What is Forex trading? Well it is quite simple. It means exchanging one currency for another. That’s it!
The Forex market is the largest financial market in the world! Forex or FX means foreign exchange.
Currencies are traded in pairs. Remember when you went overseas and bought Pound Sterling with your South African Rand at the airport? You traded Forex by exchanging Rands for Pound and GBP/ZAR was the currency pair.
After your holiday was over and you waved goodbye to Big Ben, you returned home. Now you had to change the remaining Pounds in your wallet back to Rand. You notice the exchange rate is different to when you left. Why is this? This change in price could have been caused by inflation, economic changes, the balance between supply and demand or other factors.
Exchange rates change all the time. When trading Forex it is important to buy at a low price and sell high or buy high and sell low. By trading currency pairs, you can profit from the rise in value of one currency against the fall in value of another one.
Who Trades the Forex Market?
The Forex market is huge and is made up of banks, businesses, governments, investors and traders like you and me. Nearly $6 trillion in currency is traded daily on the Forex market.
The forex market is extremely competitive but not utter chaos as you might think. Below you can see how the institutions fit together to make it the largest financial market in the world.
Advantages of Trading Forex
You Don’t need a Million Rand to Start Forex Trading
Unlike share trading where you need a decent amount of money to invest, Forex trading allows you to start with as little as nothing. I say nothing because some Forex Brokers such as AvaTrade will give you R400 just to open an account and you can start trading immediately. We don’t suggest trading with the bare minimum is a good thing but you get my point.
Leverage for Massive Profits
In Forex trading you have an option of leverage. If you select a leverage of 100:1 with your broker it means that if you open a $100 trade you are in fact buying or selling $10 000 worth of currency. Just remember that leverage is a double-edged sword and will increases your risk as well as reward. Most brokers offer leverage up to 500:1 and the good thing is that the choice to make use of leverage remains yours.
The Forex Market Never Sleeps – Choose your Trading Style
The Forex market is open 24hrs a day 5 days a week. (22:00 GMT Sunday – 22:00 GMT Friday). This means you can place trades whenever you are online. This is especially great if you’d like to trade full-time or on a part-time basis.
Trade from Anywhere in the World
You don’t need anything but a laptop and internet connection to trade on the go. Whether you are on a holiday in the Bahamas or sitting by your pool, trading Forex is very convenient. Don’t have your laptop with you, no worries! You can open and close trades on your telephone too.
The Forex Market is Massive with High Liquidity
With a trading volume of over $4 trillion a day the Forex market is 53 times bigger than the New York stock Exchange. You will always have instant access to the market to buy and sell currency at a fair market value.
No one can Corner the Forex Market
No hedge funds, banks, analysts or brokers can influence the market for an extended period of time. Not only is Forex open to everyone, but it also applies the same rules to all investors, no matter how big they are.
Constant Trading Opportunities
Unlike with the stock market where you invest money and hope for the share price to go up, the Forex market allows traders to buy or sell. If the price of the Dollar strengthening you can buy, if it goes down, you sell. With such a massive, volatile market there are constant high-probability trading opportunities to profit from.
No Middleman Means Low Costs
Forex is traded OTC (over the counter) and the market is decentralized. When you trade Forex you the trade happens directly between the buyer and seller. This means there is no middle man. The only fees that are paid is what we call the spread. The spread is the difference between the buy price and the sell price. Spreads vary from broker to broker but are minimal in comparison to the stock market which have clearing fees, exchange fees and brokerage fees. Forex brokers tend to have very low spreads, typically less than 0.02%
Lots of Free Stuff
Brokers love new traders, from beginners to advanced. When you sign up to your preferred broker you will have access to so many free resources. Free training and learning resources, free trading webinars and free daily market analysis are to name just a few. More importantly most Forex brokers will offer you a free demo trading account so you can practice and hone your trading skills prior to opening a live account. What is not to love about Forex trading!
Types of Trading Styles
Like with ice cream, everyone has their favorite. The same goes for traders, everyone has their own preferred trading style. Some traders may open one or two trades a week where other traders use of intraday trading or scalping. In this lesson, we look at the different trading styles and help chose the best trading style for your personality and risk appetite.
Day Trading or Intraday Trading
As a day trader, you hold positions for a brief time (from minutes to hours), make many trades a day, and usually enter and close your trades on the same day. This trading style suits traders who plan ahead but would not be able to sleep at night knowing a trade is left open and could be affected by market movements overnight. All trades are closed prior to finishing for the day.
Swing Trading
Swing trading is like intraday trading, but it has a longer trading horizon between hours to a few days. Swing traders don’t expect their trades to become profitable immediately but they have the patience to wait for the trade to become profitable. Swing traders may set up larger stop-losses and would become paranoid if the market moves against them in the short term.
Position Trading
Position trading is the longest term of trading. Position traders will hold positions open from weeks to years. It’s the complete opposite of intraday trading because you are more interested in long-term investment than in short-term price changes. Position traders may target several thousand pips rather than short term gains.
Scalping
Scalping is very short-term trading. This means often opening trades seconds apart. The aim of scalping is to make many small profits during a single trading day. Scalping is suited to traders who tend to be more impatient however they are confident about their decisions and not easily distracted. Being a successful scalper requires focus and dedication in order to execute the right trades at the right time.
Being Faithful to your Trading Style
Choosing a trading style requires the flexibility to know if it is working for you or not. However, it also requires the consistency to stick with the right trading style even when it is not performing optimally.
One of the biggest mistakes that new traders can make is to change trading styles (and trading systems) at the first sign of trouble. Constantly changing your trading style or trading system is a sure way to catch every losing streak. Once you are comfortable with a particular trading style, remain faithful to it, and it will reward you for your loyalty in the long run.
How to Select the Best Forex Broker
Unlike the share trading where there is a central marketplace, the Forex market is decentralised. Therefore, you need a Forex broker and trading platform to help you place trades. The Forex Broker facilitates your trade and the platform is where you place your trades.
With a growing number of Forex Brokers in the market in this lesson we discuss the qualities you should look for when selecting a Forex Broker.
Proper Regulation / Regulatory Compliance
There are regulatory bodies across the world who keep brokers in check and separate the trustworthy from the fraudulent. Regulation is a crucial factor when considering a Forex Broker. Regulated brokers keep your funds in secure and segregated accounts, and maintain fair dealing practices. This means that your money is kept separated from the broker’s own assets, and so the broker is not allowed to use it.
Most developed countries regulate forex trading. In South Africa, we have the FSCA / The Financial Sector Conduct Authority who promote and maintain a sound financial investment market. The FSCA is an independent body set up to oversee the South African non-banking financial services industry.
Other reputable regulatory bodies are:
- South Africa – The Financial Sector Conduct Authority (FSCA)
- USA – NFA and CFTC
- UK & Europe – CySEC FCA, PRA and FSA, SFBC, AMF, BaFIN
- Australia – ASIC
So, in short, brokers with a flashy website, offering huge deposit bonuses does not necessarily mean they should be held in high regard. Always make sure that your chosen forex broker is regulated in South Africa or one of the main financial hubs.
Rules when picking a Forex broker
- If the FX Broker has been in the industry more than 5 years it means that people trust them and they care about their clients.
- If your chosen broker is regulated in South Africa it means that this broker is serious about doing business with South African clients. For any brokerage firm to become regulatory compliant in South Africa it means aligning with rules and requirements laid out by the FSCA. Internationally regulated brokers should not be ignored or avoided, just make 100% sure your broker is licensed and regulated by a reputable governing body.
- If a broker offers more than one product for example, Futures, Stocks, Options, CFD, etc it means that it is larger business, carries more responsibilities and has more clients trading with them.
- Read reviews. There are quite a few websites which offer user reviews. Take note of them. Any number of bad reviews for a specific forex broker is most certainly one to avoid.
- Make sure they have the instruments you want to trade. For example, if you want to trade Bitcoin, Ethereum or Ripple, make sure your brokers offers cryptocurrency trading before you sign up.
Now you should know what is Forex trading. You can also visit other sites to learn more information about Forex.
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