Whether you are an active trader or not, you must have heard about the forex market, Isn’t it? Forex is one of the actively traded and popular markets which stays in every financial news. The other names of this market are FX trading or foreign exchange. Considering the average daily volume, it is estimated at around $5 trillion. Let’s take a closer look at each vital concept you require to know about the Foreign exchange market though this forex trading guide, including how to start a trade, what is leverage and top forex brokers for trading.
What is forex trading?
You can define the foreign exchange market or forex as a platform that contains numerous sellers and buyers who agree to exchange one currency with the other at an acknowledged price. It is a medium through which central banks, firms and individuals convert the currency of one country into another. The best example describing the forex transaction is when you travel abroad and exchange currencies to make further payments in the respected country.
While much of foreign exchange is made to fulfil some practical purposes, most conversions are done to harvest profit from financial market moves. The volume of currency converted daily can significantly surge in its value and make this highly volatile. This volatility is the major factor that makes this foreign exchange market attractive for numerous retail traders luring. Moreover, it also paves the way for making a massive profit but, at the same time, also exposes forex traders to financial risk.
How does currency trading work?
Unlike commodities and the stock market, forex trading is done OTC (over-the-counter) market directly between two participants. The entire market is run by two major entities: Spreads calculated across four primary forex trading hubs in different time zones and an international network of banks. The major time zones are Sydney, London, Tokyo and New York. As there are different time zones and locations, you can trade forex twenty-four hours a day.
The forex market can be classified into three major types:
Forward forex market
It is an agreement where both seller and buyer agree to buy and sell a fixed amount of currency at a pre-decided price at a fixed future date or within a time span of future dates.
Spot forex market
The physical exchange of forex pairs or currency pairs occurs within a short duration of time or “on the spot”.
Future forex market
Future forex is an agreement where both sellers and buyers agree to sell and buy a fixed amount of currency at a predetermined price and fixed future date. It is a bit different from that of forwarding forex agreement as it is legally binding.
The majority of investors monitoring the currency pair prices will never intend to deliver the pair itself. Rather, they make predictions over the exchange rate to benefit from the price shift in the financial market.
What are a quote and base currency?
The currency pairs comprise two currencies. The first currency listed in this pair is known as the base currency. Similarly, the second currency listed in the pair is known as the quote currency. Forex trading is all about purchasing one currency and simultaneously selling another one. This is the major reason why the currencies are quoted in pairs. The aggregate price (of a pair) is estimated by how much one unit of the former currency (base) is worth in the latter currency (quote).
Each forex pair is written by using the three-letter code. The code written on either side of the slash is an acronym of a specific region’s currency. For example, EUR/USD or euros is a currency pair involving buying United States dollars and selling the European Euro. Here USD is a base currency, and EUR is a quote currency. If eurusd is trading at 1.32459, the one euro is worth 1.32459 dollars.
To make things easy going, most financial service provides divide forex pairs into the following categories:
- Minor pairs: These are the pairs that are not traded frequently. It often involves significant currencies against each other (leaving the United States Dollar). For example, EURGBP, GBPJPY, EURCHF.
- Major pairs: These are the most popular pairs and contribute about 80% of the global forex trading. The major pairs included in this category are USDCHF, AUDUSD, GBPUSD, USDCAD, USDJPY, EURUSD.
- Exotics: It is a currency pair consisting of a major currency against small or emerging economies currency. The examples of exotic pairs include GBPMXN (Sterling and Mexican peso), USD/PLN (United States dollar and Polish zloty), EURCZX and several others.
- Regional pairs: There are those pairs that are classified by regions. For example Australasia or Scandinavia. It includes AUDNZD (Australian dollar and New Zealand dollar), EURNOK (Euro and Norwegian krone), AUDSGD and several others.
How to enhance capital and performance through top forex trading strategies?
Trading in financial markets requires deep knowledge and a robust strategy. Many forex investors begin with a simple trading technique. For instance, they may see that a particular forex pair tends to bounce from a specific resistance and support level. After monitoring this, they may decide to employ other assets that promote the accuracy of these basic trading signals over an interval. For example, they may want the amount bounces from a particular support level by several pips or a specific percentage.
There are some crucial elements to efficient forex trading strategies:
- Choosing the currency pair: Investors must select what forex pairs they wish to trade. While making this selection, always remember to target currencies of those economies which you understand better. Also, before entering the trade, try to build strong trading knowledge. It will guide throughout the trade.
- Determining position sizing: Investors must decide how many trading positions they can control by concerning the amount you have in your trading account. Do not risk larger than your account balance; otherwise, you will land into serious problems if you lose the trade.
- Determining precise entry points: Investors should use various market analysis tools to decide when to enter a short or long trading position in a particular currency pair. It will surely help to harvest greater profit from the market.
- Determining exit points: Investors should also try to make rules guiding them when to close a short or long position. Sometimes a trader becomes over-emotional and does not close a trading position in an expectation to earn a larger profit. It might create problems for him/her.
Choosing the best forex trading strategy
When choosing the profitable and right forex trading strategy, many traders find this a tough task. The best forex strategy is the one that fits your trading desire and trading conditions best. It means you need to find out your personality and the time you can provide to trading. Always remember that the strategy that resulted in a trader’s success might prove to be disastrous for you.
On the other hand, techniques that other successful traders have questioned may turn out to be profitable to you. So, never copy anyone who decides your preferences concerning your condition. Also, deep research can assist you in this. It will help in eliminating those which do not suit you at all. One of the major key factors which you can consider while selecting the trading style is the time-frame.
There are many kinds of trading styles mentioned later in the article for long time frames and short time frames. These strategies are efficient and widely used by thousands of traders over the years. The year 2021 has started with the recovering economy and financial market. It can be a profitable year; thus, make the right decision. Here is the list of some best financial market strategies. Read and select the best one for you.
Some trades are short-lived. Usually, they are held for a few minutes. Scalping is a trading technique that is useful for harvesting profit from small price movements. This strategy requires an investor to have a robust exit strategy as one significant loss can reduce numerous small profits the investor worked to achieve. Hence, having precise instruments such as new updates, direct-access financial service providers and the potential to place several trade orders. All these things need to make this strategy successful.
Several trades are closed before the end of the trading day. This eliminates all the chances of being negatively influenced by large price movements overnight. Day trading is popular among neophytes. Here, both trades and price chart or bar are typically set to one or a maximum of two hours.
Swing trading is associated with those trades which are held for several days. Here, traders mainly focus on generating profit from short term price movements. Forex traders decide to go with a swing trading monitor chart and price trend every hour.
Positional trading is a long-term trend following techniques that seek massive returns from major price shifts in financial markets. The long-term investor would usually consider the end of the entire day chart. The major things required in positional trading technique is discipline and immense patience on the part of investors. Moreover, it also needs excellent knowledge concerning market fundamentals.
The right time to change the forex trading strategy
The forex market strategies work best for you only when you follow each rule. But, similar to any other thing, one specific technique may not fit into all kinds of trades. Also, the strategy which is successful today may not be beneficial tomorrow.
So it is necessary to decide after taking all factors into account. If, at any point, you feel that the technique is not working to provide desired outcomes and is not profitable, you can change your game plan anytime. But, there are several things that you should know before making any amendments. Here are several points which will guide you when to change your strategy.
Balancing your trading style and risk management: If you find that your risk to reward ratio is not good and not suitable for trade, you can immediately skip the particular trading style.
Financial market situations evolve: Some market trends can also influence a forex trading strategy, so if these vary, a specific technique can become out-of-date. It is a significant warning sign that there is an urgent requirement for modifications.
Comprehension: If an investor does not understand the technique well, there are major chances that he/she will land into a set of problems. For instance, if a trader does not understand the strategy and amid problems or financial risk surrounds the trade, he/she cannot make any decisions. Thus, the strategy will lose its effectiveness.
Note: The variation in the forex trading strategy is good and bad at the same time. It is good to change the technique if you find it unproductive, but changing it too often can be expensive. There are great chances that you may lose out.
What does the spread refer to in forex trading?
The spread can be defined as the difference between the asking price (or selling price) and the bid price (or purchase price) quoted for a currency pair. Trading in the forex market is more or less similar to the financial market, here also when you open any trading position, you will be offered two primary prices. If you decide to go long, you trade at the bid or buy price, which is slightly greater than the market price. Similarly, if you wish to go short, you trade at the asking price or selling price, which is slightly lower than the Financial market price.
What is forex leverage?
Leverage is a vital financial market instrument that allows you to own relatively larger assets or currency pairs that you cannot afford otherwise by paying only a small amount upfront. The entire trade amount is divided into two parts. First (or the larger part) is paid by the broker, and the trader pays the second (or smaller) part. This amount is known as margin. When you close this leveraged trading position, your loss or profit depends on the trade’s aggregate size.
What is technical analysis and fundamental analysis?
Technical and fundamental analysis are two primary concepts that help while approaching the financial markets. But, both approaches are a bit different from each other. Traders and investors use both forecast and research to determine the future price of the currency. Both these indicators serve this purpose.
What is the fundamental analysis?
Fundamental analysis evaluates currency pairs, stocks and several other financial instruments by estimating their intrinsic value. This analysis calculates everything from the overall industry and economy conditions to the individual firm’s management and strength. Assets, expenses, liabilities and earning all these falls under fundamental analysis.
What is technical analysis?
Technical analysis is slightly different from fundamental analysis. Here, traders attempt to calculate opportunities by studying statistical trends such as price movements in currency pairs and change in volume. The central idea is that all the fundamentals are categorised into the price. Hence, there is no requirement to pay heed to them. Technical analysts usually do not estimate the intrinsic value of the provided asset. Instead, they use price charts to determine trends and patterns that determine how the currency pair will perform in the future.
Some of the famous technical analysis tools include support and resistance levels, simple moving averages or SMA, momentum indicators and trendlines.
Types of Technical Indicators
There are several types of technical indicators such as trend following indicator, simple moving averages and others. Here is a brief explanation about each type:
Trend Following Indicators
Trend following technical indicators was designed keeping the traders and investors in mind. These tools help them to trade forex pairs that are trending down or trading up. All of you must have heard about the famous phrase that the trend is always a friend. Thus, you can employ these indicators to point out the direction of the trend and help determine whether the trend actually exists.
A MA or moving average is a technical indicator that estimates currency pairs’ price over an interval. It helps to decide the direction in which the price of pairs is moving: dither sideways, down or up. There are many types of moving averages to select from. Some of the popular ones are exponential moving averages and simple moving averages (discussed later in the article).
Ichimoku is a complex trading assistant. But, it is simpler than its appearance. It is a Japanese indicator showing resistance and support levels, current trends, and trend reversal.
Oscillators provide investors with an overview of how momentum is originating on a particular currency pair. The oscillator will shift higher when the price surges. Similarly, the oscillator will shift lower when the price drops. When the oscillator touches an extreme point, it indicates that currency pairs’ price will turn back to the mean.
The Relative Strength Index (or RSI) is one of the most famous oscillators among traders. A big element of its trading formula or equation is the ratio between the average loss and average gain over the past 14 periods. The Relative Strength Index is restricted between zero and a hundred. A value over 70 indicates the condition of overbought, and a value below 30 is considered oversold. Investors generally prefer to buy when the value crosses 30, and they usually prefer to sell when the value crosses 70.
Stochastics provides investors with a distinct way to estimate price oscillations by tracing how far the price is from the lowest value (calculated by looking at X number of periods). This distance or regular is then divided by the difference between low and high price.
What Is Trend Analysis?
Trend analysis is a trading strategy that tries to anticipate the future currency price movement depending on the recently observed data related to the trend. It also surrounds the idea that what took place in the past provides a clear idea about what will happen in the future. There are three major kinds of trends: long-term, short-term and intermediate.
Introduction to Forex Elliott Wave Analysis
EV is an acronym for Elliott Wave. It is one of the famous indicators which holds a special position in forex trading analysis because of its several vital characteristics.
Here are several ways which depict how professional approaches to Elliott waves:
- Firstly, they select the specific way of producing the Elliott Wave count.
- Then they wait until this Elliott wave number becomes 5.
- Further, they confirm this trend from several indicators.
- After this, they finalise the stop-loss point.
- Then they enter the forex market and place stop-loss orders.
- Also, they consider optimum gains and stops.
- Finally, in the case of losses, they make a trade exit plan.
What if forex risk?
Foreign exchange market risk results from the losses incurred in an international financial transaction because of the fluctuations in the currency price. It is also referred to as currency risk, exchange rate risk and FX risk. It reflects the chances that a currency investment’s value may decline because of variation in the given currency’s aggregated value. Traders may also face jurisdiction risk in the form of forex market risk. Some of the forex risks include:
- Risk due to high leverage
- Risk due to sudden price shifts
- Liquidity risk
- Credit risk
- Country risk
- Interest rates risk
- Exchange rate risk
- Risk of ruin
- Transactional risk
Ten Tips for Forex Risk Management
Here are the top ten methods through which you can mitigate forex risk. These methods are known as forex risk management strategies. They are the same for both professional and novice traders.
- Build a strong trading foundation and knowledge before getting started
- Read about all risks involved in a forex trade.
- Try to employ the stop-loss function.
- Use a take profit function to safeguard your profits.
- Never risk more than what you can not afford.
- Always trade on low leverage.
- Make a plan before starting.
- Never bring your emotions while trading.
- Diversify your trading portfolio.
- Keep realistic expectations.
- Keep a close check on interest rates.
How to choose the best forex broker?
The financial service provider is an essential entity in trading. It not only helps you in raising trading standards but also assists in money management and risk management. There are many trading firms in the financial market, but choosing the authentic one is a typical job. These fake firms try to lure traders through their misleading website. Hence, don’t make any decision by reading the wrong theory or biased review. Here we have covered some of the top forex brokers for trading.
It is one of the top brokerage firms which was established in the year 2019. The broker allows traders to speculate on a wide variety of assets, including forex, stocks, cryptocurrencies and several others. You can start with the demo trading account offered by the broker. The website of HFTrading is simple and contains each info you require to know before getting started, such as regulation, trading platform, leverage, minimum deposit and contact.
Moreover, the firm is authentic as two central bodies regulate it: the Financial Markets Authority and the ASIC (Australian Securities and Investments Commission). Thus, it is a safe venture to invest your capital. The platforms also keep you updated about financial news, market data and financial market events.
Is Global TradeATF a scam? Traders usually ask this question. But, it is entirely a safe brokerage firm to spend your capital. The broker is regulated by the famous financial authority, the Cyprus Securities and Exchange Commission. For utmost trading experience, Global TradeATF offers advanced trading platforms such as MetaTrader 4 and web traders. The instruments available include forex, stocks, commodities, cryptocurrencies, indices and several others.
The broker’s educational hub contains interviews of various successful traders along with courses, tutorials, videos, etc. The latest market news and market price shifts add another feature to its features. Moreover, have distinct teams for different areas such as customer support teams etc.
The Bottom Line
The Forex trading guide covers each critical concept you require to know. Trading in the forex market can help you in harvesting a larger amount. But, it requires deep research and knowledge. Along with the research, the choice of brokerage firm also plays a vital role. One wrong decision while choosing a broker can directly impact your trading career. So, analyse things before getting started. We have provided you with a list of top and authentic brokers above. You can select any of these. It just takes five valuable minutes to open a trading account with Global TradeATF and HFTrading. Moreover, the services are offered at an affordable price. Visit the site to know more.