All about Forex Trading
Most of us have heard about Forex, but do we really know what it is? Trading Forex or any other instrument is not easy. Mastering it takes time, patience and can be frustrating at times. It is also important to understand that trading is not an easy way to become rich. Establishing consistently profitable results takes knowledge and practise and some losses are inevitable.
Still, there are many examples of traders who successfully trade the biggest financial market in the world. In this article we will discuss the main characteristics of Forex trading
We expect this article will help you to improve your trading knowledge and therefore you trading per se.
What is Forex Trading
The best way to answer this question is by breaking down and defining both terms:
- Trading - is the activity through which one product is exchanged for another. We can trade an infinitive number of instruments, such as: commodities, indices, stocks, cryptocurrencies, etc.
- Forex - Forex is an abbreviation for Foreign exchange and refers to the exchange of currencies on the financial markets.
So, when you trade Forex you are in fact buying and selling currency pairs in an effort to profit from the potential increase or decline of the price of such pairs. Due to technological developments in the past decades anyone with a computer and access to the internet can start trading Forex. The accessibility has attracted many enthusiastic beginning traders and participation in the market is higher than ever before.
Whilst the market is easy to access, the dynamics of the markets and trading can be quite complex. If you too are looking to get involved in the Fx market, we strongly recommend that you gain familiarity with the basics of trading.
If you are interested in learning more about trading we suggest you check out the 'The Ultimate Guide for Beginner Traders' on our website.
Register for Live Trading Webinars With Admiral Markets to learn more about what is going on in the markets today. Click on the banner below to register for FREE!
Best currencies to trade
There are many different currencies and currency pairs available. Let's look at the most popular currencies that are available to traders:
- The U.S. Dollar - USD
- The Euro - EUR
- Pound sterling - GBP
- The Japanese yen - JPY
- The Swiss Franc - CHF
The most commonly traded currencies make up the 'Forex majors' - theForex currency pairs with the highest trading volume:
Pairs made up of other major currencies excluding the US dollar are referred to as cross pairs. Some examples are:
There are 3 other currencies that are quite commonly traded on the Forex market:
- The New Zealand Dollar
- The Canadian Dollar
- The Australian Dollar
The minor currency pairs encompass combinations of the aforementioned currencies and the US Dollar:
All other pairs, known as exotics, make up less than 10% of all Forex transactions.
How to trade FX?
Looking to trade the biggest financial market in the world? To get started with Forex trading you will need to consider the following:
- To gain access to the Foreign Exchange market you need a broker and a trading account. As retail traders we need a broker to act as an intermediate and provide us access to the financial markets. Choose a broker and account types, make a deposit and start trading.
- To start trading you need a trading platform. Admiral Markets offers free access to the world's most popular trading platform - the MetaTrader trading platform .
- Once you have downloaded your trading software you can log in with your trading account and start trading the instruments available. Which instruments and markets you can trade is dependent on your broker's offering. With Admiral Markets you can trade over 80 different currencies. As we have noted in the previous section, the characteristics of the different currencies can vary greatly. Make sure you are aware of the relevant information about the pair(s) you are looking to trade..
- Determine the timeframe in which you wish to trade and make sure you have a trading strategy suited to the market conditions.
- Analysis is key and can cover as many aspects as the trader sees deems necessary but should at least entail the following:
- The exact conditions under which the trader would enter the market
- Rules regarding money management
- Volatility forecast for the in which you are looking to trade
- Upcoming relevant economic events or data publications
- Conditions to close the trade
Many beginning traders are eager to get started and easily bypass this phase. However, it is important that each trading decision is based on analysis. The purpose of this analysis is to identify the most favourable trading opportunities and to determine how to best take advantage of these. Trading without a strategy and proper analysis is gambling and does not warrant profitable results consistently. The ability to find, analyse, synthesise and apply the information the market provides is the key to success in Forex. Conducting proper analysis and trading on the basis of an adequate strategy is said to be the differentiating factor between success and failure in online FX trading.
The actual trade execution is surprisingly easy and can be carried out by a simple click of the mouse using a trading platform. Placing the order is just a small step in the trading process, the analysis is the most important part.
Type of Trading analysis
Fundamental analysis is the oldest form of financial forecasting. It focuses on examining various macro economic elements, i.e. the current state of the economic cycle, relevant current events, future prospects and their possible impact on the market.
The main fundamental analysis indicators are:
- The Gross Domestic Product (GDP) of a country
- The unemployment rate
- The current interest rates of central banks
- The index of Industrial Production
- The political situation (i.e. political stability, elections and geo-political factors)
- Retail sales
- General data about economic progress
While fundamental analysis is geared to uncover what is happening in the economy and how this can potentially impact the markets, technical analysis solely focuses on whatever the chart is showing. It is a method of market analysis that mainly considers two variables: time and price. Both factors are strictly measurable and accounted for by the market. The general ideology behind technical analysis is that all known relevant data and its impact is discounted in the chart.
In today's rapidly evolving markets, most traders use a form of technical analysis to support their trading decisions. Whether it is drawing support and resistance lines, identifying key levels, applying technical indicators or comparing candlestick formations. For many, especially those who are trading Forex on a shorter time frame, the practical application of technical analysis is better suited than economic research.
Most traders will attest to the fact that a combination of both schools of thought will produce the most reliable results.
Fortune favours trained traders
Lack of training is the biggest reason many aspiring traders fail before actually discovering how trading works. Trading is a hot topic and often marketed as a 'get rich quick' scheme by Forex brokers and other financial institutions. They promote a vision where beginning traders, with little or no training can earn fortunes with just $ 10 and a few decisive clicks. Because of this many enter the markets full of hope and give up in disappointment after having suffered a loss.
It is important to realise that while there is money to be made in the markets, the risk of loss is also very real. Beginning traders are advised to educate themselves about the basics of trading and the dynamics of the markets. With adequate knowledge and practise you can learn to identify the best trading opportunities and how to profit from these.
Admiral Markets offers a wealth of free training materials - from a library of articles to complete online courses and live webinars. Furthermore, we provide free access to a demo trading account. With a demo account you can trade in real time market conditions in a risk free environment. You have the opportunity to familiarise yourself with the dynamics of the markets, the basics of trading and the functionalities of your trading software without having to risk your capital.
Open a FREE demo trading account by clicking on the banner below:
Why invest in the currency market
The Forex market has an average daily trade volume of over 5.3 trillion USD. In less than 20 years the market has evolved to the biggest financial market in the world and the favoured option for both beginning- and experienced traders.
You can access the Forex market with a relatively low deposit, unlike other investment options where a substantial starting capital is required. Accessibility is an important factor but what really makes the popularity of Forex trading so widespread are some of the other features listed below.
The mechanics behind trading are very simple: you buy an asset at a favourable level and sell it at a higher price - taking advantage of the change in price. How does this relate to the concept of volatility? Well, the more volatile the market, the more the price moves over a certain period. This movement provides opportunities to buy and sell assets and profit from the change in price.
When trading the Foreign exchange market you can expect almost immediate order execution. When you are selling an asset, you will need someone to buy this. Due to the high participation in the currency market your broker can, under normal market conditions, match your order to that of another party within seconds. The FX market is considered the most liquid in the world.
The popularity of Forex trading has led to more brokers entering the space. Where competition is fierce, brokers are forced to provide the best possible conditions and experience to their clients. One of the main factors that determines the trader's experience is the trading software his broker offers.
The ability to work with a platform that offers advanced functionalities and is intuitive in use will stimulate traders to trade more actively. While some brokers choose to develop their own platforms, Admiral Markets offers free access to the world's leading trading software - the MetaTrader trading platform and Exclusive MetaTrader Supreme Edition add-on.
We offer free MetaTrader software applications customised for different operating systems such as Windows and Mac and special trading apps for iOS and Android devices. The browser based WebTrader programme, that allows you to trade directly from your internet browser.
As Forex trading gained popularity so did the need for traders to connect. Their quest for additional information and interaction led to the birth of a large number of trading related blogs and forums. With a considerable number of active contributors you are able to find information about various topics and in different languages. As the market operates 24 hours a day, 5 days a week it is open to traders from all over the world.
Trading FX on margin
The CFD (Contracts for Difference)construction enables trades to trade on margin and leverage. This sets trading Forex CFDs apart from other instruments where you must have a sizeable capital available to trade.
Learning with demo accounts
If you are enthusiastic and want to start trading Forex you have the possibility of doing so risk-free with a free demo account. With a demo account you can trade in real time market conditions, experiment with different trading strategies and techniques and perfect your trading skills.
On a demo account you trade exclusively with virtual assets. No deposit required. You can open a demo account within minutes. All you have to do is register your interest on the Admiral Markets website, fill out your personal details and you will instantly receive login information via email.
While the Forex market is a decentralised market, it is strictly regulated. For your own safety we advise that you trade with a regulated broker. Choose a broker that is regulated with a renowned regulatory authority such as the British Financial Conduct Authority.
Due to the high liquidity and volatility the Forex market lends itself perfectly for the application of various trading styles. The 3 main trading styles are:
- Forex Scalping is a trading system that involves buying and selling currency pairs in very short intervals. Generally, trades are held anywhere from a few seconds to a few hours. This is a very hands-on system that involves taking a large number of trades to gain small profits and accumulating these profits.
- Intraday Trading is a more conservative approach than scalping. Day trading focuses on daily price trends, opening and closing positions with the day or trading session. Day traders are usually focused on the main Forex sessions as these provide sufficient volatility and liquidity.
- Swing trading is a medium term approach that focuses on larger price movements than scalping or intraday trading. Traders generally hold positions for multiple hours, days or weeks. Swing trading is a less time intensive form of investing where the trader does not need to monitor the charts constantly, this makes this trading style a good option for those who wish to trade alongside a job or other activities.
To gain more insight into aforementioned strategies and make a fair comparison we suggest reading our article "A Comparison Scalping vs Day trading vs Swing trading"
It is important to understand that a trading style such as day trading is not a strategy. A trading strategy lists the exact conditions for trade entry, exit and rules for trade- and money management. The most popular strategies for trading the currency markets are:
- Currency hedging: this technique is geared to offset (potential) losses by taking the opposite market position. When trading currencies, traders aim to control their risk by taking two positions in opposite directions on the same or correlated pair.
- The Forex martingale strategy - is based on the hypothesis that price tends to move in trends and entails doubling the investment to recoup losses. For example, if the trader loses 100 EUR, he will invest 200 EUR on his next trade, and so on. This is a high risk strategy and only suitable for professional traders.
- The Forex grid strategy - is a strategy in which the trader sets out to profit on the regular price evolution of the market by placing stop orders above and below the trading price at set intervals.
Trade With Admiral Markets
If you're aiming to take your trading to the next level, the Admiral Markets live account is the perfect place for you to do that! Trade CFDs on 80+ currencies, choosing from a range of Forex majors, Forex minors, and exotic currency pairs, with access to the latest technical analysis and trading information. Trade right way, open your live account now by clicking the banner below!
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.