In a competitive world, trading and investments control the financial market. While most of these financial strategies may seem hard to understand, fx trading is quite simple to navigate through.
Many who decide to start investing find the process intimidating; some never begin because of how scary it might seem.
Worry not because this guide covers everything you need to know about Forex trading.
What is Forex Trading?
Forex trading is relatively navigable because it finds itself in our regular lives. Foreign exchange is changing one currency into another, and this process is integral to the commercial and tourist sectors.
Because of the Trade’s worldwide reach, forex markets are the largest and most liquid assets.
By trading currencies, an investor makes a profit from the difference between the rates of two currencies. This profit results from buying Currencies at higher interest rates and shorting those with lower rates.
How can we trade Currencies?
In the past, currency trading or the forex market was exclusive. It was difficult for individual investors to access services, and the investor market comprised MNCs and hedge funds.
However, the internet changed that narrative. With online trading, one no longer needs excessive capital to reap benefits from the Forex market. The Forex market targets individual investors by providing access to the market via banks or secondary brokers. These parties offer high leverage to traders who control a significant trade with smaller account balances (Yes! It’s possible).
Types of Fx Trading
A broad trading classification can fall under two types – Spot and Future.
Spot Market
The forex spot market is perhaps the most popular because of its safe nature. Trades occur on the underlying and present market value of a currency. This Trade implies that both parties know the price before closing the deal. In the past, forwards and futures markets were more popular. However, the advent of online trading created a boost in broker availability, leading to a booming spot market.
When two parties agree to trade, one receives a currency and provides the other with an equivalent amount depending on a pre-decided exchange rate. This Trade is a ‘spot deal’. Although the deal is grounded in the present, it takes two working days to close.
Forwards and Futures Market
Parties negotiate a futures contract before the deal. The Trade focuses on the future price of the currency. During this negotiation, the parties agree on a certain amount of currency delivery at a predetermined exchange rate.
While the market risk exists, the benefits one can reap from the futures market is unimaginable. Unlike the spot market, future deals do not trade actual currencies. Instead, the contract stands as a claim for a certain amount of a specific currency type at an agreed exchange rate.
While forwards contracts have customised rates and amounts, future ones are standardised. These contracts are transferable before expiry, and many buy and sell futures contracts.
Both contracts are legally binding and cash-settled upon completion, marking the successful end of Trade.
Fx Trading Tips
Budget Smart
Many beginning investors set a budget. One only invests what they can afford to lose because risk always exists (especially with futures markets). Without risk, there is no reward. However, one can make it very far financially with adequate risk mitigation.
Setting Brokerage Accounts
Brokers rarely charge costly commissions. Instead, they make money from spreads or pips between buying or selling. Beginners learn exponentially from setting up micro forex accounts with low capital requirements. Think of it as a demo account to allow you to get comfortable with fx trading and trading styles.
Monitoring
As with any investment plan, monitoring is crucial. Traders need to stay on top of their numbers. For example, start by checking and monitoring positions at the end of every day.