Exchanging one fiat currency for another is known as foreign exchange. This exchange is done at various scales for reasons such as commerce, trade or to facilitate tourism needs. Even though it may sound simple, trading currencies can be tricky. Banks are major players in the forex market and thus, regulation levels in the interbank market are not the same across the board. Forex trading in some countries has little to no regulation while forex instruments are also not uniform.
Let’s Understand the Basics
The forex market is not controlled by any central body or authority like a bank or a government. It doesn’t function from a particular location but operates through a large network of computers as well as brokers who’re based out of different locations. This global network enables forex traders to buy or sell fiat currencies at exchange rates. The exchange rate is determined by the demand and the same along with many others in the market is traded from 5pm EST on Sunday until 4pm EST on Friday.
The forex market has two broad levels: the interbank market and the over-the-counter market (OTC).
Banks exchange foreign currencies in the interbank market for several reasons that range from hedging, making adjustments to balance sheets, and even trading on behalf of their clients. Banks tend to dominate the forex market because of the high volume of trades that they conduct. To give you an idea of how impactful this is, interbank market trades can sway currency prices owing to the bulk of their trades.
The OTC market on the other hand is used by individual traders to conduct trades through forex brokers or via online trading platforms like MT4 and MT5. The hub of OTC trade lies in the United Kingdom with London making up to 43.1% of the total trades conducted globally in this market.
5 Steps to Making your First Trade in Forex:
Since you’ve learned the basics of the forex market, let’s now try to understand the steps you should take to start forex trading.
Read, Read, and Read More:
You must understand that the idea here is not just to become a forex trader. That is as simple as investing a little money, setting up a trading account, and starting trading. When the goal is to become a profitable forex trader, you should spend some time developing the necessary skills that can make you successful in your trading career.
Forex trading may not be complex but it’s certainly a subject that needs to be studied deeply to understand the nuances. It is important to keep in mind things like how the leverage ratio is more for forex trades than equities. You should take an online course on forex trading to get an understanding of the key areas every forex trader should be aware of.
Find a Suitable Online Forex Broker:
The very first step to starting forex trading is to open a trading account with a forex trader. Usually, forex brokers earn their share from the spreads between the bid and the ask prices. Therefore, reputed forex brokers would generally not charge you an additional commission. A good broker will be registered under a regulatory authority and would have clear distinctions between your money and their own.
Develop a Trading Strategy:
A mistake that most forex traders are likely to make at the beginning is underestimating the value of a good trading strategy. The forex market has lots of variables and thus it is impossible to exactly predict the perfect timing and movement of prices. A trading strategy would give you some direction as to how you should proceed. It may be unique to you and take into account your financial requirements.
Forex trading strategies should help you determine your trade moves as per the capital you’ve set aside for this purpose and your risk-taking appetite. It helps to know that forex trading tends to be a high-leverage zone and thus offers more profits to those who’re open to taking risks.
Be on Top of Your Numbers:
It’s a healthy and an almost necessary practice to check where your trades stand at the end of each day. Generally, you will be able to access the status of your trades on the trading software itself. All you need to do is get the numbers from the forex trading platform that your broker has given you access to. This could be a custom-made platform specific to the broker or the popular MetaTrader 4. It is important to ensure that you don’t leave out any positions pending and that you have enough funds in your account to continue trading.