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Trading With Forex For Beginners

Forex trading for the beginners

Trading With Forex For Beginners:

Forex is a combination of several foreign exchanges and currency. Foreign exchange refers to the changing currencies for various reasons, often for tourism, trading, commerce such as imports & exports. Trading with forex for beginners can be a lucrative career however detail know how of forex market is a must.

With the emergency of digital currency, such as Bitcoin, foreign exchange trading has gone a notch higher.  A 2019 report showed that daily trading volume in the global forex exchange market climaxed at $6.6 trillion in April.

What is the Forex Market?

This is where currencies are bought and sold. Currencies are often traded because they are needed for purchasing goods and services within the country and across the borders. Governments and businesses need to exchange international currencies to enable them to conduct foreign business and trade.

For instance, if you live in Japan and want to buy a machine from France, then either the company you are buying from or have to foot the French price in euros. It means that the Japanese importer would exchange the equal number of Japanese Yen into euros.

The same rule applies to traveling, where tourists have to change their currency at the forex market to obtain local currencies to pay for vital services and products in the country they visit. 

The forex market differs from other traditional markets because it does not have one central place of operation. The trading is done electronically over the counter, meaning that all transactions happen via the computer network, connecting traders worldwide.

This market operates 24 hours a day in five and a half days weekly, trading currencies across the globe. Currencies are also traded in main financial centers, such as Hong Kong, New York, Frankfurt, London, Sydney, Singapore, Tokyo, Zurich, and Paris-depending on time zones. It means that when Tokyo and Hong Kong’s trading comes to a close, the U.S forex market starts again. 

Forex History

Though the current forex market is a modern invention, it has existed for centuries in its basic form, where people exchanged goods and currencies to buy other goods and services. After the beginning of the collapse of Bretton Woods in 1971, currencies were allowed to compete against one another, with the value of each currency dictated by the supply and demand forces and controlled by foreign exchange services. 

Today investment and commercial banks flood the forex markets to conduct businesses on behalf of clients, taking advantage of speculative opportunities to help individual and institutional investors trade currencies.

Currency traders can benefit from its asset class in two ways: earning interest rate differential between currencies and earning a profit from the difference in value in the exchange rate. A trader can buy a currency with a higher interest rate and then short it with one having a lower rate in a carry trade strategy. 

Why You Can Trade Currencies:

Before the internet age, it was challenging for individual investors to trade currencies. It was only possible for hedge funds, multinational corporations, or individuals with high-net-worth to trade because the forex market needed lots of capital. The internet created a retail market, allowing individual investors to access it through their banks or brokers easily. 

A forex market is a continuous market where individuals and businesses trade currencies. Previously, it was dominated by large banks and financial institutions acting on behalf of their clients. However, the internet has made the forex market retail-oriented as traders and investors begin to conduct business in it.

It is conducted through computer networks and trading terminals, thus not needing a physical building or venue for trading. The retailing of the market eliminated the need for large liquidity pools. The prices are majorly determined by the motives of participating large financial institutions. 

Trading Forex:

Spot Market

It is the largest of the three since it trades in the real foundation asset for futures and forward markets. In recent years, the trading volume of forex spot markets was boosted by the invention of electronic trading and forex brokers, thus overtaking forwards and futures.

Most people, when talking about the forex market, they are referring to the spot market. Futures and forwards are popular with companies that often hedge their foreign exchange risks in a future date.

The Outworking of Spot Market 

The spot market is a virtual market where currencies are traded according to their prevailing prices. These prices are determined by the forces of demand and supply, calculated using several factors, such as economic performance, present interest rate, and the prediction of future performance.

The final deal is called the spot deal, a dual transaction where one party delivers the agreed-upon currency figure to the other counter-party in exchange for a specified value of another currency. After closing the position, the settlement is in cash, taking two days to complete the transaction.

Forex Trading Markets

Forward & Future Markets

Forward markets present forward contracts in which two parties sign a private agreement to buy a currency in the future at a specified date and price over the counter. On the other hand, futures contracts present standardized agreements between two individuals to take a currency delivery at a predetermined date and price.

Unlike the spot market, the future and forward markets have no dealings with the actual currencies; they are contracts representing claims to a given currency type, stipulated price, and date for settlement. 

The forward market has contracts traded OTC between two individuals who dictate the agreement terms between themselves. The future markets consist of futures contracts bought and sold depending on the settlement date and standardized size in a public commodities market.

In the United States, the futures market is regulated by the National Futures Association. The futures contracts contain details like the specific number of tradable units, customizable minimum price increments, and settlement and delivery dates.

Futures are forward contracts binding, with settlements done via cash upon maturity, though they can also be bought and sold before their due date. Since they are not affected by currency fluctuations, large corporations prefer using them to hedge against exchange rate fluctuations in the future. 

Forex Hedging

Companies that conduct businesses abroad experience the risk of currency value fluctuations when they trade goods and services outside the domestic market. These risks can be mitigated through the forex exchange market mechanism to hedge the currency. The market allows companies to trade at a fixed rate determined now for a future transaction. 

To benefit from this mechanism, a company should sell or buy currencies in the swap or forward markets before the transaction, thus locking the exchange rate. For instance, let’s assume that a company intends to sell U.S-made shoes in Europe when the euro and the dollar exchange rate are $1 to £1. If the shoes cost $40 to make and the U.S company intends to sell them at £70- we assume the price is competitive with other shoes made in Europe, and the plan succeeds, the company will have a profit margin of $30 for every sale.

Unfortunately, if the U.S dollar starts to gain value against the euro to say an exchange rate of 0.8, $0.8 acquires £1.00. The problem this company will face is that while the production cost will not change, it will be forced to still sell at £70, which, when translated back to dollars, will only be $56 (£70 x .8). If the dollar weakens, the company will get a bigger profit margin. 

The shoe company could mitigate this potential risk by buying the U.S dollar and short selling the euro when the currencies were par. This would help the company offset the reduced profit should the dollar rise in value. This type of hedging is done in the future markets where the trader benefits from the future standardized contracts handled by the central authority. However, currency futures have little liquidity than forward contracts, which are easily accessible within interbank systems worldwide. 

Forex for Speculation

Several factors, such as trade flows, interest rates, tourism, geopolitical risks, and economic strength, influence currencies supply and demand, thus creating continuous forex market volatility. This creates an opportunity to profit from these changes in currency values. If it is forecasted that one currency will weaken, it signifies that the par currency will strengthen since forex trade currencies in pairs. 

Let’s assume that a trader believes that the interest rate will rise in the U.S than in Australia, when the exchange rate between them (AUD/USD) is 0.75, meaning you need $0.75 USD to buy $1.00 AUD. Increased interest rates in the U.S. mean USD’s demand will skyrocket, and the exchange rate will fall.

A trader will need fewer USD to acquire AUD. Assuming that this trader is correct, a rise in interest rate decreases the exchange rate to 0.650, meaning that with $0.65 USD you buy $1.00 AUD. If the trader short sold AUD and went along with the USD, they would profit from the change in currency value.

Trading with Forex For Beginners:

Based on the preceding discussion, it is clear that currency trading can be very complex and a risky venture. The interbank market, where many individuals trade currencies, has varied regulations, and the trade instruments have not been standardized. In some parts of the globe, forex trading completely has zero regulations. 

The interbank markets have banks as major players, trading with one another worldwide. These banks analyze, determine, and accept credit and sovereign risks, while establishing an internal process to protect themselves as much they can.

Forces of supply and demand dictate the prices of currencies since the participating banks often provide bids and offers for a given currency. The sheer volume of trade flows also protects the banks from rogue traders who may manipulate currency prices. There is increased transparency to allow investors accessing the inter-banking deals to trust the system.

Small retail traders with small and semi-regulated forex dealers can sometimes requote prices and trade against their customers. Though there are regulations to check on forex trading, these regulations are not uniform across the globe for small traders.

If you are in the United States, it is recommended that you should thoroughly investigate a forex dealer and determine if it is governed by the U.K or the U.S or is it from a region with lax rules. This investigation will help you in case the dealer becomes bankrupt or there is a market crisis. 

How To Start With Forex Trading:

  1. Learning the basics of forex.
  2. Create a brokerage account.
  3. Develop a trading strategy.
  4. Be on top of your numbers.
  5. Build an emotional equilibrium.

There is a big similarity between equity trading and forex trading. The following steps can provide you will the needed help to get started.

Learning the basics of forex.

As an investor, knowledge is power, and getting to know what forex trading is about is the first thing you should do. You could benefit from online courses that will help you learn terminologies and the inroads into the market. You will need more knowledge than you would with equity trading to succeed as a forex trader. 

Create a brokerage account.

All forex traders have a forex trading account, and you also need one to begin your forex trading. As a broker, you do not make money through commission; rather, your money comes from spreads (pips) between the selling and the buying prices. If you are a beginner, start with a micro forex account having low capital requirements.

These micro trading accounts allow you to limit your trading amounts to a low of 1,000 units of a currency. Often the standard account is equivalent to 10,000 currency units; therefore, the micro forex accounts are designed to comfortably introduce a beginner into forex trading as determine your way and style of trade. 

Develop a trading strategy.

Though you will not always predict market movements, developing a trading strategy will enable you to set feasible trading roadmaps and guidelines. You will realistically assess your finances and situation, considering the amount of money you can invest in trading and the risk involved. Remember that this market operates in a high-leverage environment; however, those who will take risks also reap rich returns. 

Be on top of Your numbers.

Once you have established your account and begin to trade, always compare your position when the day ends. Some trading software will provide you will daily accounting for easy tracking. Ensure your account has sufficient funds for future trades and no pending positions. 

Build an Emotional Equilibrium.

Do not allow missed opportunities as a beginner to drive you into frustrations and detract you from the main goal. Obsessing over unanswered questions about the decision you made or didn’t make will send you into confusion, rob you of confidence and interfere with your decision-making skills.

Conclusion

Starting as a forex trader required knowledge in finance and currency trading. As a beginner, you will need to attend some online classes to have a clear picture of what is required of you. Once you gain mastery of reading the market, you can make a kill from forex trade. The secret is to be willing to take risks and continue to learn along the way. 

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