This is the ultimate beginner’s guide to forex trading. Forex trading is one of those few things that is very underrated in the market and isn’t discussed broadly as we discuss cryptocurrency or the stock market.
But before we learn anything about Forex trading on the forex market, let’s first understand why the forex market is so unpopular among traders or investors. Because if you can learn about the fears that people feel before investing or trading in the forex market, you can probably get to know about the forex market’s positive and negative sides.
It is often seen that people don’t discuss Forex trading. People who do regular trading cryptocurrency or stock market don’t do any trading in the forex market. This can probably happen because of a few reasons.
First of all, data shows that The forex market is comparatively very less popular than the stock market in are cryptocurrency market. Because of the lack of popularity of the forex market, people don’t feel the interest to enter the market.
And there may be another reason why people don’t enter the forex market: many people who trade in the stock market don’t have a very clear idea/conception about Forex trading and the forex market. We feel you have gathered knowledge about why the forex market is not very popular from this discussion.
Now we’re going to discuss the main topic of this ultimate beginner’s guide to forex trading, which is –
What is Forex?
The word Forex is derived from two words which are Foreign & Exchange. The word Exchange refers to the Exchange of the currencies of foreign countries. Let me explain the term Forex market & forex trading in a very simple word.
But before moving to the except let’s first understand the concept of Exchange –
Suppose you live in the United States of America, but you have to travel to the United Kingdom for some reason. Now the currency of the USA, which is named the dollar, will not be acceptable in most of the places in the UK because the dollar is not legitimate currently. That’s why we need to exchange our dollars with the pound or any other currency depending on the country we are visiting to make transactions there hassle-free.
What is the Forex Exchange Market?
The Forex market (often called the Forex exchange market) is an open market where currencies all around the globe are traded.
What is Forex Trading – Beginner’s Guide to Forex Trading
This is the most important question of this beginner’s guide to forex trading. Similarly, forex trading is the way of trading currencies of different countries. People who have a basic knowledge of the stock market can understand it very well if they read the following paragraphs.
How Do People Make Money From the Forex Market?
From the point of view of trading, in the stock market, we trade stock or ETF ( Stock Exchange Traded Funds). Each person in the stock market aims to make a decent amount of money from the stock market. That’s why we usually buy shares of companies at a lower price and sell the company’s shares at a higher value makes us profit.
But in the forex market, we do not trade any stocks or ETFs. In the forex market, we trade currencies of different countries. Just as the price of all good stocks fluctuates throughout the day, the currency’s price with respect to other currencies changes every moment.
People in the forex market enter into the segment of a particular currency when they find it lower than its value, and when the value moves up, they sell the currency. – The forex market is as simple as that.
How Does the Forex Market Work?
Unlike stocks in the share market that fluctuate within a particular time of the day, the Forex market remains open. The price of a particular currency keeps fluctuating every moment for thousands of factors. If you have good technical analysis skills, you can also enter the forex market, buy currencies at a low price and sell them higher.
How to Make Money From the Forex Market?
The Forex market is different from all other kinds of markets. We know that the stock market and the price of stocks is mainly controlled by the demand and supply of a particular stock, but in the case of the forex market, the price of a currency does not directly depend on the demand and supply of the currency rather depends on tons of external factors.
People in the forex market do a technical analysis to determine various information, including the chart pattern of the currency and trading volumes, etc. Technical analysis does work in Forex trading, but as we have said, the currency price does not depend on the volumes or solely any technical indicators.
The question that must appear in our mind is that the price of any two currencies does not fluctuate very much on an intraday basis. The average vaccination that can be seen between two currencies of two different countries is about 1 to 2 percent maximum.
Whereas in the stock market, 3 – 4% fluctuation of every company’s stock price on an intraday basis is very common, and in some cases, it can rise to 6 or 7%. That’s why traders can make money in the stock market because of this fluctuation in price with average amounts of trading capital.
As the price of the currency does not move up or down very much, people use a large scale of money in purchasing those currencies so that if the price moves just 0.5% or even 0.1%, it makes a great difference.
And you will find it strange that that actually happens in the real world, where a minimal amount of fluctuation in the price of currencies makes a massive amount of money for traders. Wrong analysis can lead to a massive amount of money loss.
Suppose: if a trader is trading with a margin of $10,000, 0.1% change will result in a profit or loss of $10.
But now the question is,
From Where Does the Trader Get the Money?
The above example says that if you trade with a margin of 10000, you can earn about $10 per 0.1% of price fluctuation in that currency. So you might be wondering where all the money comes from.
Does A Trader Need to Have That Amount of Money in His Trading Account to Take the Trade or is There Something Else?
The answer is that forex traders don’t require money in their trading accounts as traders who deal in Forex get leverage. We have already discussed the concept of leverage in a previous post, but we are explaining the matter once again.
In bread, in trading, leverage is the margin you will get on your capital to trade. If you have a capital of $1000 and your broker allows you 10x leverage, now you have $ 10000 to trade with. The amount of leverage a trader gets in the forex market is way much higher than people get in the stock market. Sometimes some brokers allow up to 20 or even 30x leverage.
I will conclude the article by saying that leverage is an excellent concept in trading, and every trader should take the benefit of leverage. But it is true that if leverage maximizes the potential return by 2x or 3x, it also maximizes the chance of loss by 2x or 3x. So when using leverage, keep in mind to calculate the risk according to your financial condition.