Forex trading refers to the exchange of one currency with another in at least two opposing sequences in order to profit from the change in the rate of exchange between both currencies.
When we say opposing sequences, it means that you must first be in possession of a currency of trade, use it to buy a certain amount of another currency, wait for the second currency to gain in value over the first currency held, then re-exchange the 2nd currency for the first one, getting more of the first currency in the process.
In online forex trading, this process is performed using certain technology such as trading platforms, is highly automated and occurs very fast. The process is a mirror of what goes on in the offline currency exchange market. It is also done on a much larger scale, as this process includes al
l players in this market on a global scale.
Why Learn to Trade Forex?
Life is a journey and so are the many aspects of our lives including careers. Therefore, learning to trade Forex is a journey on itself that requires traders to take specific steps before finally launching their activity online. You cannot just wake and decide that today you are going to start trading online.
In order to success in online trading, traders must have a plan which involves establishing an entry strategy, a trading strategy, withdrawal/reinvestment strategy, huge loss impact recovery strategy and most importantly, an exit strategy. As such, this implies the importance of learning to trade because traders must learn how to derive the strategies that suit them both personally and financially.
How to Begin Trading Forex:
So what does a beginner who may have some faint idea as to how currencies are exchanged with a local Bureau de Change operator, have to know about the way the online spot forex market operates?
Every currency listed in the spot forex market is a floating currency. That means that its value is determined by market forces and this is what makes the value of that currency subject to change.
The change in value of floating currencies is a continuous process.
The spot forex market is open 24-hours a day, 5 days a week.
There are currencies whose values are either fixed to a single value or within a tight range by the government. These currencies are fixed currencies and are not suitable for spot forex trading. Examples of such currencies are the Chinese Yuan (CNY).
Currencies are listed, priced and traded in pairs. This because what is traded in spot forex is the change in value of one currency relative to another currency.
You cannot access the market directly. Rather, a trader will need to open an account with a broker. The broker will provide the platform, provide a fair and balanced field for all participants and generally provide market tools for traders.
Fixed vs Floating Currencies
A currency is said to “float” when its value is determined by forces of demand and supply for it. Change in value of a currency is what makes forex trading, and is a continuous process which occurs minute by minute, and second by second when the market is very active. You cannot make any money if the value of a currency is static, such as is the case with fixed currencies. Some governments either fix a set value for their currencies, or restrict its movements to a tight band.
Various factors cause traders to have demand for a currency, or cause them to jettison it for others. Many of these factors are listed in the forex news calendar and form the basis of news trades. The relationship between these factors and the change in value of currencies is complex and demands careful study from the beginner trader. Indeed, a beginner in forex should ideally not trade the news until these complex relationships are understood and mastered.
Forex Trading Hours
The forex market is a 24-hour market. This is because there are three major trading hubs which do most trading activity over an 8 to 10 hour period. There are periods when the trading activity in at least two hubs will overlap, producing the periods of maximum market volatility. A situation where we have one zone opening for business in a day (Tokyo and Sydney- Asian session), followed by the London session (European market) and finally the New York session, gives an almost continuous state of forex trading activity over a 24-hour period, commencing on Sunday 9pm GMT and ending on Friday 9pm GMT.
Currency Pricing and Pairing
Currencies are traded in pairs and have two sets of prices. There is a bid price, and the ask price. So a typical quote for the Euro against the US Dollar will be displayed as follows:
EUR/USD = 1.0345/1.0347
In this example, the currency pair is EUR/USD, the bid price is 1.0345 and the ask price is the 1.0347.
Access to the forex market is obtained through a forex trading account. Apart from a brokerage account, there are other requirements the trader must fulfill:
There must be an acceptable means of depositing and withdrawing funds from the account. Various methods now exist in addition to the conventional bank accounts: credit cards, Skrill, Neteller, etc.
The new trader must submit a government-issued ID and a document acting as a proof of residence such as a utility bill or bank statement to verify the identity and the residence of the trader.
The trader must have the required trading capital deposited into the trading account. Such capital must constitute the required margin for any trades placed on the account.
The trading platform does not work in limbo: it has to work on a hardware device such as a laptop, desktop, smartphone or tablet device. So the new trader must own any of these devices to be able to trade forex.