Forex trading is the buying and selling of different currencies in an attempt to make a profit. It is also known as foreign exchange trading or currency trading. The forex market is the largest and most liquid market in the world, with trillions of dollars in turnover every day.
Individual traders or institutional investors can participate in forex trading, either electronically over the counter (OTC) or on a centralised exchange. The goal of forex trading is to profit from the changes in the exchange rates of different currencies.
What makes forex trading appealing to traders?
Forex trading is appealing to traders for several reasons, including:
With a daily trading turnover of trillions of dollars, the forex market is the biggest financial market in the world. It does depend on the currency pair that traders decide to trade, as some are more liquid than others. However, traders can, for most currency pairs, enter and exit positions quickly and easily. This makes it attractive for traders, particularly short-term ones.
Forex trading is also highly accessible in two ways.
Firstly, the forex market is open twenty-four hours a day, five days a week. This makes it easy for traders to find time to participate in the market, as it does not close at the end of each weekday, unlike different stock exchanges around the world.
Secondly, there are more and more electronic trading platforms that allow traders of all experience levels to participate at low cost. They come in the form of downloadable apps or trading platforms independent of brokers, and they allow traders to very easily sign up for an account and start trading their desired currency pairs.
Forex trading is also appealing because of traders’ ability to use leverage when they trade. This means they can control large positions with a small amount of capital. This can lead to higher profits, but traders should also know the use of leverage – when done incorrectly – can lead to substantial losses. Sometimes, these losses may even exceed their initial investment. In this way, leverage is a double-edged sword.
Forex trading also allows traders to diversify their portfolio easily, due to the abundance of currency pairs available on the market. This means traders can take advantage of different market conditions easily.
The forex market is generally said to be highly transparent. This is due to its size, liquidity, and 24-hour trading availability. There are also real-time price quotes available for all traders should they want to find them. This helps traders make informed decisions about their trades.
Finally, this does depend on the currency pair that a trader decides to trade, but for major and minor currency pairs, there is high volatility in the market. This means that there is a lot of movement in currency pair prices every day, which makes it easy for traders to find opportunities for trading.
7 elements to consider before forex trading
Yet forex trading carries its own sets of risks, and traders should do their homework before participating in the market. Some elements that traders should consider include how well they know the market, how familiar they are with trading and the instruments they want to trade, and how well they know how market analysis works. They should also make sure they understand their own investment goals.
Below, we examine these elements in more detail.
1. How educated you are
Before getting started, it’s important to learn the basics of forex trading, including the terminology, the mechanics of trading, and the factors that influence currency prices. You should know how the forex market works, and how forex trading works. You should also know when the market is open or closed.
This is the baseline when it comes to forex trading. If you do not know how trading takes place, you should not get started putting your money in.
2. What instruments you will trade
You should also do thorough research on the currencies you want to trade. Figure out which currency pairs you want to invest in and monitor their price charts closely. You should also know all about the factors that drive the currencies, so you will be able to make better market predictions.
3. Your investment strategy and goals
Next, you should be familiar with your investment strategy and goals. Think about why you are trading, and what objectives you are working towards. You should also think about the kind of trading you want to do, the time you have available for trading, and your risk appetite. All this will inform your investment strategy, from your trading style to the types of currencies you will trade.
4. Which brokerage you will work with
Afterwards, think about the kind of brokerage you will work with, and what kind of support you will need from the brokerage. If you are a trader in the MENA region, you can go for local brokerages or international ones with local or regional presences, such as Saxo Broker Dubai.
The benefits of local brokerages are that you can ensure you get on-the-ground support in your local languages, while the benefits of international brokerages include the fact that you can often access global markets. Therefore, consider your needs before settling on a broker.
You should also think about the fees a broker charges, the spreads they offer on their currency trading, and any commissions they take. Finally, it is essential that the broker you choose has the required local licensing, as that can give you greater peace of mind when trading.
5. How you will manage risk
When you know your risk appetite, you must know how you will manage your risks when trading. One way you can start is by understanding and learning all about the different risk management techniques that forex traders use.
Some common risk management techniques include setting limit orders, stop-loss orders, and close monitoring of the market. Other more advanced risk management techniques include hedging existing positions.
6. Whether you will trade with a demo account
Before approaching the live forex market with real funds, you may also want to consider whether you want to try your hand at trading with a demo account first. Many brokerages offer demo accounts for free, and they allow you to participate in trading with simulated funds.
The use of demo accounts is a great way for traders to become familiar with trading platforms and how to test risk management techniques. It is also a great way to test out new strategies – in the case of intermediate traders who want to try something new. Finally, it can allow you to test out third-party plugins and tools if you are an advanced trader looking for a more sophisticated trading experience.
7. Your market analysis skills
The last thing you should consider before diving in is how skilled you are at trading. This is different from knowing the steps you need to take to trade. You should learn how to interpret price charts, extrapolate data, and forecast price movements. This is especially true if you are planning on executing strategies that relate to trendspotting and range-bound trading.
The bottom line
Forex trading offers traders exciting opportunities in a fast-paced market, and the abundance of currencies available for trading gives investors the flexibility they may want and need. Despite being relatively straightforward, there are elements that all traders should consider before trading. These include how well you know the market and your trading instruments, how you want to trade, your trading plan and investment objectives, and how you will manage risk. It is important to know that there is no such thing as guaranteed profit in the financial markets, and one should always do their homework before investing.