Updated February 2021
Do you want to know how to trade foreign currency? If yes, we can guide you. But first, we need to learn certain terms related to forex trading and the forex market.
Forex means Foreign Exchange or Forex Exchange market. This is the market in which foreign currencies from all over the world are traded.
- Forex Trading = Foreign Exchange Trading
Forex trading simply means buying and selling foreign currencies.
It is one of the prominent financial markets in the world. On a daily basis, trillion-dollar worth foreign trading takes place in this forex market. You have to find a forex broker in order to start trading in the forex market. You have to make strategies to gain an advantage and make the right move. As a day trader, you can trade in the forex market. But you have to make plans and strategies to find some good trades. If you are fairly new to forex trading, we can guide you. In this post, we will introduce you to forex trading and show you how to choose a good forex broker.
Forex Trading: What is it?
Forex trading means buying and selling foreign currency. While some people genuinely need to convert their currency, others do it for profit. Some currencies are volatile. Their price can fluctuate easily due to demand and supply. You can take advantage of this volatility to find some good trades. You can buy the currency at a lesser price, and when the price increases, you can sell it for a higher price. This is how forex trading works.
Why should you trade in forex?
As we have discussed above, the forex (foreign exchange) market explicitly is very huge and has a lot of scope for day traders. You can speculate a change in currency price and make your move. If your speculation is correct, you will end up with the profit. But there are also some risks. Sometimes you may end up with loss as well. You have to make an appropriate strategy to trade in this market. You can trade 24 X 7 as there is no central market in forex trading. Here are a few reasons why you should trade in forex.
Reasons to trade in the forex market
- Liquidity: The forex (foreign exchange) market explicitly is extremely liquid. On a daily basis, $3.2 trillion is traded in this market. It means you can trade many times in a single day. There are lots of opportunities for day traders.
- Diversity: You have major currency pairing as well as regional currency pairings. You can trade in any of these pairings. There are many currencies for you to trade-in.
- Accessibility: This market is open 24 X 7. You can easily access this market to trade currencies. There are no time regulations.
- Leverage: Forex traders use leverage to trade currency in large quantities. You can either earn huge profits or incur a huge loss.
- Low commissions: The commission in the forex (foreign exchange) market moreover is very low. Some companies will not even charge commission. You just have to pay spreads.
These are all the reasons why you should trade in the foreign exchange market. This market offers a lot of benefits to day traders.
Currencies Traded in Foreign Exchange Market
In the forex market, currencies are always traded in pairs. The pairs of currencies are divided into two i.e., major and minor.
Major Currency pairs
In forex trading, people mostly focus on major currencies. You can find seven extremely fluid pairs here. There are four major pairs + 3 emerging pairs.
Four major currency pairs
The four major pairs are,
- EUR/USD (Euro/ Dollar).
- GBP/USD (British Pound/ Dollar).
- USD/CHF (Dollar/ Swiss franc).
- USD/JPY (Dollar/ Japanese Yen).
Three emerging currency pairs
The three emerging currency pairs are,
- AUD/USD (Australian Dollar/ Dollar).
- NZD/USD (New Zealand Dollar/ Dollar).
- USD/CAD (Dollar/ Canadian Dollar).
95% of speculated trading includes the particular currency pairs. You can clearly see that each pair includes a dollar. It shows how powerful the USD is. It is considered a universal currency. 88% of trading includes dollars.
Minor Currency pairs
When the USD is not in a pair, it becomes minor. It is also known as a cross-currency pair. Here are the famous minor pairs.
- CHF/JPY (Swiss franc/ Japanese Yen).
- EUR/AUD (Euro/ Australian Dollar).
- EUR/GBP (Euro/ British Pound).
- GBP/JPY (British Pound/Japanese Yen).
You can trade in the exotic currency as well. Some exotic currencies are Thai Baht, Swedish, or Norwegian Krone. These currencies increase risk. They are highly volatile.
In forex trading, you need a broker. A forex broker acts as a middleman between you and the foreign exchange market. IF you want to buy or sell a currency, the broker will match you up. There are many buyers and sellers in the market. A broker will match you with respective clients. They also act as a middleman between you and the interbank system. Forex brokers work with a number of banks to offer you liquidity. Because of this, it is very important to approach a good forex broker.
How to find a good forex broker?
Your trading success depends upon your forex broker. Many firms provide broker services. You have to choose your broker carefully. Every trader has a different approach while choosing a broker. While some look for trading platforms, some look for currency pairs. Here we will compare several factors that determine a good forex broker.
Lowest Trading Costs
The broker charges commissions and various other charges like overnight fees, withdrawal fees, inactivity fees, etc. You have to consider these costs while choosing a broker. Choose a broker with low trading costs.
Forex trading platforms choices differ from trader to trader. You can use a demo account to know which platforms suit you. Moreover, you can choose simple cut down interface platforms. You can also choose multiple built-in features platforms.
There are several mobile applications through which you can trade easily. You can download the application and see how it works. Check all the features and decide. If you like mobile trading, choose a broker who has mobile trading services.
You can check how the firms provide customer support. You can check what mode of communication they use. If they have a chat, email, or telephone options. You can check the language and decide what you want.
Check what all currency pairs they have. If you want exotic currency trading, check if they have it.
Many regulations regulate broker firms. See if you want a regulated broker. European regulation may impact your trading.
Spreads or Commission
Part of it is covered. However, you need to compare the spreads to choose a broker. You can choose multiple accounts and brokers to find tight spreads for trading.
Choose what payment options are available with the broker. PayPal, Neteller, debit cards, credit cards are some options. You can even use bitcoin in some firms.
Most firms will provide you data security. There can be unregulated and unlicensed brands as well. So choose carefully. Security should be your major concern.
Some brokers will give you a demo trading account. With this, you can trade risk-free. Check all the features, and see how things work. Choose a broker with the best services.
There are different account types with brokers. Each account has certain advantages and limitations. You see a difference in spreads, costs, and data. If you have a micro account, your trading size will be limited. Choose carefully.
In Europe, there is less leverage. But in Australia, there is more freedom. You can choose where you want to go. You can either choose more leverage and high risks or low leverage and safety.
Tools of Features
Brokers provide various tools for trading. See what all tools are available and choose a brand on that basis.
Some broker firms offer free tutorials to educate their clients. Choose a brand that can educate you.
Metatrader 4 or 5
Some firms provide automated trading. Some use software integration. You can choose firms with popular software like MetaTrader 4 or 5.
Earlier brokers used to provide a variety of bonuses, but it has changed now. Choose a firm that still provides some bonuses.
Check if the mobile apps provided by brokers have good execution speed. Execution speed is very important in trading.
Here are some scams done by brokers. If your broker does this, don’t trade with them. These are signs of scams.
- If they are cold calling you.
- Offering huge profits.
- Asking to trade on your behalf.
To start forex trading, you need to open an account with forex brokers. The first step is to choose a broker. Compare all the above factors to choose a good forex broker. Choose your broker carefully. If you don’t like your current broker, you can approach someone else. Once you choose the broker, you can start trading foreign currencies.