It is very tempting to trade forex because of its popularity and the potential return you can make. Research paired with a good trading strategy can generate good trading profits.
Here are some of the things you should know before entering the forex market:
Forex can be intimidating for other people because money is involved. The first thing one should know in order to change that mentality is learning the basics of what forex is is the common terms involved in it.
Here are some terms that should be added to your vocabulary:
Currency Pairs – forex trading is always traded in pairs. It represents the value of the base and the quoted currency like USD/GBP.
Base – it is the first currency that you see in a pair.
Exchange rate – the amount of 2nd or quoted currency required to purchase 1 base currency.
Bid – the price that a trader is willing to buy the currency pair.
Ask – the price that a trader is willing to sell the currency pair.
Pip – the smallest change in price in an exchange. It is equivalent to 1/100 of 1%.
Spread – the difference in pip between the bid and ask prices.
Leverage – a borrowed capital that a broker offers. This gives traders the chance to enter a larger trade without paying for the entire value.
Familiarizing yourself with the common terms is just the initial step. The next key step is understanding how the price moves. This will help a trader make rational decisions and minimize the risk of entering unnecessary trades.
Here are some of the factors that increase the risks of traders:
These are some of the most important factors that increase trading risk:
Interest rate – when interest rates go up, it means a strong exchange rate. In contrast, a falling interest rate may result in depreciation in the value of a currency.
Country – economic stability plays a very important role in the value of one currency.
Counterparty – this is the opposite party of a transaction. If you are a buyer, then the broker serves as the counterparty or the seller.
Leverage – this is borrowed money that a broker offers to a trader. It should be noted that higher leverage comes with higher risks.
Politics and Economy – both factors have a great impact on the value of a currency.
Liquidity – high liquidity means that the demand and supply can vary which makes it very volatile.
A forex broker that you can trust is a must if you want to trade forex. A broker is a person or a firm that facilities that trade. Whatever the transaction is, it goes through the broker. The broker is also the one who offers you the leverage required in order to enter a big trade. Brokers should be regulated by the Financial Conduct Authority.
The trading platform, on the other hand, is the software that gives a trader access to the forex market. Most platforms offer demo accounts that you can try for practice.
Forex trading is always coupled with risks. However, arming yourself with knowledge minimizes the risk and increases your chance to reach your trading goals.