The foreign exchange market or forex, as it is commonly referred to, is one of the most well-known markets in the current financial industry. It is a vast market which offers immense opportunities to investors, however, forex trading for beginners involves some degree of knowledge before entering the market.
In the case of forex trading for beginners, it is crucial to seek professional advice before investing as trading in forex requires the knowledge on how the forex market works which a novice may not possess. Moreover, it is a fast-paced market where trading is completed quickly.
What is forex?
It is a marketplace where currencies are traded. Basically it involves exchanging a local currency with a new one.
Across the market as a whole, an estimated 5.3 billion USD is traded every day between governments, banks, corporations, and speculators.
The basics of forex trading
Till recently, forex trading in the currency market was the preserve of big financial institutions, corporations, central banks, hedge funds and individual with high net-worth. But the advent of the Internet has transformed the way forex is traded at the foreign exchange. Now forex trading for beginners is easy as it is possible for even the average investor to engage in forex trading and buy and sell currencies easily through their trading accounts at various online brokerage firms.
Another advantage of investing in the forex market is that it is one of the least volatile financial markets since the daily currency fluctuations are usually very small with most currency pairs moving less than one cent per day. With this, many currency speculators depend on the availability of enormous leverage in order to increase the value of any potential movements. The forex market is an ideal place for a lot of traders due to its extreme liquidity and high leverage. As the forex market is based on demand and supply, it is not easy to manipulate the value of currencies. Apart from this, it is not possible for large players such as central banks to manipulate the currency prices given the large size of the market.
Overall, there are a lot of opportunities for forex trading for beginners but they need to familiarise themselves with the forex market in order to receive significant returns on investment. New investors should learn the basics behind currency movements in order to be successful in trading.
Forex trading is not conducted at any central marketplace. Trades are conducted electronically over-the-counter or OTC, which means all transactions take place via computer networks between traders all over the world instead of one centralised exchange. This means the market is open all the time. Currencies are traded worldwide in the major financial centres of London, New York, Tokyo, Zurich, Frankfurt, Hong Kong, Singapore, Paris and Sydney spanning almost every time zone across the world. This means that when the trading day ends in one part of the world, the forex market begins in another part of the world. The forex market is highly active throughout the day, with price quotes changing constantly.
Forex trading strategies
There are a number of strategies for forex trading for beginners which include:
Day trading: Under this strategy, trading is done for one day. Trades set using this strategy are usually exited on the same day. This prevents investors from any negative event that may happen overnight.
Trend taking: Trend taking involves following the trend in order to determine the way price are moving.
Swim trading: Swim trading strategy is usually applied in case of trades that last between one day and one week.
Apart from these, there are a number of trading styles based on the time frame or holding period of each trade. These include intraday trading, position trading, swing trading, trend trading, technical trading, and fundamental trading.
Currency pair is the quotation and pricing structure of the currencies traded in the forex market. The value of the currency is a rate and is determined by its comparison to another currency. Forex trade involves the purchase of one currency and the sale of another at the same time. For example, the euro against the US dollar is a currency pair which is commonly shown as EUR/USD. The first currency, in this case the USD, is called the base currency, while the second one, EUR is called the quote currency. The currency pairing shows the amount of the quote currency needed to purchase one unit of base currency. When buying the currency pair, the investor buys the base currency while selling the quote currency. As opposed to this, an investor sells the base currency and buys the quote currency when selling a currency pair. The buy price of a currency is called the ‘bid’ while the sell price of the currency is called the ‘ask’. The ‘bid’ is an indicator of the amount of quote currency needed for buying the base currency, while the ‘ask’ for the currency pair indicates the amount the investor will receive in the quote currency in return for one unit of the base currency.
Forex trading for beginners risks
There are certain risks associated with forex trading which every forex trader should be aware of, which include:
Leverage risk: Leverage can be beneficial as well risky. Profits can rise if leverage is high, but high leverage can also increase the losses.
Interest rate risk: A rise in a country’s interest rate strengthens its currency. This rise in strength can be attributed to a rise in investment in that country since a strong currency may mean higher returns. On the contrary, a fall in interest rates has the opposite effect on investment since investors may divest from that country due to weakening of the currency.
Transaction risk: This is exchange rate risk which may be due to the time differences between different countries, which can take place during the time between the beginning and end of a contract as exchange rates may change before settling a trade. As a result, more time duration between entering and settling the contract increase the transition risk.