What is Forex Trading?
Forex Trading, or foreign exchange, is a network of traders who transfer currency between each other at an agreed price. Individuals, enterprises, and central banks use it to convert one currency into another. If you have ever traveled abroad, you will likely have made a forex transaction.
Why trade Forex instead of Stocks?
Your decision to trade forex or stocks on leverage should be based on whether you want to exchange currencies or stocks. However, here are some proofs of why some traders favor forex trading over stocks:
- Opening hours of the market: The forex market is open 24 hours a day. Whereas the stock market is restricted to an exchange’s opening hours. However, it is worth stating that specific stock indices are prepared for weekend trading.
- Higher liquidity: The forex market sees a mean daily turnover of $5 trillion, whereas the stock market views relatively fewer trades every day.
- Greater volatility: The stock market has more stable values that change over time. Although this benefits some trading styles, the volatility of the forex market can produce an exciting range of opportunities for shorter-term traders.
When deciding whether forex or the stock market is better, you should consider your attitude to risk and financial goals.
How does Forex Trading work?
There are many ways to trade forex which work the same way: by together buying one currency while selling another. Traditionally, a forex broker creates many forex transactions. Still, using derivatives like CFD trading, you can take advantage of forex price movements with the rise of online trading.
CFDs (Contract for Differences) are leveraged products that allow you to open a space for just a fraction of the total expense of the trade. In addition, you don’t take control of the asset but take place on whether you think the market will rise or fall in value, unlike non-leveraged products.
Although leveraged products can also magnify losses if the market moves against you, they can amplify your profits.
To maintain order, most suppliers divide couples into the following groups:
- Major pairs – Seven currencies make up 80% of global forex trading, like EUR/USD, USD/JPY, GBP/USD, USD/CHF, USD/CAD, and AUD/USD.
- Minor pairs – These are less often traded and pit major currencies against one another rather than the US dollar. Includes: EUR/GBP, EUR/CHF, GBP/JPY.
- Exotics – A major currency pitting against one a small or emerging economy. Includes: USD/PLN (US dollar vs. Polish zloty), GBP/MXN (Sterling vs. Mexican peso), EUR/CZK.
- Regional pairs – Pairs categorized by region – such as Scandinavia or Australasia. Includes: EUR/NOK (Euro vs. Norwegian krona), AUD/NZD (Australian dollar vs. New Zealand dollar), AUD/SGD.
Basic Forex Trading Strategies
The most basic forms of forex trading are long and short. The trader is risking that the currency price will rise in the future, and they can profit from it, known as long trade. Conversely, a short trade consists of a bet that the currency pair’s price will decrease. Based on technical analysis, traders can also use the forex trading strategies, like breakout and moving averages, to refine their approach to trading.
The best trading strategies are as follows:
- Scalp Trade – Scalp trade comprises positions held for seconds or minutes at most. Such transactions are cumulative, meaning that small gains in each trade add up to a kempt amount at the end of a day or time. They depend on the predictability of price swings and cannot handle much volatility. Therefore, traders tend to limit such trades to the very liquid pairs and at the busiest trading times of the day.
- Day Trades – These are the short-term trades. Here the position holding and liquification is done on the same day. The extent of a day trade could be hours or minutes. To maximize their profit gains, day traders must have technical analysis skills and knowledge of important technical indicators. Day trades hold on incremental gains throughout the day for trading, just like scalp trades.
- Swing Trade – In swing trading, the trader holds the position for a more extended period than a day. This means they may keep it for days or weeks. Swing trades can be helpful during a significant briefing by governments or times of economic turmoil. Swing trades do not require continuous monitoring of the markets throughout the day since they have a longer time horizon. Swing traders should be able to assess economic and political advancements and their influence on currency movement in addition to technical analysis.
- Position Trade – In this type of trading, the trader holds currency for an extended time for as long as months or even years. Because it provides an intelligible basis for trade, this form of trade requires essential analytical skills.
While trading Forex, it is important to have a strategy. In order to make the most of your trading, it is necessary to know how to manage your risk. Forex Trading can be a highly risky investment, but with a little knowledge and a little practice, you can earn some money. Go ahead, try Forex trading for yourself and have a wonderful investment career.