The forex market is very dynamic as it is constantly changing and evolving. The global currency market is way ahead of any other financial market if we look at the trading volume and liquidity. There are millions of traders from all parts of the world who are exploring the decentralised market with the goal of making profits from currency price fluctuations. One thing that attracts many of us towards the forex market is the high flexibility and accessibility. Currency trading has become a lot easier after the advancement in technology and the launch of forex trading platforms like MT4 and MT5. However, having a clear idea about the functioning of the forex market is essential to navigate it with ease.
In this article, I will be talking about the currency market in detail, so that you can have a closer look at the changing world of forex trading.
Learning about the functioning of the Forex Market
The first thing that you need to learn about the forex market is how it works. The forex market is a place where currencies are bought and sold in pairs. Here, a currency pair represents the value of one currency in comparison to the value of another currency. If we take the example of EUR/USD, the pair has the Euro as the base currency and its price is quoted against the US Dollar. If a trader anticipates a rise in the price of Euro, a buy position will be opened for the pair which is what we refer to as going long in forex terms. Those who expect a fall in the price of Euro will place a sell order instead and it is known as shorting.
However, a retail trader cannot access the global currency market without a forex broker and trading platform. The OTC market is not directly accessible and you will have to open a trading account with a reliable broker and then use the trading platform offered by this broker. After you sign up for an account and install the trading software, the broker will allow you to analyse the market by providing real-time price quotes. The broker will be responsible for the trading conditions that you get and also for the execution of your orders.
Another service offered by the broker is allowing you to trade with a smaller margin by availing leverage. Many refer to leverage as a type of loan for trading purposes but it is more like an amplifier for the trade sizes. Leverage does increase your profit potential even if you are trading with a small amount of capital, but it also increases your exposure to risk. Thus, the potential losses can also be higher in margin trading. Margin is the minimum account balance that you need to maintain for trading as per your trading capital. To find the right margin and the leverage you should use with it, you can take the help of trading tools like a margin and leverage calculator. These will provide you with accurate information so that you never trade beyond your risk appetite. There are other trading tools as well, which offer fast trading values so that you enter and exit trades on time and with precision.
The Forex Market’s Allure
The most attractive feature of the forex market is that it is operational 24 hours a day and 5 days a week. The market hours do not interrupt the trading process as you can choose to trade at any time. In fact, the forex market is moving even during the weekend gap but trading time is fixed as per the 4 major trading sessions based on the economic centres of the world and their time zone. The trading volume tends to be highest during the overlap of major sessions and many prefer to trade during this time to get the advantage of high liquidity. The New York and London sessions record the highest trading volume, followed by the Tokyo session and the last one is the Sydney session.
The major currency pairs are the most liquid and have the tightest spreads due to the high trading volume. Thus, all beginners are recommended to start trading with major pairs to minimise the risk. Minor pairs are also liquid but they are more volatile and spreads are higher. Exotic pairs are the least liquid and extremely volatile with high spreads, which makes them riskier in nature. Traders can choose to trade with any of these pairs and also pick a timeframe that they prefer based on the trading style. You can start out as a scalper or day trader if you want to exit trades within a short period of time or try swing trading and position trading if you want to hold the trades for a longer duration.
Even though the forex market offers a lot of trading opportunities to everyone, attaining success as a forex trader requires knowledge and analytical skills. It is not easy to learn trading from scratch but the reward is surely worth the effort. You cannot expect to become a millionaire in a day or two and setting realistic goals is the key to profitability in the long run. You need to be disciplined and stay focused throughout the trading process. It can be tough when you deal with uncertainty for the very first time as a beginner. But it will surely get easier when you gather more experience in the forex market. If you are able to crack the code by remaining patient, you can build a successful trading career in the future.
The Impact of Technology on Forex Trading
When we talk about the impact of technology in forex trading, we always think about trading automation and advanced trading softwares. But beyond the usage of automated trading systems and EAs, technology is an essential component for carrying out the trading process. The speed with which orders get executed and the ease with which you get to trade were all boosted due to the upgrade in trading technology and software solutions. Over the years, trading in the currency market has become a lot easier and we can’t deny the fact that technological advancements have reduced the complexity of trading to a great extent.
Even basic tools like a currency calculator that converts one currency to another are based on an algorithm, and all such tools are a part of technological progress in the trading industry. If you want to find the dollar rate in another currency, let’s say Euros, then you can easily do so with the help of a currency calculator. Even in the case of simple calculations, performing them manually takes a good amount of time and an automated calculator can give instant results, saving your time and minimising the effort. In the future, the technology of trading will become more and more efficient and this will boost the growing popularity of the forex market.
Things to Know about Risk Management as a Forex Trader
One thing that each and every forex trader needs to master for survival is risk management. Because you are being exposed to the market risk in every single trade that you place and no strategy can give you a 100% win rate irrespective of your skill level. You can surely boost the win rate by making logical decisions but losses are inevitable once in a while. Thus, you need to minimise the impact of these losses by limiting the risk per trade and trading with an optimal risk/ reward ratio. Another rule that you should never break as a forex trader is always trading with a stop loss as not having one will lead to excess losses.
It would be ideal to risk just 1% to 2% of your account balance for a single trade as anything above 2% will result in a higher account drawdown and you should be trying to preserve the trading capital before being able to make profits. It will surely take some time to become consistently profitable and you need to be mindful of the risk even after that. But in the initial phase, you need to be more cautious as you are more prone to encountering losses due to common beginner mistakes. Hence, all experts suggest starting with demo trading for practice and then taking risks as per your risk tolerance while going live.
How Forex is Influencing the Global Economy?
The forex market is more influential than we think as the daily turnover and trading volume are contributing to financial growth and there are also a lot of job opportunities that are being created in the forex world. You have a chance to attain financial freedom by becoming an independent trader or generating passive income by investing in managed forex accounts like MAM/PAMM accounts. Forex brokerages and trading platforms are also making a lot of profits due to the growing client base and it is surely strengthening the economies.
Just like how economic indicators and news events have an impact on the forex market, the forex market can also impact the decisions of policymakers at times. Central Banks and other authorities often use the forex market for implementing their policies and many companies are trying to mitigate the exchange rate risk of international trades by relying on the forex market. Thus, there is no doubt in the fact that the forex market is strongly influencing the global economy as they are interdependent.
In summary: The Future of Forex Trading
The future of forex trading will be even more dynamic and bright with the currency market continuing to grow and expand over the years. Those who are planning to build a trading career should be indulging in both learning and research to discover the opportunities while also dealing with the risks. Having emotional control certainly gives you an edge in the fast-paced forex market and this is one key trait that you will always find in successful traders.
