The basics of Forex trading – All you need to know

What is Forex Trading

Forex trading, like other forms of financial market trading, can seem complicated, abstract, and intimidating. The word Forex is a term that refers to foreign exchange. Forex trading always involves selling one currency in order to buy another, which is why it is quoted in pairs, the price of a forex pair is how much one unit of the base currency is worth in the quote currency.

The underlying activity of trading one currency for another is relatively straightforward and the mechanism to profit in currency markets is simple, regardless of whether one buys low and then sells high and vice versa.

Forex trading for novices

Forex can be attractive for novice traders, regardless of their experience. Forex trading is easy and requires only a small amount of money to be able to trade. The market is open 24 hours a day/5 days a week. This allows traders to access the market at any hour of the day, even when centralised markets are closed. If you are a trader beginner, we recommend by starting by reading this guide about basics of the forex trading for beginners.

A simple trading fee is charged by brokers, determined by the spread between currencies bid and ask prices. Traders can also predetermine their stop-loss or trade exit prices before entering any trade. This allows them to control how much risk they are willing to take.​ Forex traders have a wide range of unique opportunities because of the extended trading hours and availability of many products. There is always a market for all majors and minors.

Trading markets

There are many options for leveraging forex currency pairs. Retail traders will find this advantageous as they can adjust the size of their positions to match market conditions and available risk capital.

Technology advancements allow traders to interact with the market via mobile or desktop applications in real-time. With just a few mouse clicks and screen taps, forex traders can trade anywhere with an internet connection. The process is simple, from order entry to account administration.

Before you jump into the market and reduce your risk, traders need to have a basic understanding of the basic concepts of volatility, leverage and counterparty.

Volatility is the fluctuation in exchange rates over time. Extreme price movements can lead to unexpected profits or losses. Volatility can be a good thing, but it can also increase the risk of any trade.

In certain situations of price volatility, traders could also be at risk. This is when market orders cannot be fulfilled at the exact same price as requested.

Currency traders are most at risk from applied leverage. The assumed risk is generally greater with higher leverage.

Counterparty is defined as “the possibility that the other party to an investment, credit or trading transaction will default on contractual obligations.” Forex trading is dependent on market makers and brokerages to honour transactions. Trading forex with reputable brokers who are licensed, regulated and accredited can significantly reduce counterparty risk.

In addition to the risks mentioned above, it is important to recognize that the majority of forex trading worldwide still takes place at major financial institutions and banks. These institutions generally have greater information, leverage, and technology resources than individual traders.

On weighing all the evidence Forex trading could be argued to be a much safer mechanism in engaging the markets for beginners providing you find a reliable platform.

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