When you are new to Forex trading, the vast amount of contradictory information on the web can actually make it very difficult for you to make progress. Before you do your next google search on what is Forex Trading, be sure to read this article to move you to the next level.
While one website is preaching the use of indicators, others are preaching a naked trading approach and others are focusing entirely on fundamentals. It can really be overwhelming and difficult to know which is the right approach, or strategy to follow.
You may have been introduced to Forex trading, and wondering how exactly Forex trading is, you might be thinking of becoming a Forex trader and wondering if it indeed is worth it, but before you begin on this quest, the question remains, what is Forex Trading?.
Table of Contents
What is Forex Trading
Forex Trading is a global decentralized market place for the trading of currencies. If you have ever purchased a currency other than your countries native currency, chances are you have participated in the Forex Exchange market passively.
To purchase your new device from another country, you need to convert your British Pound to for example the United States dollars. This exchange of currency is Forex Trading.
Forex Traders are people like you who take an active part in benefiting from the International Forex Exchange Market in the hopes of profiting from the rise or fall in the value of a currency.
On the honeymoon to New Zealand, you converted your United States Dollars, to the New Zealand Dollars (NZD), your $2000 is now 2800 NZD.
Months after your return you still had about 1400 NZD on you and decided to exchange it back to USD, however, instead of getting $1000 as per your earlier transaction records, you now got $1200 from the exchange, you went home excited about the extra $200 you made converting back your NZD to USD. That is what Forex Traders do.
Except they do not have to wait for months to make $200, they can depend on the volatility in the market, and leverage to earn more.
While your bank may post one exchange rate for the day, in reality, the exchange rate is never stagnant, it keeps fluctuating, and these fluctuations and accompanying volatility is what creates the opportunities in the market.
The job of a Forex Trader is to buy when they anticipate a rise in the value of a value, and sell when they anticipate a drop in the value of a currency. If they do this, well enough, chances are that they would make a whole lot of money.
Before we go into the details of how you can make money through the Forex Market, you would benefit immensely if you take a moment to read about the basics of Forex, However, if you already have a solid understanding of the basics of the Forex market, I suggest you skip the next section unto the following one.
What do you need to trade Forex
Before you can trade Forex, you need the following,
- A Good Forex Broker: A broker could make your life easier or difficult, they could make your trading experience worse if you choose a terrible Forex Broker. Follow this link to choose among some of the best Forex Brokers in the world today. The broker sets the spreads, the commissions, and your entire trading experience. It is wise to choose the best.
- A Trading Software: The Forex Broker would provide you with the software you need to interact with the International Forex Market. The most common software you would find among retail Forex traders is the Meta Trader software, However, there are other trading software such as the C-trader, etc., but whichever one you end up using, depends primarily on the Forex Broker you choose.
- Forex Training: Many are those who have lost thousands of dollars trading the Forex market because they could not spare the thought of getting proper Forex Education before risking their hard-earned money. While any proper Forex Mentorship might cost you some money, it does liberate you from failure and set you up to avoid some painful mistakes you otherwise would have made.
- A computer with an internet connection: You may have guessed this already, a necessary tool of the trade is having a computer to trade with. It doesn’t need to be a supercomputer, a simple laptop is good enough for a start. While you could trade from a tablet or your phone, you should know that it comes with some severe limitations.
- Starting Capital: Many have asked if you can start Forex Trading with $100. Yes, you can start with $100 as a beginner, in fact, that is what I recommend you do. You see, while the Forex market is incredibly profitable, it could be extremely risky if you go in with the wrong strategy and psychology. Starting with something as little as $100 can indeed help you get yourself acquainted with the business of Forex trading and position you to become a profitable Forex trader in the future.
The Basics of Forex Trading
Before we can proceed to talk about advanced things, it is imperative that you get the basics right, if you are new to Forex trading, this could be of immense help to you, however, if you are an intermediate trader, you might want to skip this part.
Currency Pairs
Once you open your trading software, several hundreds of currency pairs would be open to you. You soon realize that each of them is paired.
From the picture above, you would see the currency pairs under symbols. There are several currency pairs, but the total pairs you would have to trade with depends entirely on your broker.
In the Forex market, each currency is presented as symbols, EUR represents the Euro, USD represents the United States Dollar, JPY represents the Japanese Yen, etc.
From the symbols above, you noticed the currencies are paired. EURUSD, GBPUSD, USDJPY, etc. With each currency pair, the first currency that comes is called the base pair.
When you Buy EUR USD, you are basically instructing your broker to sell your USD and buy you EUR. From this, you get the understanding that each transaction you make is at its very core a dual transaction.
When you buy, you are buying the base pair while selling the other pair, and when you sell, you are selling the base pair to buy the other pair.
Each market pair has a fluctuating price attached to it, I call it fluctuating because the prices in reality are always almost fluctuating. From the picture above, you realize that each pair has a bid price and an asking price.
For the purposes of Forex trading, the base currency is also known as the directional currency, thus if you are trading GBPUSD and you see the price is moving up, it means the value of the GBP is rising up against the value of the USD.
The Bid Price | The Ask Price
The Bid price is the price at which your broker executes your buy trades, and as you might have guessed, the Ask price is the price at which your Sell trades would execute. The difference between these two (Bid and Ask Price) is called the spread.
The Spread
The difference between the Bid and Ask Price is the Spread. The bigger the spread the more expensive your trading fees. The most commonly trading pairs often have lower spreads, and as a beginner, it might be wise to stick to currencies with lower spreads.
Spreads are often wider for 2 reasons:
- When there is low liquidity on that currency pair.
- When you have a terrible broker
A pip
A pip is an acronym for Point in Percentage, is the name used to indicate the fourth decimal place in a currency pair, or the second decimal place when JPY is in the pair.
However, the value of a pip differs from currency to currency pair. 50 pips of USD CAD, isn’t the same as 50 pips of GBP USD.
For each pair where the USD is listed second, purchasing a 1000 unit gives you a pip value of $0.10. Thus if you made 50 pips, that means you made 50 X 0.10 = $5
If you bought 10,000 units, the pip value would be $1 per pip, this your 50 pips profits would be equal to $50 profits.
Quick question:
If you buy 100,000 units and made a profit of 50 pips, what would be your actual profits in dollars, assuming the USD is listed second.? Let us know in the comments section.
For any currency pair where the USD is listed first, e.g. USD CAD, USD JPY, the pip value might be different from the above.
To determine the value of the pip for USD CAD, for example, divide the normal pip value as described above by the current USD CAD exchange rate.
Lot Size
In Forex trading, lot size refers to the quantity of a currency purchased. The standard Lot size is equivalent to 100,000 units of the base currency.
If you purchased 1 lot size of GBPUSD, you are actually buying 100,000 worth of GBP.
Can Forex Trading Make You Rich
Forex trading can make you rich, same as any other business, I do not conform to the idea that everyone must learn to trade Forex in order to be successful in life. However, compared to other businesses, it is very easy to scale Forex trading.
All it takes is to increase your lot size, and you could just double your profits in a day. Despite these? the truth is that it could be really hard for you to become profitable in Forex.
It is said that over 80% of Forex traders lose or are losing money, while these statistics might be correct, it is no different than starting any other business.
Data from the BLS shows that approximately 20% of new businesses fail during the first two years of being open, 45% during the first five years, and 65% during the first 10 years. Only 25% of new businesses make it to 15 years or more.
What this data shows is that, despite the heavy criticism of businesses about the failure rate of Forex traders, in the long run, it doesn’t differ so much from starting any business.
Having trained people for over a decade, in our professional Forex Trading Course, I can tell you for a fact that indeed you can be successful with Forex trading if you are willing to put in a lot of work same as you will, starting any other business.
Is Forex Trading Illegal
Forex trading is not illegal in any country in the world. However, brokers must be regulated, it is illegal to operate a Forex brokerage firm without a license.
For a trader, you do not need a license to trade Forex.
Is Forex Trading a Pyramid Scheme
No, Forex Trading is not a pyramid scheme.
People use Forex to lure people into unregulated and unlicensed pyramid schemes, to trade Forex, you do not need to invest with any scheme, you only need your broker and your skillset as a trader. Do not invest with anyone who claims to provide any returns from Gorex, most of them are scams.
How much do Forex Traders Make a Day
How much any Forex trader would make in a day, depends entirely on their skill sets and their ability to spot and utilize opportunities in the Forex market.
Experienced traders I know make thousands of dollars, while new traders may start by making a couple of dollars a day.
With time, and given enough hard work, every trader can indeed earn enough to sustain him or herself.
Is Forex a Good Investment
No, Forex Trading is not an investment, it is a market. Anyone who tries to ask you to invest in the Forex market is most likely trying to fraud you of your hard-earned money.
Can Forex Trading be a Full Time Job
Forex Trading can be a full-time job, you only need to get a little consistent with the market and become profitable to a certain degree before you take on Forex trading as a full-time job.
Most of the students we have trained have moved on to become professional Forex traders, who trade for a living. With enough determination on your side, you can indeed take on Forex trading as a full-time job.
Is it Worth getting into Forex Trading
If you are willing to take on the hurdle of learning how to trade forex profitably, this could be the most amazing thing you could ever do with your life.
However, if you are going to lazy around, and base your trading on luck and emotions, then you might as well not attempt it.
Is Forex Still Profitable
Forex trading can indeed be profitable if you have the right psychology and strategy to guide you. For those who take the time to master the trade, you can indeed become profitable.
If you are willing to take a leap forward towards profitability in Forex, consider joining our one on one mentorship by registering below.
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