What is Forex Trading?
Forex Trading is the trading of currencies, where traders simultaneously buy one currency and sell another. The “Forex” (Foreign Exchange Market) is where these trades take place. You can either trade directly in the Foreign Exchange Market or by using CFD Trading, where you invest in the movement of a currency, rather than the currency itself.
What are the Advantages of Forex Trading?
The Forex Market is incredibly lucrative, it is the largest market in the world and the largest liquid market. Daily activity can often exceed $4 Trillion. Despite its size, The Forex Market is a great market to invest in if you are trading with limited funds – not only is there no minimum investment, but traders can also take advantage of the commonality of ‘leverage’.
Leverage is the use of borrowed funds to increase the size of one’s place in the market – while this can be incredibly beneficial to traders (potentially increasing profits 50-fold), it has a reputation for being a double-edged sword, we will look at the disadvantages of this later.
The Forex Market is also incredibly suited to those with limited available time to trade. As a 24-hour marketplace, traders can choose currency pairings that best suit their needs. Whatever the time, day or night, there will be an active currency to suit you, whether it is a European Currency, and Asian one or the Australian Dollar.
What are the Disadvantages of Forex Trading?
The Forex Market is actually very complex, and it is important to understand the nuances of it. Researching you chosen currency pairs before getting started is integral to successful trading.
As previously discussed in advantages, leverage works both ways. While its use – if done properly – can help you to maximise profits, should a trade not go your way, you stand to lose a lot more than your original deposit. The maximum leverage allowed in the US is 50 times your deposit, which makes you liable to lose 50 times your deposit. If you are going to use leverage, make sure you do it responsibly and are aware of all the risks involved.
Forex For Beginners – Things to Consider
1. Which Currency?
Chose a currency pair to suit you. Think about what time of the day you are best placed to trade in and pick a currency that fits in with your schedule.
2. Buying or Selling?
Do you think the market is going to go up or down? Have you done the required research to back up your position? Whether you, buy (go Long) or sell (go Short), know why you have made that decision and have the facts to back up your position.
3. How Much Do You Want to Trade?
And even more importantly, how much can you afford to lose. Especially when using leverage make sure you have considered the possibility of each trade not going your way. If you can’t afford it, don’t do it.
4. Risk Management:
Have you familiarised yourself with all the safeguards available to you? Have you got Stop Losses in place? Do you have a well thought out plan to help you deal with any eventuality?
5. Monitoring your Position:
There are plenty of ways to automate notifications to keep you updated on your trading positions – use them. It is important to always make sure you are aware of what happens in the market and how it can affect your current trades.