Forex is the abbreviated form of Foreign Exchange. You can also abbreviate it to FX. The Forex market is global and this means that everyone from across the globe can get involved in it and trade for profit. The Forex market is also decentralized and you can trade several world currencies in Forex trading. Different categories of people and organizations are involved in Forex trading, examples of which are highlighted below:
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All of these categories of people and organizations participate in the Forex market by buying and selling currencies. The buying and selling activities of these individuals are responsible for the foreign exchange rates of individual currencies.
Forex trading has to do with speculation. The traders or investors speculate on the change or fluctuation in the currencies of two different countries. In Forex trading, currencies are traded in pairs; the pairs include currencies from two different countries. The first currency in the pair is the base currency, while the last one is the quote currency. The USD is the most popular of all currency pairs traded in the Forex market. It is also the most traded among them all. The most traded currency pair is the EUR/USD, which means the Euro against the United States dollars.
When you buy a currency pair, you are automatically buying one currency and selling the other in the pair. This means that you will be buying the base currency and selling the quote currency. If the currency pair is EUR/USD, for example, it means that you will be buying the Euro and selling the USD if you decide to buy the currency pair. When selling the EUR/USD, on the other hand, it means you will be selling the Euro and buying the US dollars.
How Forex trading works
As mentioned earlier, Forex trading involves the buying and selling of currencies. The main aim is to make a profit from either the buying or selling of currency pairs. One of the many benefits of Forex trading is that the trader or investor does not need to own the currencies being traded. You can trade these currencies without owning them. You can also make a profit when the value of the currency is rising and when it is falling. If you own the currencies being traded, you will only make a profit when the value is rising and you will record losses when the value of the currency you own falls. When you trade Forex, the difference between the price when you enter or open the trade, and when you close it will represent either the profit or loss.
How risky is Forex trading?
Forex trading is risky. It is also not for everybody. You need to first determine how much risk you are capable of taking before you venture into Forex trading. Virtually all kinds of trading are risky. You need to always keep that in mind when trading Forex. While Forex trading is risky, it can also be profitable. If you are new to Forex trading, you should start your trading adventure using a demo account. A demo account will help you to prepare very well for the risks in Forex trading. This way, it will not get you down by the time you start live trading. Also, you must know that the emotion in life trading can make the results to be different from what you will get in demo trading.
There are two main trading positions you need to bear in mind when you are trading Forex. A position is a partial trade that is in progress at the present. The two types of positions are long potion and short position.
- Long position: This talks about when a Forex trader opens a trade with the expectation that the asset will increase in value. The long position is also a buy position. You will close the long position when you exit by closing the trade.
- Short position: A Forex trader takes a short position when his analysis tells him that the price of the asset will fall in value. Another name for it is the sell position.
The most popular currency pair
There are so many currency pairs in Forex trading. Be that as it may, some currency pairs have more popularity than others. In theory, you can trade virtually all currency pairs in Forex trading. The ones that Forex traders prefer to trade most of the time are the major currency pairs. Studies show that the major currency pairs take over 80% of the total trading activities in Forex trading. The major currency pairs are currencies that belong to those countries with stable economies. As a result, the currencies have high liquidity and low volatility.
Major currency pairs
Check below for the major currency pairs:
- EUR/USD: This represents the Euro vs. the US dollars
- USD/JPY: This represents US Dollars vs. Japanese Yen
- GBP/USD: This represents Great Britain Pound vs. US Dollars
- USD/CHF: This represents US Dollars vs. the Swiss Franc.
Many traders prefer to trade the major currency pairs because the brokers are not able to manipulate these currency pairs. Also, the pip spread on each of the major currency pairs is usually small.
Another name for cross currency pairs is Crosses. These pairs of currencies do not include US Dollars. As a result of this, they tend to be more volatile than the major currency pairs. They also have less liquidity than the major pairs. The crosses do not feature the USD, but you can find other currencies as part of their pairs. Examples of currencies you can find in cross currency pairs include the GBP and the EUR. Some of the examples of cross currency pairs include the following:
Aside from the major and cross currency pairs, we also need to mention the exotic pairs. You can also just call them Exotics. They are special types of currencies that arise from emerging markets and smaller economies. The exotics usually go together with the major currencies in a pair. The liquidity is low and the exotic pair has the highest volatility among the three types of currency pairs. Because of this, the risk you experience here is more than what you will get from any other currency pair. Good examples of exotic pairs are:
Forex trading is done using charts. The charts represent the movement of prices of the various assets. There are three types of charts and they are:
- the Candlestick chart
- The Bar chart
- The Line chart
The Candlestick chart
You can also call it the Japanese candlestick charts. This is because it originated in Japan. Each candlestick says a lot about that particular asset. This is one of the reasons why it is the most popular of all Forex charts. The components of the candlesticks are simple and easy to understand. Each candlestick will show the trader the opening price, closing price, low, and high of the asset at a particular timeframe. The wicks of the candle show high and low of the asset in that particular time frame. The body of the candle will be solid if the price opens lower and closes higher and vice versa. However, the body will be empty if the timeframe opens and closes at the same time frame.
Bar charts indicate the high, low, open, and close price. The top of each bar indicates the highest price paid. The lowest point of the bar indicates the lowest price attained in that particular timeframe. The bar indicates the currency pair being traded. You can find two horizontal lines one at each side of the bar. The horizontal line on the left side indicates the opening price, while the horizontal line at the right indicates the closing price.
This is the simplest in appearance among the three types of Forex charts. Many beginners in Forex trading prefer this particular type of chart. However, most experienced Forex traders prefer to use the bar chart and the candlesticks chart. The line chart simply indicates the movement of the price if a particular currency pair. The line chart draws a line from one closing price to another of each time frame.
How to start trading Forex
As a beginner, it can be challenging to trade Forex. However, the information available here can guide you every step of the way. First of all, you need to look for a reliable Forex broker. Make sure that the broker is regulated. Also, make sure that the broker has at least 5 years of track record. Before you can start trading Forex live, you need to first deposit to your trading account.
Another name for the trading account is the margin account. Before you go into live trading, however, make sure you first practice with a demo account. Many Forex brokers give access to a demo account for free and you can use it to test your strategy before you go live. As a rookie, this is the best place to start trading Forex in Australia. The demo account will ensure that you do not use your own money to practice. You can continue to use the demo account until you develop adequate confidence to venture into live trading.
How to choose a broker
As an Australian Forex trader, you need to put a lot of things into consideration. First of all, you will need to choose a very good Forex broker. The type of Forex broker you choose goes a long way to determine your success in Forex trading. So, you need to choose carefully so that you will not end up with a wrong Forex broker. The number of Forex brokers in Australia is increasing and you may have some confusion about the right one to choose among them. In this section of the write-up, we will show you a couple of things that you need to consider when you are choosing a Forex broker in Australia.
Compliance with regulation
Before you register with a Forex broker in Australia, find out if the Forex broker complies with regulatory guidelines. The Australian broker needs to be a member of the Australian Securities and Investments Commission (ASIC). It is also important to find out if the broker has the Australian Financial Services License (AFSL). These two organizations are the regulatory agencies for Forex brokers in Australia. The organizations see to it that the brokers meet all their regulatory responsibilities.
How to check if a broker is regulated
- Find out about the AFSL number of e broker. You can directly ask the broker to provide you with the number. It is also possible to get the number from the “About Us” page of the broker. The link to the “About Us” page is usually at the bottom of the broker’s website.
- You should visit the ASIC website to validate the AFSL number. This will help you to determine if that broker is regulated or not.
One other important factor that can help you to choose right when looking for a broker in Australia is the trading platform. Check if the trading platform is stable before you register there. Also, find out if the trading platform is user-friendly. These factors can help to determine if the broker is reliable or not. A good Forex broker will give you access to a demo account. This way, you can easily practice as much as you want before you go into live trading. The demo account will give you the same experience as the live accent. It will, therefore, get you ready to face the challenges of live trading.
Things to look for on the trading platform
- Different types of technical and fundamental charting tools and analysis tools.
- Check if the broker offers buttons or tabs for easy buying and selling of assets. This way, it will not be difficult for you to enter or exit a trade.
- Check also if the broker offers MetaTrader 4 (MT4) trading platform. The MT4 trading platform is customizable. Its design is specifically for Forex trading. The MT4 trading platform is the standard platform for Forex trading. It is reliable for all levels of Forex traders.
- Check also if the trading platform has elements that can enhance Forex trading.
Some of the unique trading elements to consider when choosing a Forex trading platform are:
- Strategy builders
- Trading alerts
- Mobile trading
- Web-based trading
- Automated trading options
- Customization option
Each of the Forex brokers in Australia has a specific offering. You can also find different types of accounts on these broker’s platforms. Check if the broker offers a type of account that fits your specific trading needs before you register there.
Spread and commissions
It is also very important to find out about how much the broker charges for spreads and commissions. You will need to pay a particular amount as a commission or spread each time you open a trade. The amount you will have to pay to differ from one broker to another. So, you need to find out how much the broker charges as a commission before you register on that broker’s platform to trade Forex. It is good to choose a broker that charges a very small amount of money as a commission or spread. Be that as it may, you should not sacrifice reliability for affordable rates. When the spread is wide, it will make it very difficult for the trader to make a profit. You should look for an Australian broker that offers tight spreads.
The leverage amount that you can find on a Forex broker in Australia differs one from the other. Some brokers can offer leverages as low a 1:50. You can also find brokers that offer leverages as high as 1:500. Leverage is the money you borrow from the broker for trading. It allows the trader to hold a large trading position with a very small amount of money in his trading account. If you have an amount of $1,000 in your trading account, for example, leverage can make it possible for you to open a trading position as large as $30,000. This is the case if you use a leverage of 30:1. You need to first consider your risk appetite. After that, you can choose a broker that offers leverage suitable for that.
Before you register with that Forex broker in Australia, you need to first consider the initial deposit. You need to find out if the initial deposit is high or low. Many brokers offer different types of accounts. Each type of account requires different minimum deposits. As a beginner, it is better to look for a broker that requires a very small amount of money as a minimum deposit. This means that your risk will not be too much. If you lose the money, it will not get you down psychologically. It will also not get you down financially. You can find brokers that accept $500 as a minimum deposit. Some brokers even accept a minimum deposit of $250. It is possible to find brokers that accept $100 and even $50minimum initial deposit.
The number of currency pairs you can find on a broker varies. You need to find out about this before you register with a broker. You can find a large number of currency pairs on some brokers. Some other brokers offer just a few currency pairs. One way to choose the right broker is to look for a broker that offers the currency pairs you like to trade. You may want to venture into some other currency pairs later. So, you can opt for a broker that offers a large number of currency pairs.
One other thing you need to consider is the execution speed of the broker. You should go for a broker that offers a fast execution speed. This will make it possible for you to trade at a price you desire and not at a price the broker wants. Low latency can make a lot of difference in your Forex trading experience. It will make Forex trading a lot more interesting for you.
Deposit and withdrawal
You should properly investigate the deposit and withdrawal methods supported by the broker before you register there. You should also find out if the broker processed the deposit fast. Most Forex brokers process deposits instantly. As a result of this, the money you deposit will be available in your trading account immediately. You should also go for a broker that processes withdrawal without any delay. One other thing to do is to look for a broker that offers so many methods of deposit and withdrawal. This way, you will be able to deposit or withdraw without any hassle. Before you register with that broker in Australia, you should go through the funding and withdrawal policies of the broker. You should avoid that broker if there is any point you do not agree with in the policies.
One other very important thing to consider when looking for a Forex broker is the issue of security. You will have to provide some personal details when you register with a Forex broker in Australia. Find out if the Forex broker offers adequate protection for the personal details you provide. Check for a robust security system on that broker before you register there. This is the only way by which your details will not leak out or get to unscrupulous elements. Some of the great security features you need to bear in mind are:
- 2-factor authentication
- SSL encryption
You should find out if that broker provides educational tools also before you register there. First of all, find out if the educational tools are of top quality. Quality educational tools will surely help to enhance your trading. Some of the examples of educational tools you can get from some brokers are:
- Professional trading courses
- Video tutorials
Quality of customer service
You should not register with that Forex broker if the customer service is poor. The Forex market is open for trading 24 hours a day and 5 days of the week. A reliable Forex broker should be available to its customers for 24 hours. They should also be ready to provide answers to your queries at any time you get in touch with them. How easy is it to contact the broker? This is one very important question you need to ask before you start trading on that platform. The common ways of contacting brokers are highlighted below:
- Phone call
- Live chat
- Social media sites
It is always better to go for a broker that offers live chat. This way, you can get in touch with the broker without spending a lot of money. Phone call contact is also good, but it will cost you service charges. You can communicate with the Australian broker via live chat as long as you have internet data on your device.
Is Forex trading for everyone?
No, Forex trading is not for everyone. There is no doubt that it is possible to make a lot of money from Forex trading. Be that as it may, not everyone can trade Forex successfully. For you to be a Forex trader, you will need to be ready to accept the risks involved in it. Anyone that is not ready to take risks is not ready to trade Forex. You should also consider your risk appetite first before you commit yourself to Forex trading. If you are the type that cannot take a risk, you should not trade Forex at all. Those who cannot take risks find themselves under the control of emotion during trading. You should not allow yourself to be controlled by emotion. You should not even trade Forex if you are unable to put your emotion under control.
Develop a trading strategy
Before you venture into Forex trading, you need to develop a strategy first. A strategy is a system of trading that tells you when to enter a buy or sell position. You need such a system so that you will know what to do at any particular point in time when trading Forex. After you have developed a system of trading, you need to first test it using a demo account. You should not start using that system to trade until you fully understand how it works.
You should also make sure that the system is profitable so that you will not end up making wrong trading decisions. Some experts suggest that you should test the system for a minimum of one month or two months. This way, you will know how your system will react to different market situations. This will help you to determine it is a profitable system or not.
Helpful strategies for Forex trading
The type of trader you are can help to determine the type of Forex trading strategy to use. Whatever Forex trading strategy you use, you will find the points below or be helpful for your trading.
- Take a few positions: If you want to make a consistent profit from Forex trading, you need to watch the number of positions you take each time. You should limit your open positions to a few ones. But you can hold each position for many days. First of all, you need to know the factors that drive the particular currency pair you are trading. This point is very important for part-time traders. Also, you should always use stop-loss when trading Forex. The stop-loss will help to minimize the losses you record in case the market goes against you.
- Long-term trends are better: It is better to trade long term instead of trading short term. As a result of this, you will not have to be looking at your computer every time.
- Test your strategy before using: You should properly investigate that Forex trading strategy before you start using it. This will help to minimize losses. You should never venture into live trading until you have adequately investigated the strategy. You should not start using the strategy for live trading until you are sure that it will work well.
Risk management is important: You need to manage your risk very well during Forex trading. This way, you will not lose all the money in your trading account. You should not risk more than 1% or 2% of your trading account per trade. You should also not invest
any money you cannot afford to lose in Forex trading. It is a taboo to borrow money to trade Forex since you may end up losing the money. This will put you in debt.
Important factors for a trading plan
Rules to open a trade
You need to create certain rules that can help you to make the right trading decisions. You should only open a trade if that rule is completely fulfilled. This is why you need to test your strategy properly before start using it. If you follow your rules properly, there is an assurance that you will make a profit regularly from Forex trading.
Know when to close a losing trade
There are so many opportunities to make money from Forex trading. Even if you lose one trade, it does not make you a failure. Because you lose this trade does not mean that you will lose every other trade. So, you should not be afraid to cut your losses when you are in a losing trade. You need to create a strategy that will tell you when it is time to get out of a losing trade.
Make your goals long term
Many think that Forex trading can turn them into millionaires overnight. You should never think like that. It is better to think long term and grow your money gradually long term goals will make you a disciplined trader. Discipline can make you a successful Forex trader. When you set long term goals, you will be able to avoid greed and stay away from overtrading. Overtrading usually causes the trader to record more losses.