What is forex trading

Forex or foreign exchange is a global market place where you can trade currency. Decentralised in nature, you can explain it as a network of buyers and sellers, who transfer the currencies of different economies at an agreed price. The forex market is the largest and also, the most liquid market in the world. According to a recent triennial report from the Bank for International Settlements (a global bank for national central banks), the average was more than $5.1 trillion in daily forex trading volume. 

If you have ever travelled abroad then you also have traded forex. For example if you live in the United States and you travel to France, you won’t be able to spend your United Stated Dollars there. But instead, you require the local currency which is Euro so you will have to exchange your Dollars for Euros at the current exchange rate. Also, the exchange rate is highly liquid and fluctuates continuously, understanding which requires proper skills and broad insights into the market-based trading system.

Forex Trading

Unlike shares or futures, forex trading directly between two parties, in an over-the-counter (OTC) market instead of exchanges. The forex market is run by a global network of banks. The banks are spread across four major forex trading centers in different time zones: London, New York, Sydney, and Tokyo. Because there is no central location, you can trade forex 24 hours a day. And there are 3 different types of forex markets which are spot forex market, forward forex market, and future forex market. Most traders usually do not take delivery of the currency itself but speculate on the price movements and take advantage of them.

Trading in pairs

Forex is traded in pairs. And it involves selling one currency in order to buy another, which is why it is quoted in pairs. In simpler words, the price of a forex pair is how much one unit of the “base” currency is worth with respect to the “quote” currency. Each currency in the pair is listed as a three-letter code. Which tends to be formed of two letters that stand for the region, and one standing for the currency itself. For example, GBP/USD is a currency pair that involves buying the Great British pound and selling the US dollar which explains the prefixes ‘P’ for Pound and ‘D’ for Dollar.

You can divide these currency pairs into the following categories –  

Major Pairs – Seven currencies that make up 80% of global forex trading. Includes EUR/USD, USD/JPY, GBP/USD, USD/CHF, USD/CAD, and AUD/USD  

Minor Pairs – Less frequently traded, these feature major currencies against each other instead of the US dollar. Includes: EUR/GBP, EUR/CHF, GBP/JPY  

Exotics – A major currency against one from a small or emerging economy. Includes: USD/PLN (US dollar vs. Polish zloty), GBP/MXN (Sterling vs Mexican peso), EUR/CZK  Regional Pairs – Pairs classified by region – such as Scandinavia or Australia. Includes: EUR/NOK (Euro vs. Norwegian kroner), AUD/NZD (Australian dollar vs. New Zealand dollar), AUD/SGD 

How do i start forex trading

So if you want to start forex trading, then you can do so. Now as you may know that day trading of stocks and future and options has been around for quite a long time. Similarly, you can also trade forex. So in order to do so, there are 2 main ways via which you can start trading. They are: 

1. Trading Forex CFD. A forex CFD is a contract in which you agree to exchange the difference in the price of a currency pair from when you open your position to when you close it. Trading CDF also offers leverage which enables you to take on trades much bigger than your account value. Leverage is a double edge sword. When you use it wisely it can create enormous wealth. But if the markets move against you it can destroy your trading account too. 

2. Forex Trading via a Broker. Trading forex via a broker is similar to trading shares. You can speculate on the price movements of currency pairs, without actually taking ownership of the currencies themselves. It can be via a broker or even banks sometimes.

Mindset and Strategy

Now after you have decided how you want to trade forex then you can go ahead and open your account. After that is the time to spend all your time and energy on learning how and what moves the forex market and developing your own strategies.

Day trading forex requires you to be constantly aware of the global economy and current world events. You have to learn and develop your skills in the market and create a trading strategy. And while strategy plays a major role in trading but money and risk management are some of the most crucial elements of becoming a successful and profitable trader.

You can read books on trading psychology and other learn information via many other methods available on the internet. Forex Trading requires a very high level of discipline and sound trading psychology. The strategy also plays a very critical role but without the correct mental approach and discipline, you can never succeed. One has to develop the attitude and patience for trading successfully and never just trade for the thrill of it.

Trading is an art that you can mastered, but you have to be willing enough to gain experience through any means necessary. Your learning curve could be a really short one if you successfully maintain your discipline and trade only when an opportunity arises. Doing so, no one can stop you from being the leader of the pack. We live in a world full of opportunities and it is up to us to spot them and cash them in at the right moment.

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