Foreign exchange trading is also referred to as forex or FX, which is considered one of the largest financial markets. Its daily trading volume exceeds $6 trillion. Forex trading is the trade involving the buying and selling of currencies for a profit by varying from exchange rates. It can be very rewarding ,however, it comes along with risks. Complete information on how the forex market works and complies strictly with a strategy would ensure better winning opportunities.
1. Know How the Forex Market Works
First and foremost, one has to understand how the forex market works before engaging in any forex trading. The global decentralized forex market is the marketplace for trading currencies. Instead of having hours of operation that compare to those of traditional stock exchange markets, which have specified times for trading, the forex market is open 24 hours a day, five days a week, allowing its participants to trade at any hour.
When trading currencies in pairs, like for example EUR/USD, you are selling one currency and buying another at the same time. The price of a currency pair tells you how many units of the quoted currency, which happens to be the second currency in the pair, you must buy in order to buy one unit of the base currency, which is the first currency.
Forex Market Participants
Banks and financial institutions prime movers in large-scale forex trading.
Companies Organizations using the forex for running businesses between countries.
Retail traders Investors trading for money using fluctuations in the value of currencies.
Case Study The Swiss Franc Shock of 2015
January 2015 was one of those days when the Swiss National Bank shocked everyone by abandoning the Swiss franc currency peg to the euro, and the Swiss franc spurted up in the next day or so by a whopping 30% against the euro. Many leveraged forex traders who were trading in large EUR/CHF positions lost heavily and some even went bankrupt. This is an example of how massive market forces and geopolitics can influence currency pricing.
2. Select a Reliable Forex Broker
A good experience while trading forex is determined by the broker. Your chosen broker should have an easy-to-use trading platform, competitive spread, and real-time data and tools designed to support your decision-making.
Components to Consider When Selecting a Broker
Regulation Ensure a good regulating authority is involved with the company; this should be the Financial Conduct Authority in the UK or the Commodity Futures Trading Commission in the U.S.
Spreads and fees Brokers make their bread on selling spreads or intermarket differences between the buying and selling prices. Research one with low spreads for those currencies you intend to trade.
Leverage Some brokers permit you to trade with borrowed money. Use leverage at your risk because it amplifies gains while magnifying losses.
3. Learn the basics of forex trading
The key to becoming a successful forex trader involves a deep understanding of both fundamental and technical analysis. The more detailed you are about the economic factors that drive exchange rates in any currency that impacts interest rates, inflation, and economic data, the better equipped you are at predicting their movement.
Important economic indicators
Interest rates The powers to determine the monetary policy and interest rate settings lie with the central banks. If the interest rates happen to be high in a particular country, its currency normally appreciates.
GDP growth Normally, people like investing in countries with an increasing economy, and it is normally what drives the currency of a nation up.
Political stability Where a government is stable with a robust economy, the currency will be strong.
Case Study Effect of BREXIT on GBP/USD
The United Kingdom voted to leave the European Union, popularly known as Brexit, in June 2016. The markets were put in a frenzy due to the unprecedented event. The British pound drastically crashed against its U.S. dollar counterpart with a loss of more than 10% in the wake of voting. Those traders who foretold such a move, selling the shorts of GBP/USD, made huge profits. Those who made longs suffered the losses. This case calls attention to the fact that it is crucial to understand political happenings while trading forex.
4. Use technical analysis in making the decision
Where as from one hand, fundamental study is a mere view of economic indicators, technical analysis is based upon chart patterns and price action. Technical indicators like moving average, RSI, and Fibonacci retracement levels are used to predict future market behavior by a Forex trader.
Technical Indicators Used Quite Frequently
Moving Averages They smoothen out the price data and follow the trends.
Relative Strength Index (RSI) This measures the velocity and magnitude of price movements and indicates whether the given currency is either overbought or oversold.
Fibonacci Retracement This is forecasting technique used for determining a possible reversal in the direction a particular currency pair is moving.
USD/JPY Technical Trading A Case Study
Most of the forex traders witnessed a steady trend in the path of the USD/JPY pair during 2018. Using technical analysis, the traders could draw key resistance and support levels using the Fibonacci retracement tool. Buying near the support levels and selling near the resistance levels meant that profit was drawn from several swings in the market.
This is an example of how technical analysis can help a trader enhance entry and exit points in forex trading.
5. Have a thought-out strategy or a concrete trading plan.
A good trading plan is the difference between successful forex traders and others. A well-planned trading plan should indicate your financial objectives, risk level, and personal entry/exit rules on trading.
Key Elements of a Forex Trading Plan
Risk Management Don’t risk more than you can afford to lose. Another guiding principle is to cap any single trade at 1-2% of your trading account
Position sizing Size the amount of currency to be traded based on how big your account is, and on risk management rules
Entry and Exit points Define entry and exit criteria from your analysis on when to be in and out of the trade.
6. Demo account exercise
The best way to get some experience in trading forex without risking any real money is with a demo account. Most of the brokers give demo accounts, allowing trading in virtual currency in real-time market conditions. It is an excellent way of testing the trading plan and getting familiar with the trading platform.
Benefits of Using a Demo Account
Learn Risk-free Practice trading without the pressure of losing money.
Test strategies Experiment with several trading systems to settle with the one that works for you.
Gain confidence With proper training, you will gain sufficient confidence and be ready for life trading.
7. Watch over and Tweak Your Trading Strategy
Forex trading is a dynamic process. The markets are constantly moving. To stay on top of them, keep close watch over your trades, take an assessment of how well your system has performed, and be ready to make changes if portions of your system are not working out as you had envisioned.
Avoid Common Mistakes
Overleveraging Too much leverage can blow out your account if the market is against you.
Emotional Trading Trading based on emotions such as fear or greed will lead to bad decisions. You should stay disciplined and stick to your trading plan.
Risk Management Neglect If you neglect risk management, then even though you might be right about the direction of the market, massive losses will sweep over you.
Case Study Need for Risk Management
It so happened that a trader had $10,000 in his trading account with leverage that allowed him to expose himself to $100,000 positions in EUR/USD. At one point, the market moved against him 1% on the position. That corresponds to the loss of $1,000. A big hit for a trading account because of the lack of management of risk could be easily minimized if the size of a position was limited or there was a stop-loss order in place.
Conclusion: Reigning in Forex Trading towards Sustainable Success
Trading is one of those activities which, if successful can be very rewarding. An understanding of the basics involved in the forex market, both technical and fundamental approach, coupled with a good trading plan may open doors to successful trading.
However, it must be noted that trading in the currency exchange does involve considerable risk, and nobody should invest any amount that cannot afford to lose.
There is definitely a proper example through the case study of the shock of the Swiss franc and Brexit, in which it could be determined that political events and volatility play a more massive role in the alteration and adaption of parameters for forex trade.
Good risk management involves having plans in place and, most of all, adaptation to current market conditions; therefore, it’s necessary for long-term success.
The point of profitable trades in the Forex market is not just about executing the trades but ensuring capital protection and proper risk management.