Forex, FX or Foreign Exchange trading is nothing but making money by trading foreign currencies. The history of Forex trading runs parallel with the history of money.
Before the Internet revolution, Forex trading was limited to multinationals, financial institutions and corporate companies who carried out currency exchange on a large scale. Small – medium businesses and individual investors could not think of getting involved in Forex but the Internet changed everything!
Forex does not follow a regulated exchange process, which makes it different from stock trading and futures trading.
There are no clearing houses or central governing body exercising control over the Forex market. Presently, Forex is the largest liquid and fluid market in the whole world.
Trading is open 24 hours a day from EST 5pm Sunday to EST 4pm Friday and the daily transaction inflow and outflow is 2 trillion USD.
There are no minimum or maximum investment barriers. You need not be a rocket scientist to understand how the Forex market works. All you need is a refresher course to understand the basics and a demo Forex trading account for few weeks to practice trading daily.
Consider the information given below as your basic Forex training session. All the information is up to date and relevant globally.
How Does Forex Trading Work?
As a Forex trading investor, you need to team up with a Forex broker whose job is to carry out the currency exchange on your behalf. In online Forex trading, you use certain software systems to carry out the exchange automatically. Of course, the first step then is to seek out a reputable and popular Forex brokerage company.
These days most of the brokerage companies offer demo accounts, especially to those who are new in this field of making money online. After weeks of practice with the demo account, you step into the real platform with real currency.
With the help of Forex trading platform, you buy and sell currency – the profit earned in between is added to your account and can be withdrawn anytime.
In return for providing you the platform, you pay the brokerage company a predetermined percentage as commission. Let’s do a recap of what you need:
- An account with a verified brokerage company.
- A valid bank account linked with a Forex account
- A valid email account
- Amount to fund the investment
- Money to pay the brokerage commission
Tips for Selecting Brokers
- You are not going to handover hundreds of dollars to a broker without doing a background check. You need to find out whether the broker will provide optimum security to your funds. Fortunately, there are ways to check broker credibility with the help of regulatory bodies in every major country. USA has National Futures Association and Commodity Futures Trading Association; United Kingdom has Financial Services Authority; Australia has Australian Securities and Investment Commission; Germany has Bundesanstalt für Finanzdienstleistungsaufsicht; France has Autorité des Marchés Financiers and Switzerland has Swiss Federal Banking Commission.
- The online trading platform of the broker should be easily accessible and hassle free. Genuine brokers will ensure that their trading platform is user friendly and provide updated technological facilities like live news feed and charting tools to make trading easier. Moreover, the broker should be competent enough to carry out transactions on your behalf. The broker should not lose your funds in losses.
- You can judge the competence level of a broker by evaluating the customer service provided. Most of the brokers online have a nightmarish “after sale” (after account opening) support system.
- While you are checking the broker’s credibility, you need to check the withdrawal system provided by the brokering service. The withdrawal system should be hassle free and instantly process withdrawal requests. A broker has no reason to hold up your funds.
How Do You Trade Currencies?
There are four major currency trading pairs accepted globally:
- GBP / USD (British Pound and US Dollars)
- EUR / USD (Euro and US Dollars)
- USD / JPY (US Dollars and Japanese Yen)
- USD / CHF (US Dollars and Swiss Frank)
Other less common or not frequent currency exchange pairs are:
- AUD / USD (Australian Dollar and US Dollar)
- USD / CAD (US Dollar and Canadian Dollar)
- NZD / USD (New Zealand Dollar and US Dollar)
- EUR / JPY (Euro and Japanese Yen)
- GBP / JPY (Great Britain Pond and Japanese Yen)
- EUR / GBP (Euro and Great Britain Pound)
Notice the currency pairs – the first currency is always counted as commodity and the second one is counted as money. In other words, in the EUR / USD pair, you buy Euro against US Dollars and if you wish to sell, you sell Euro against US Dollars.
The best thing about working with Forex trading software is that everything is taken care of automatically. You don’t have to worry about transaction rates or exchange prices.
Now you must be asking – where does the money come in? Or, in finance terms, how to estimate the time to trade? When is the market ‘high’ to make a profit?
Let’s take the EUR / USD pair again. Either you buy EUR when the price is low and sell it when USD is high or sell EUR at high price and buy USD at low price. For instance, you buy EUR when 1 EUR = 1.41138 USD and you sell EUR when 1 EUR = 2.41138 USD. You make a profit in this transaction… it’s easy, right?
Now how would you know when to buy and when to sell? There are two basic techniques:
- Fundamental Analysis – This method looks into the current political and economic conditions of major countries and then predicts how the market is going to turn out in the next few days. For instance, if the present US market is showing economic growth then Forex traders will buy USD because the price of USD will rise. Similarly, if there is economic slump then Forex traders will want to sell USD even if they have to suffer some loss. Waiting to sell currency of a country when the country’s economic and political situation is going downward will only result in loss. Therefore, traders try to minimize the loss and sell while they still can.
- Technical Analysis – This method uses Indicators and Price Chart Analysis to analyze the direction of currency market in the next few days. If you wish to become a Forex trader, especially intraday trader, you need to learn Technical Analysis to make informed decisions about your investment. Give yourself a few months to learn all about Technical Analysis. There are lots of free resources online for help.
Experienced Forex traders believe in following both the techniques closely before buying and selling currencies. In Forex you do not actually sell or buy anything in the traditional sense of the term. All the transactions are electronically carried out in specific currency pairs. The reason why Forex exists is to facilitate currency exchange in order to pump in funds to multinational companies, corporate and financial institutions.
Making a Living with Forex Trading
There are people who have turned Forex trading into their permanent source of income online. After all, Forex trading is one financial industry that is recession proof. People who earn from Forex permanently have spent years mastering this trade so don’t expect you can do the same in a matter of months.
Until you know the pros and cons of the trade, you cannot take a leap of faith; leave your full time job and sit at home working online 24 hours a day trading currencies. If you are serious about trading Forex for a living, know this:
- Earning money from Forex is not a get – rich – quick scheme. You cannot become a millionaire in a day.
- There is no software in the market that will earn you profits instantly. If it had been, that software would have sold for thousands of dollars! What there software does is support you and reduce technicalities that would have been otherwise difficult to deal with personally.
- You should be ready to invest anywhere between 6 months to 2 years to learn the trade completely. Don’t give up your job yet. First spend 3-4 months with a demo account, another 3-4 months to learn the Forex trade and then the next 10 – 12 months doing real trades. Start with a small investment and increase your investment amount as you learn more about Forex.
- You need to be good with money management. Don’t be impulsive and whimsical while trading. You need to think like a finance expert would in your place and then get involved in FX trading.
Advantages with Forex Trading
- A Forex investor can trade anytime. The markets are open 5 days a week from Sunday to Friday. This 24 hour trading facility makes it easy to trade from anywhere around the world and takes care of the global time differences.
- If there are million Forex investors, each one of them has equal opportunity to earn profits. There is no competition or bidding process. Moreover, Forex trading is also known as ‘over the counter’ trading, that is, you buy currency and you sell currency – the balance is maintained and you earn profits in real time.
- Forex market offers 100% liquidity. There are no cash bonds or waiting period to get your profit. Little slippage, price stability and narrow spreads gives Forex currencies high liquidity level.
- Every dollar or any currency invested can be leveraged to its full potential. It means that investors can make huge amounts of profit by investing little. Again, don’t mistake this as a get rich quick scheme. As mentioned earlier, this trade needs patience and devotion for you to learn the ropes first.
- Regular investors dealing with Forex markets daily need not pay any commission. These are called “free of commission” trading.
Disadvantages with Forex Trading
- The 24 hour 5 day a week market has its share of disadvantages as well. For traders, it is difficult to keep track of the market movement 24 hours a day. This way you can lose profits. This is the reason why it is advisable to hire Forex brokers. The brokers will give you minute by minute details of market fluctuations and also guide you with buying and selling currency.
- If you are dealing in large amounts of money, there is risk of loss in a high leverage market. You can lose buying and selling opportunities in a matter of seconds, and you are left with marginal profits only. This is another reason why efficient and clever money management is needed.
Learning to Forex is like any other trade where you have to spend time learning its basics and then put the learning to practice.
Again we repeat – Forex trading is not a shortcut method of getting rich quickly. You need perseverance, patience and dedication to turn Forex trading into a long term income source. In the meantime, search for free resources online and get yourself acquainted with trading Forex online.