The Fundamentals of Forex Trading

As the name implies, foreign exchange or Forex is the exchange of one currency with the other for several reasons like trading, commerce, or tourism. Alternatively, it is the largest financial marketplace (with a daily trade volume of over 5 trillion US Dollars) in the world where national currencies are traded against each other. It is a 24-hour international currency market or interbank market, or a trading platform to carry trade (buy or sell) of various currency pairs. With such a vast market, finding a buyer or a seller for your currency pairs (e.g., EURO against US Dollar) is much easier than in other markets. It gives participants more opportunities for investing that other markets don’t. This article talks about investing in forex markets, futures markets, bond markets, etc.

Forex InvestmentsForex Investments

How to Invest in Forex Trades

In a foreign exchange market, an investor can buy or sell, exchange, or even speculate on currency products. Any currencies can be traded based on user experience that can assume the value, whether it is moving up or going down.

Here are the steps for forex investments for better understanding:

1) Open a brokerage account – First of all, investors have to open a brokerage account, and for that, investors can open an account from industry leading platforms like FOREX.com and City Index. Both are part of Gain Capital Group LLC. A brokerage account serves as a store to hold your foreign currencies if you are going to sell them, or it will hold your currencies after you buy them.

2) Fund your brokerage account – Deposit money into your brokerage account to start trading.

3) Do your own research – Just don’t go and buy currencies for the sake of trading currencies. Instead, do your own research, check the latest news updates, and use a demo account to see which currency will increase or decrease in value and make a calculative move thereafter.

4) Choose your currency pair – Foreign exchange trading always requires two currencies that will be traded against each other. Therefore, it is important for an investor to choose the pair wisely. The most popular currency pair that is traded the most is EUR/USD.

5) Keep an eye on your investments – Foreign exchange markets are subjected to rapid changes, sometimes even rapidly than stocks. Therefore, it is important to stay focused on your investments and read news updates frequently so that you can keep track of your money.

Types of Foreign Currency Investments

Foreign currencies can be directly traded, but most traders prefer the following trading tools to trade foreign currencies:

1) Options – Foreign currency investment options give the participants the right but not the obligation to trade foreign currencies at a set price and a specified time and date or before that. If all these specifics fall into the right place, currency trading using options can be profitable.  

2) Futures – Foreign currency futures are futures contracts on foreign currencies that are bought or sold based on a settlement date or standard size of the currencies. Futures work like options in several ways. But unlike options where the trading can be done on or before a specified date, using Futures requires currency trading only on a future date when the price is up.

3) Mutual Funds – Mutual funds and exchange-traded funds or ETFs apart from holding bonds or stocks can also hold foreign currencies. Some participants may buy single-currency ETFs, while others may prefer a group of foreign currencies to earn a profit.

4) Certificates of Deposits – Foreign currency certificates of deposit or CDs are available both on individual currencies or a group of currencies, thereby allowing investors to earn interest and profit at a foreign exchange rate.

5) Foreign Bond Funds – Foreign bond funds are also a mutual fund that invests in foreign government bonds. These bonds are denominated in the currency of the country that is selling the bonds. The bondholders earn a good amount of money when the foreign currencies’ value rises more than the investor’s local currencies. The investors will then gain more money when the currency is converted.

Reasons to Trade in Forex Market

The foreign exchange market is huge in terms of their daily trading volumes worldwide and therefore offers more liquidity. As per the personal finance reviews and news, there are some other reasons why to invest in forex trading:

1) Accessibility
The foreign exchange market is easily accessible, and investors can start forex trading from as low an investment as 100 USD. 

2) Equality
The enormous size of the Forex market allows everyone to trade equally. Unlike a stock market, the Forex market provides equal opportunities to the retail investor accounts and banks.

3) Time flexibility
The Forex trading market is open 24 hours and seven days a week, and therefore investors from any time zone can trade (buy and sell) any time.

4) Leverage
Leverage is one of the important tools offered by forex brokers that makes forex trading so profitable but along with risk. While stock market brokers provide leverage in the range of 20:1 to 50:1, forex brokers offer leverage in the range 400:1 to 500:1.

Various Forex investment strategies

There are a variety of strategies to determine the best market entry and exit points. Here are some of them discussed below:

1) Trend Trading – Trend trading strategies involve identifying an upward or downward trend in the price movement of a currency. It also consists of choosing the best entry and exit points based on price positioning within the trend’s relative strength. Trend trading tools include moving averages, volume indicators, relative strength indicators, stochastic and directional indices.

2) Carry Trading – Carry trading strategies augment gains by buying and holding a currency that pays a high-interest rate against a trading account that pays a low-interest rate. Traders may use a combination of the trend trading strategy with this carry trading strategy to find the entry or exit points of the world forex market.

3) Breakout trading – In this method, a trader tries to identify a trade entry point at a breakout point from a previously defined trading range. If the price breaks out higher from a previously described resistance level on a chart, the currency value will move higher. Similarly, if the price breaks out within a range, the trader may sell the currencies in the belief to buy them again once the prices are favorable.

4) Retracement strategy – according to this strategy, currency prices never move in a perfectly straight line between the highs and the lows but instead, they change their paths in between the range. For this, retracement traders wait for a price to “retrace” or pull back a portion of the price movement to confirm a trend before buying or selling.

Wrap Up

Forex trading is complicated and frustrates most people, but if you can take the risk and have the patience and persistence to learn from your mistakes, it is the best place to trade. Unlike stocks, commodities, or other products or any financial markets, forex trading does not occur on any exchange. Still, it takes place directly between the two parties (the buyer and the seller) in an OTC (over-the-counter) market. Any particular exchange does not manage the forex market. Still, a global network of banks spread across four major forex trading centers worldwide, New York, Sydney, London, and Tokyo, that manage the forex market. The absence of any central location helps participants from any time zone trade via a third party 24 hours a day.

FAQs

1) Is Forex a Good Investment?

Ans: Yes, forex is an excellent investment that can work to multiply your initial investments to a manifold.

2) Can you get rich by trading forex?

Ans: Forex trading is a very lucrative one, provided you know the risk tolerance strategies and limitations associated with it while investing.

3) Can I trade for $100?

Ans: Yes, the forex market is the only market where traders can begin trading with just $100.

4) Is Forex easier than stocks?

Ans: Yes, forex is easier than stocks given its high liquidity and low spreads and transaction costs that provide more opportunities to the traders for investing in forex.

5) Is Forex trading the same as CFDs?

Ans: The significant difference between Forex trading and CFDs is that CFDs can associate different types of contracts from different markets, whereas Forex offers pure currency trades. However, the potential risk in CFD trading is weak industry regulations.

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