Forex is the world’s most widely traded market, with an average $5 trillion traded globally every day. It is also known as foreign exchange, FX and currency trading.
HOW DO YOU TRADE FOREX? -Forex trading is the buying and selling of currencies on this single global currency market. Everyone from the smallest retail forex traders to the biggest of banks is buying and selling currencies for profit.
In Forex trading, currencies are traded in pairs as the value of a currency is always relative to the value of another currency. So as you are buying one currency, you are selling the other currency in the pair. One of the most popular pairs to trade is the EURUSD or ( Euro and Dollar).
The biggest difference between Forex trading and stock trading is that the trader never takes ownership of the currencies they are trading. Instead, a Forex trader is only speculating on the value of the currency either increasing or decreasing.
A forex trader makes a profit by purchasing a currency and then selling after the price has increased in value. Should the trader assume wrongly, a trade can make a loss should the value of the currency decrease.
HOW DOES FOREX TRADING WORK? - A Forex trader buys and sells currency pairs, with the hopes that the value of the currency changes and they make a profit. You basically buy low and sell high and the change between these prices is your profit to keep.
WHY TRADE FOREX? - Trade anytime and anywhere Easy to get started Sell currencies without buying then first Benefit from upward or downward trends Higher leverage compared to stocks Low minimum and no maximum capital requirements
AN EXAMPLE OF FOREX TRADING - A Forex Trader wants to trade currencies that are going to change in value. It is the change in the buy and sell price that gives us profit in the trade. So in this example, we are going to speculate on the change of the value of the GBP.
Every two months, the Monetary Policy Committee of the Bank of England meets to decide on interest rates. As a trader, you expect changes to be made and that the press release which has been scheduled for 2 pm, will drop interest rates. This rate change has been expected for the past 2 quarters but has never been made, so we feel that now it will happen, so we plan our entry into the trade.
Right before 2 pm, you place a trade for 170 GBP with 1:50 leverage which gets a trader £8500 (170 GBP * leverage) to invest. For argument’s sake, we can say this is 1 standard lot. You buy in at 1.6927 and watch the market.
At press release time, MPC reduces interest rates as you expected and the market starts to move. You monitor your trade for 15 minutes when you decide to sell at 1.7685. The outcome of this trade – you make a profit of 641 GBP. A forex trader needs to do research, understand market movements, and plan both the entry and exit of the trade.
Trading Forex and CFDs is not suitable for all investors and comes with a high risk of losing money rapidly due to leverage. 75-90% of retail investors lose money trading these products. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
HOW TO COMPARE FOREX BROKERS? - There are a lot of Forex brokers available to traders, but these tips should help you find the best ones.
Regulation – Make sure the broker is regulated by a respectable regulator. Read more here about this. Spreads – Spreads are the way most brokers make their money. It is the difference between the buy and the sell price. A good broker will have the buy/sell prices closer together, meaning that it is easier for you to make a profit on your trades. Platform Choice – Does the broker have a connection with a software platform you like? An example is if the broker supports MetaTrader. Withdrawal Options – Check the conditions by which you can withdraw your money. A good broker will process your withdrawal request on the same business day through a large variety of methods.
WHAT's NOT IMPORTANT IN COMPARING FOREX BROKERS? - As controversial as it may sound, We don’t see the minimum deposit required to start an account as something important to consider when evaluating a broker. Now you are thinking – I don’t have 1000 USD to put into an account – and that may be valid and true. But we can not say that a broker is bad because they require that amount to open an account.
A trading account needs to have some money in it in order to invest. And because Forex trading is CFD trading that uses leverage, we need to have an amount of capital in the account as collateral in case our leverage trade goes against our position.
So as hard as it sounds, don’t judge a good broker from a bad one based on the minimum deposit required to start an account.
WHAT IS IT LIKE TO TRADE FOREX? - Forex traders spend much of their time looking at the way the currencies value changes over time. This is always done by comparing a currency against another in a process called pairing.
DO FOREX TRADERS PAY TAX? - Forex gains are not tax-free income, and all gains from your Forex trading are taxable even if your brokerage and capital are overseas. You are expected to declare taxes just as with any other income either as an individual or a company.
IS FOREX TRADING RIGHT FOR ME? - Above is a fairly good overview of what you can expect with Forex trading. By now you should know that it is high risk, that you need to find a broker that you feel suits you best, you should know the amount you want to put into that account with a broker. Forex trading takes commitment to learning, and you should be ready to:
Compare brokers to find one that suits you.
Understand the way the FX market and CFD trading works.
Learn the software and tools that will power your trading.
Be ready to lose all the money you place in an account.
Don’t deposit any money you can not afford to lose.
