Foreign currency trading, also known as forex or FX trading, has the potential to deliver impressive returns. It can turn out to be very lucrative for savvy traders, but if you don't know what you're getting into, it can also turn into a miserable experience.
Before you take the plunge and choose a forex market trading platform, it's a good idea to take the time to understand the basics of forex market trading, including how it works, what makes it profitable and why it can be difficult for new traders. Read on to get all the answers you'll need, starting with a concise definition of what currency market trading is, and why it matters to global commerce.
Definition of Forex Trading
The foreign exchange market is a global market where banks, financial institutions and private investors exchange national currencies. It is the largest marketplace in the world, with an average daily trading volume of around $6.6 trillion.
All transactions are conducted electronically through a decentralized network of computers. This is called over-the-counter (OTC) trading, which allows the instant exchange of large amounts of liquid assets.
The value of each currency can only be determined by comparing it to another. This is why traders can only buy and sell currencies in pairs. Currency pairs can be major, minor or exotic, and the value of each pair increases or decreases depending on various factors.
Important world and regional events, economic and political factors, and even market psychology can affect fluctuations in value. Such a wide range of influencing factors makes the market very volatile, which is another way of saying that trades always have the potential to surprise you.
Countries need the currency market to do business abroad, but it is also used as a way to make profits on rising and falling currencies. Profiting from currency market trading requires a combination of skill, knowledge and luck, and it bears repeating that there are no guarantees when it comes to speculative investments.
How Traders Can Make Profits
Of all the business skills you need to learn, risk management is the most important to master. Successful traders know all too well that trades can go either way, and it all comes down to whether or not the risk is worth the reward.
In order to mitigate the risks of a volatile market, you need to be able to use technical analysis tools, make informed decisions, and execute your plans within a critical time window. It requires careful planning and a significant amount of research.
If profitable trading sounds like hard work, that's because it is. There is no sure bet and you don't want to put money on the line if you can't afford to lose it. You should be prepared to learn about the forex market, develop a trading strategy that suits your personality, and stay on top of major events.
These days, there are several tools that make it much easier to make informed trades. Technology has given us online brokerage platforms, artificial intelligence (AI) based market analytics, and unlimited access to all the charts and information feeds we need to trade profitably.
Expert traders use a combination of tools and knowledge to achieve consistent success, but they also rely on instinct and experience to make their decisions. Unfortunately, there is no substitute for experience and you will have to learn to walk before you can run. In other words, take it easy at first and learn from your mistakes as you go.
The best strategy for beginners
Day trading small amounts at a time tends to be the most effective strategy for new traders. This is because short-term trading is largely based on market expectations, and most currency pairs follow a discernible pattern over time.
If you keep a close eye on the previously mentioned influential factors, you will start to notice windows of opportunity at certain times of the day. If you can plan ahead and create an appropriate schedule, profitable trading can become a regular activity that fits into the rest of your day-to-day business.
The forex market is open 24 hours a day, Monday to Friday, which means you can trade at a time that suits you. Being able to enter and exit the market at will is extremely convenient, and is the main reason why day trading is so popular among traders in the forex market.