A Simple Guide to Forex Trading

Forex stands for Foreign Exchange; however bunch of the trading is done for currency pairs. This is actually a platform where currency from one country is changed into another one for numerous reasons like for instance commerce or tourism. Since business is getting global these days, hence there is a growing demand for transaction of currencies with most of the countries having their own currency type. The importance of foreign exchange service has emerged in the year 1971 when the currency of different countries were allowed to float with respect with the other ones which in turn has brought significant importance to its value. Every day, trillions of dollars exchange hands in Forex and it has a very big impact on the overall business of the market.
Sample Forex Trade
A trader buys EUR/USD at 1.3225 market price or places a BUY ORDER for EUR/USD at 1.3225. And places a SELL ORDER for EUR/USD at 1.3235. Same trader places a STOP LOSS order at 1.3210. That trader gained 10 pips from this trade if the market touches 1.3235. And that trader loses if market touches the STOP LOSS price of 1.3210. If that trader did not place a STOP LOSS order than if the market continues to fall below 1.3210, the trader will face to lose excess amount of his/her assets as the system will closes his/her position automatically with a higher loss.
Forex in the Form of Hedge
Commercial organizations that are performing business in the other countries are at a very high risk owing to the fact that currency changes its value and fluctuates from time to time. In order to hedge this risk, Forex comes as a kind of saviour in which it fixes the value of the currency at the end of the trade sometimes in the near future. In order to accomplish this feast, traders are asked to sell or purchase currency in swap or forward market. This can therefore act as a kind of hedge depending upon the actual currency which is involved and trade size.
Forex in the form of Speculation
There is a continuous fluctuation in the overall currency value of different countries and it is attributed by numerous demand and supply factors like for instance political risks, economic strengths, tourism, trade flow and interest rate. So the trader is given the opportunity to sell the currency with the hope that it is going to weaken or buy the currency with the anticipation that it is going to strengthen in the near future. So Forex industry is all about speculation, and if you speculate well, then nothing can be better than this.
Why Forex is So Popular among Traders?
Forex trading is getting popular with every passing day with hundreds of people starting to venture capital in the financial market. This is primarily because Forex offers a lot of advantages which are discussed under the following headings:

a) Commission: There is no commission charged by the broker concerned for placing the trade in assets. The only compensation that is charged by the brokers concerned is “bid-ask” spread and nothing else.
b) Middleman: There is no middle person in Forex trading which you need to deal with. All that is required is one genuine trading account and you can then directly deal with the market if you want to sell or buy any currency.
c) 24 Hour Market: Forex is one big industry that never sleeps. This gives a fair advantage to you to trade at any pre defined time from your own comfort zone. This also gives you the liberty to purse Forex as part time job that can be carried over weekends easily.
Risks Involved in Forex Trading
There is a lot of confusion involved in the Forex industry and a lot has been said about the market being not properly regulated which in turn makes it risky. However this perception is not the least bit true in nature and one needs to see things differently at this point of time. One needs to see the differences between the centralized and decentralized market and would need to determine where the regulations are going to be appropriate. Since the financial market is made up of a lot of participating banks who in turn provide specific bidding and offers for a single currency which results in demand and supply mechanism in market pricing. As a result of which it is practically impossible for any individual trader to influence the currency market.
Pros and Cons of Forex Trading
1) Forex is the biggest financial market at the present time. As a result of which astronomical amounts of trade are carried out on a daily basis which in turn makes it offer a lot of liquidity to the traders concerned. So it makes it relatively easy for anyone to enter and leave a certain position in the currency trading within a small span of time.
2) Since Forex provides a lot of liquidity, hence brokers or banks offer a large amount of leverage to the traders which in turn allow them to control a very large position with a small capital. Leverage in the ratio of 100:1 is very common to see and one should not be carried away by it. A large leverage can have potential risks on the overall trade of the individual concerned and if things don’t go as planned, it can wipe out the entire trading career.
3) One of the biggest advantages of trading in the Forex market is that it gives the merchants the flexibility to trade at any point of time depending upon their comfort zone. It is open 24 hours in a given day with trade starting in Australia and ending in New York.
4) Trading in the Forex market is actually a macroeconomic endeavor which everyone needs to be aware of. One should have a broad picture of market in their mind with fundamental knowledge of trade and ability to use all the trading tools available. The trading decisions should be based on the economic activity and should be able to see the market opportunities that are being made available to them from time to time.
Bottom-line
For anyone who is looking forward to start their Forex career with limited funds and want it to do for a short period of time, then swing trading or day trading is best available option for them. If you want to stay in the market for a long period of time, then you need to make proper alternative to your style of trading if you wish to survive in this rat race. In order to excel, it is imperative that one must be able to use the charts so that they are able to time their trade properly. Never try to violate the good trade habits with bad or impulsive behavior and always try to make use of common sense and have a logical flow when you are trading. As the saying goes “Fortune Favors the Brave”, so you need to be analytical and have a well prepared mind if you wish to become a successful Forex trader.

Source: Steve Gardner