FX Trading for Dummies – Start Your Journey To Forex Success
Simply put, Forex Trading, or FX Trading, is the trading of currencies from different countries against each other. For the average person currency trading refers to what you do at the airport when you are just about to step on a plane for an idyllic holiday in an exotic location. While this is technically correct. most people are unaware that this is but a small component of an industry that dwarfs other stocks exchanges we regularly hear about on the news. They also don’t realize the enormous potential for profit that is right in front of them.
The term Forex or FX comes from Foreign Exchange, and involves speculation on the price of one currency against another on the forex market.
The forex market is also known as the FX market, Currency market, Foreign exchange currency market or Foreign currency market.
The FX market is one of the largest and most liquid markets in the world. While we regularly hear about the New York Stock Exchange on the news, to put it into perspective, the Forex market is over 200 times bigger and trades over $5 trillion dollars worldwide everyday. With it’s size it brings liquidity that is hard to match, which opens opportunities for traders around the globe.
Forex Trading Basics
In contrast to commodity trading, forex trading works on the comparison of one currency to another, you can think of the currency pair as a single unit, an instrument to be bought or sold.
The first currency of the currency pair is the base currency, and the second is the quote currency.
When forex trading, you buy the base currency and sell the quote currency, and the quoted rate for a currency pair tells you how much of the quote currency is required to purchase one unit of the base currency.
For example: Take the USD/EUR currency pair quoted at USD/EUR = 1.5. If you buy this currency pair, you’ll receive USD$1 for every EUR€1.5 you sell. If you sell this currency pair, you’ll receive EUR€1.5 for every USD$1 you sell.
Of course, you can also trade on the inverse currency pair EUR/USD, with the quote price then being EUR/USD = 0.667, or USD$0.667 buys EUR€1.
Different Traders – Different Styles
As with all things, different people prefer to trade Forex differently and there is no one correct way to do it. In fact it is because we all view and interpret the markets differently that such opportunities for profit exists – essentially we trade based on what our own understanding of a situation tells us has happened and is likely to happen in the future. For every trade we place, someone, somewhere is taking an opposing viewpoint to ours and essentially ‘betting’ that they are right and we are wrong. This doesn’t mean you can’t win however, as there are many many variables that influence the reasons people buy or sell at a particular time. In fact time, is a very important one itself in that some traders may close a trade simply because it has run out of time to perform based on their trading system not necessarily because it is performing badly.
Below are some of the more common types of trading styles that people who trader the Forex market use:
Scalping is a technique that is made possible by the enormous liquidity found on the Fx market. This type of trading is synonymous with the stereotypical image of a trader that most people have in their heads, that is, of the fast paces, hyperactive trader that moves fast and makes thousands of dollars on every move. While this is not quite accurate, there are similarities. Scalpers tend to hold positions for only a few seconds or a few minutes at a time, and they seek to gain a small number of highly probably ‘pips’ with each trade. In order to make this profitable they often trade when the markets are most active and present them with many opportunities to pick up these pips. They essentially ‘accumulate’ their profits over many trades, and this requires their full attention during trading hours which usually has them glued to their computer.
Day trading, as the name suggests takes place over the course of one day. Although it is also considered short time frame trading, a day traders day is not as action packed as a scalpers day. Basically in this type of trading the trader will trade a position from the start of the day and close it at the end of the day. Prior to the open of the day this will often have done some analysis to determine where they think a currency pair is headed for the day and then usually shortly after the market opens they will act on these beliefs, let them run for the day and then close the position either when they are suitably in profit, unsuitably in debt or the market closes at the end of the day. They normally won’t hold a position overnight in order to avoid movements that may occur overnight and avoid interest charges on their positions (if any).
Now we start to head towards some of the longer term trading strategies. Swing trading is one such strategy whereby traders take a longer view of the markets, usually several days or weeks and try to capitalize on short to medium term trends that emerge. Typically their ‘stops’ will be wider to allow the currency pair more space to breathe as they are looking to take advantage of a longer term trend rather than short term fluctuations. In swing trading traders also try to capture larger profits per trade than the shorter term styles discussed above. One of the more attractive things about swing trading is that it does not require the high time demands that the previous two styles do, as traders can monitor and adjust their positions in the evening after work for example and aren’t necessarily concerned with short ‘spikes’ that might occur with a day.
Position trading is a long term trading strategy that can last for several months or even several years! This type of trading is more in line with what the average person thinks of when they think of the word ‘investing’. Position Traders take a long-term view of the market and often rely on fundamental analysis to make decisions about a currency pair. Although not as time intensive as the other styles it usually requires a large bank roll to be able to maintain the large ‘stops’ that are required in this type of trading, as there will often be large moves against you which need to be handled accordingly.
What Types Will You Use in Your Trading
It is important to note that any one trader may employ more than one of these techniques in their trading career, often at the same time. For example, one trader may employ a position trading strategy on one one currency pair as well as a scalping strategy on another pair at the same time! It is important to note though that while there are commonalities between the trading strategies above they can also be considered entirely separate to each other and being an ‘expert’ in one does not make it so for the other without education, training and experience.
Want to learn more? Read more about pips and spreads on this page.
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To get started with Forex trading you essentially need three things: trading knowledge, a market broker or trading platform, and some money to start trading with.
In the FX trading world, a pip is considered a point for calculating profits and losses.
In forex trading, the margin is what the forex broker requires you to put up in order to open a trading position, like a good faith deposit.