month (yes, you read that correctly, there is no typo) for the best and most risk-tolerant among them. This is not a hoax, a rumor, or an exaggeration; it is factual and verifiable.
You purchase and sell "pairs" in the form xxxyyy, where xxx is one currency and yyy is the other, such as usdcad, eurusd, or gbpaud, when trading currencies. You do this by depositing money with a forex broker, who then allows you to purchase and sell currency pairs. Forex stands for "Foreign Exchange," and it is by far the world's largest financial market, dwarfing all others by several orders of magnitude. There are trustworthy brokers and shady brokers; make sure you use a reputed broker like Oanda. The "spread" is supposed to make money for the broker.
In practice, most brokers also have a trading desk, and the broker's traders try to make money by taking the opposite side of their clients' trades and hoping that the clients will lose, on average (which is obviously true, based on statistics), which is similar to a casino: you're "betting" against the house, which means you need to be aware of things like "stop hunting" and other issues (we'll cover that later). Remember that trading is a zero-sum game (or even a negative-sum game) in which one's gains are offset by the other's losses. However, in comparison to the casino (and stocks), the "game" is significantly fairer and better in forex, and the odds of winning are significantly higher for good traders, because the price of the pair fluctuates mostly outside the control of your broker, and THAT is what is good about it, as the pair will follow the global market price quite closely. The currency market is a MACRO market, similar to a stock index, as opposed to a MICRO market on a single stock, which is vulnerable to a great deal of chaotic volatility and market manipulation. Currency pairs can also be "manipulated" and pushed in one direction or the other for a short time and a few pips.
I won't get into all the nitty gritty details because the "operational elements" of forex trading are quite simple to master and are not the main obstacle, so I'll just say this:
- You are continuously buying one currency and selling the other in every deal. You are purchasing usd and selling cad when you buy usdcad. You are selling usd and buying cad when you sell usdcad.
- You don't purchase or sell anything "for real" - don't worry, you don't need a lot of dollars or euros to trade ;) Your broker handles everything for you, and all you have to do is tell him or her what to do by clicking the "sell" or "purchase" buttons (it is literally that simple).
- When you anticipate xxx will appreciate against yyy and/or yyy will depreciate versus xxx, you "buy" xxxyyy (or both).
- You can "cash in" your earnings at any moment (by transferring funds from your broker's account to your bank account).
- With Oanda, you can start trading with as little as $100 and take risks that are virtually symbolic, such as a "large" profit or loss of $20. When dealing with a good broker, don't be concerned if they say "losses may exceed deposited funds" - this is intended for safety, but it never happens. If you deposit $1,000, that's the most you'll lose, and if you proceed with caution, you won't lose it all that quickly, and once you've mastered it, it will grow, possibly dramatically.
- You can trade with a demo account (fake money), but I urge that you start trading with "real money" (even if it's only $100) as soon as possible to get a feel for the real thing. Once you start consistently making 20 cent net gains (or whatever), simply remember that the SAME successful method will instantly translate to 200$ or 2000$ profits with a larger deposit, as long as your psychology and emotions remain the same.
- In currency trading, you utilize "leverage," which means you can buy or sell 10, 20, or 100 times the value of your account. This has a significant impact on profits and losses.
- When you first begin, I recommend that you: 1) Begin with a small sum, between $100 and $1,000, and 2) utilize a low leverage strategy. Increase your deposit and leverage if you've established a consistent profit (in pennies).
- I recommend that a common beginner's setup be set up so that one pip equals one cent. Then you can move on to a more "real trading" environment for retail traders, where 1 pip is worth between $10 and $100. Depending on trading style, trading skill, risk management, and risk tolerance, daily net earnings can range from 20 to 100 pips.
We hope that this blog post will be beneficial for you. We will continue to create useful works in order to get inspired by everyone. We are sure that we will achieve splendid things altogether. Keep on following Finage for the best and more.
You can get your Real-Time and Historical Forex Data with Finage free Fx Data API key.
Build with us today!