Definition of the Forex Market
When we travel to foreign countries, the first thing that most of us do is exchange the money we have to the local currency of the country we are visiting. By doing that, we participate in the forex market, or the Foreign Exchange Market. Let’s explore the forex market in more detail!
The forex market or foreign exchange market is where you trade international currencies. This market has no actual central location. The transactions happen electronically over the counter in any place in the world.
As for the working hours of the forex market, it is open 24 hours, five days a week. The reason behind that is that transactions occur in different time zones. Once a central market closes, the other one opens. Therefore, it is highly active at any time of the day, with the prices constantly changing!
Though currencies are traded globally, Frankfurt, Hong Kong, London, New York, Paris, Singapore, Sydney, Tokyo, and Zurich are the major hubs for Forex trading.
What Makes the Currency Pairs Unique?
We have mentioned before that the forex exchange market is one of the largest markets around the world and that it is open 24 hours, five days a week. However, these are not the only features that make it unique. There are several other factors that contribute to that:
1. Forex has high volatility
Imagine how many transactions take place within minutes in the forex market! It literally translates to billions of dollars. Due to this high volume, the price movements for some currencies can be highly volatile. Speculating on price changes in either direction gives you the potential to yield enormous rewards. However, you must bear in mind that volatility is a two-edged sword. The market can swing against you. Therefore, it is critical to restrict your exposure with risk-management measures when trading forex.
2. Forex trading is transparent
This market is open to all participants, who can use the information that market provides to have more influence over their transactions than in any other liquid market.
3. Forex is the most liquid market in the world
Almost any time you peek at this market, a trade is happening. Hundred or rather millions of buyers and sellers, individuals, banks, and companies trade large amounts of currency. The main aim of most of these transactions is to make a profit. Because of that, the forex market is the most liquid in the world.
4. Forex market offers you the chance to go short or long
One of the most exceptional features of trading forex is that you can go long or short. Currencies are quoted in pairs. You are always selling one “the quote currency” and buying the other “the base currency”. If you think the value of one currency will increase against the other, you can buy the pair. If you think it will decrease, you can sell it. Your prediction is the main factor that sets your profit or loss.
The Different Types of Forex Trading
As the name indicates, this forex trading takes place either “on the spot” or after a short period. In this trade, currencies are exchanged in physical form.
Forward forex trading
Just like the previous one, the name of this kind of trade is indicative in nature. The trades are executed on a future date or within a set of several future dates (forward in time). In this kind of trading, you sign a contract to buy or sell a certain amount of a currency at a specific price at the set date or range of dates.
Future forex trading
The contracts agreed upon in this form of trading are basically the same as the previous one but there is one exception. Future contracts are legally binding, which is not the case with the forward ones.
How to Start Trading Forex?
Now that you have learned about the forex market, understood its unique features and different types, you are probably motivated to start forex trading. To trade forex, you need to follow these steps:
1. Choose the type of forex trading you prefer.
Before you embark on your trading journey, you have to choose the type of forex trading you prefer. As an individual, you can either choose to trade forex CFDs or trade forex with a broker. As for CFDs, you trade the difference in price between the time you open a position and the time you close it. You can also speculate the price movement by trading currency pairs via a broker. However, you cannot access other markets in that case.
As it is the case with other forms of trading, you need to have a trading account with a trusted and regulated broker if you choose to trade forex CFDs.
3. Draw a forex trading plan
If you do not plan, you plan to fail. This applies to every kind of trading. Trading forex is no different. After you have chosen the trading style and opened an account, you need to start working on your trading plan. Your trading plan sets your general guidelines and your trading strategies. You can refer to this plan to know when to open and close positions.
4. Choose an online trading platform
5. Open, monitor, and close your position
Since you have your platform, you can open your first position. After that, you can set the stops and limits. With stops and limits, your trades will be closed when they reach a certain level that you specify. To make sure you make the most of your trade, benefit from all the analysis tools available. Study the market carefully and monitor the movements of the price.
Risk Management with Forex Trading
Though you are not supposed to have a set minimum in your account when trading forex, you must be careful. Because trading forex and CFDs is highly risky, traders are often advised to risk just 1% of their funds with every trade. However, your required capital varies depending on your goal and trading style.