A Detailed Forex Trading Guide For Both Professional & Amateur Forex Traders
Forex trading is a trillion dollar business that witnesses the largest liquidity in the world concerning the trading volume and the number of investors that access the markets on a daily basis. Forex trading has evolved into one of the most popular investment options due to a wide variety of reasons, the chief among which is the incredible profit potential that feeds billions of dreams across the planet. Forex is a leveraged product that has its fair share of risks and rewards, which also offers plenty of opportunities for dedicated Forex traders to indulge in a part-time or full-time career.
- Forex Market
- Costs incurred in Forex trading
- Forex Brokers’ Role
- Trading Platforms
- Trading Strategy
Trading the FX market might be intimidating at first, especially due to the different aspects of trading that can confuse even the most seasoned financial expert. Owing to the risks involved in Forex trading, it is common for beginners and intermediate traders to lose more money than they can afford to lose. In this professional Forex trading guide, we will provide you with all the essential information required to trade the FX markets in a safe manner and to avoid some of the common risks associated with Forex trading.
What Is FX Trading?
Forex is an acronym for Foreign Exchange or FX in short and involves transacting different currencies through a global network of exchanges and liquidity providers. Anyone can trade the FX market by changing one country’s currency for another, and typically involves buying and selling currencies as a pair. As per the free trade accord of 1971, currencies are freely floated across the different markets and their values determined by the global supply and demand.
There are various reasons for changing currencies in the international market, which involve overseas business transactions, paying for products and services, hedging against exchange rate fluctuations, managing currency reserves, speculation, and for diversifying investments. Traditionally, Forex currencies were primarily traded by large institutions such as central banks, exchange houses, hedge funds, wealthy individuals, and other commercial establishments; however, ever since the introduction of the internet into the financial markets, Forex trading has become an immensely popular investment option among retail traders.
Online Forex trading is facilitated through brokerage houses and liquidity providers, which offer the buy side and sell side for a currency pair. The Forex market is open for 24 hours a day and 5 days a week in between the opening session of the Australian Financial market on a Monday and the closing session of the New York financial market on a Friday. The Forex markets offer access to currency pairs from almost all countries of the world, where the price value of one currency is pitted against the price of another currency. There are currently 164 different currencies in the world that are circulated across more than 195 countries around the world, giving ample opportunities for traders to buy or sell a currency against another.
Due to the mechanics of the market involving supply and demand (buy or sell), the value of a currency against the other keeps changing according to the existing market conditions. Currency pairs are traded by offering a buy rate and a sell rate to traders, which are then used to judge the best price available in the market to go long (buy) or go short (sell) on the currency pair. The price of a currency is also determined by the actions of its native Government, as the respective country’s central bank may choose to increase or decrease the value of its currency to suit its monetary policies.
Economic aspects of a country such as political resolutions, changes in ruling policies, rate decisions, unemployment, fiscal measures, civil unrest, war, and other factors also contribute to the variation in the value of currency. In fact, sudden and unexpected news releases, relevant market announcements, and other significant events can induce wild swings in currencies that can move pairs anywhere from 1% to 3% in a single trading day. The changes in the market are measured according to the change in the second, third, fourth, or fifth decimal points of currency pairs. Each point movement is known as a pip, and the profits and losses in FX trading are measured according to the number of pips gained or lost.
The 24 hours a day market allows traders to get in and out of the markets at any time of the day or night. The markets react differently at different times, but orders can be placed at any time, provided there is enough liquidity in the markets to absorb an order. Some traders, especially a group, known as scalpers, enter the markets for a very short amount of time, while long-term swing traders are known to hold on to their position for hours, days, weeks, and even months. Therefore, Forex brokers now offer the convenience of market making accounts that accept orders internally without passing it to the interbank liquidity provider.
Forex Market & Currency Pairs In Detail
All transactions in the Forex market involve buying and selling currencies. The rise in the value of a currency against another currency is known as a bullish phase, while the decline in the value is known as a bearish phase. Forex traders aim to take advantage of the price action by speculating the movement of the price and investing in the market accordingly. If a trader buys a currency pair during its upward movement or sells a currency pair during its downward movement, he or she makes a profit. However, if the price moves in the opposite direction to the trade, the trader loses money. The profits and losses in trading are determined by the size of the investment, the magnitude of movement of the market, and the leverage used by the trader.
The standard currency pair in Forex trading is split into two parts, the base currency, and the quote currency. Let us take the example of the most traded currency pair in the world, the Euro versus the US Dollar. Popularly cited as the EUR/USD, the Euro forms the base currency, while the US Dollar represents the quote currency. Buying the Euro against the US Dollar means that a trader is speculating on an increase in the value of the Euro against the Dollar while selling the EUR/USD means that the trader is speculating on a decrease in the value of the Euro against the Dollar.
While the EUR/USD currency pair is the most active currency in the market, there are other similarly active major currency pairs such as the GBP/USD (British Pound vs US Dollar), USD/JPY (US Dollar vs Japanese Yen), AUD/USD (Australian Dollar vs US Dollar), USD/CHF (US Dollar vs Swiss Franc), and the USD/CAD (US Dollar vs Canadian Dollar). Apart from the major currency pairs, the Forex online market also offers minor currency pairs such as NZD/USD (New Zealand Dollar vs US Dollar) and exotic currency pairs such as the ZAR/USD (South African Rand vs US Dollar). Traders can also trade commodities through Forex brokers such as Gold, Silver, and Oil, which are valued against the US Dollar. The sheer range of financial instruments offered by the online Forex markets allows you to diversify your investment portfolio and invest in exotic markets for added volatility and increased investment options.
Are Forex Markets & Trading Products Regulated?
The global Forex market is a mostly non-regulated entity due to the nature of the free floating currencies. The value of a currency may be determined by several factors, which makes regulation of currency pairs and their values practically impossible. Nevertheless, Forex trading products, brokerage houses, hedge funds, asset managers, and all financial participants are governed and regulated by numerous agencies across the different financial markets. Overseas financial transactions are also regulated under the anti-money laundering laws imposed by the IMF and other allied organizations, which work towards ensuring a safe environment that prevents malicious activities such as terrorism and consumer abuse.
Popular regulatory organizations include the CFTC and NFA from the US, the FCA from the UK, the BaFin from Germany, the CySEC from Cyprus, and the ASIC from Australia. There are other lesser-known regulatory organizations such as the FSB of South Africa, the FMA of New Zealand, the FINMA of Switzerland, the IIROC of Canada, and the FSA of Japan, which are also highly regarded and reputed institutions. Regulation is the key to choosing a reliable Forex trading partner, as choosing non-regulated brokers will prove to be immensely risky for your trading capital and your trading results. You should always concentrate your efforts on finding the best regulated Forex brokers for your trading needs and continued trading success.
Is Trading Forex Profitable?
Forex online trading should not be considered as a genuinely profitable alternative to other investment options, especially if you are not familiar with the industry. There are enormous risks involved with the Forex markets, and one should only attempt to trade FX online if they have a successful trading strategy. Psychological factors also play a major role in determining the profitable outcome of trading, which requires traders to remain emotionally stable while trading the highly volatile FX markets.
Nevertheless, trading Forex can provide a lucrative career in investments for the disciplined and motivated individual that can control his or her emotions. Leveraged products are always risky, regardless of the potential outcome, as leveraging ones’ money in the market has a huge downside. But in short, FX trading can be profitable, provided you have the right tools and the right mindset to tackle the markets in a positive manner.
The Different Costs Involved In Forex Trading
It is imperative for traders to understand the actual cost of FX trading to be able to stay on top of all the expenses in the Forex market. In this FX trading guide, we will attempt to take a close look at all of the costs incurred in Forex online trading:
Account Opening Fees (Minimum Deposit):
The most basic cost of Forex trading is, of course, the minimum deposit required for opening a trading account. Traders can usually start investing in the FX market by depositing a minimum trading capital of $1, which can go up to millions of dollars depending on the broker and the type of account. Regular Forex brokers usually require a minimum deposit of $100 to $500, while some of the top Forex brokers in the retail market allow traders to start with as low as $1. ECN and Direct Market Access brokers have higher deposit requirements due to the nature of the account but expect to start with at least $500 for a regular ECN trading account.
Spreads are considered to be the real direct costs involved in Forex trading that are paid directly to a broker or your price provider. Currencies are offered as pairs that have a buying price and a selling price. The difference between these buying and selling prices is known as the spread, which is shared between a broker, the interbank liquidity providers, and other market intermediaries. Brokerage houses offer different price levels with different markups on spreads that constantly changes according to the market conditions. Most currency pairs have 4 to 5 decimal pricing and the spreads start from 1 pip for major currency pairs on market maker accounts. DMA and ECN accounts offer reduced spreads that start from 0 pips, but real-time spreads can fluctuate between 0.5 pips and 1.5 pips at prices provided by interbank liquidity providers. Since ECN accounts offer ultra-tight spreads, brokers are often known to add additional costs to trading known as commissions to earn a sizeable profit for their services.
Commissions are fixed fees that require traders to spend anywhere from $2 to $25 per traded lot. ECN brokers earn considerably less amount of money via spreads due to the hugely competitive spreads offered on an ECN platform, which necessitates the introduction of a commission per trade to ensure that the broker can earn a significant amount of revenue from their traders through other means. Almost all ECN, STP, and DMA brokers charge a nominal amount of commission per traded lot, but some brokers might choose to do away with commissions by slightly increasing the markup spread. By avoiding commissions altogether, certain FX brokers promise a 0% commission ECN account together with a tight spread, which might confuse some traders. If you come across an ECN broker that does not charge commissions, do not worry about the legitimacy of the broker, as the broker might simply charge you in other ways such as markup spreads or other hidden fees for trading.
Forex trading primarily involves currencies transactions that require a person to buy or sell a currency with respect to another currency. Buying a currency of a country means that you are appreciating the value of the currency, which allows you to earn interest on your investment while selling a currency means you are doing the exact opposite and have to pay interest. The interest rates are determined by the existing central bank rates of a particular currency and other economic factors. SWAPs are overnight trading costs that are determined by the differences between the central bank rates of the base currency and the quote currency of a currency pair, which are automatically added to the P/L of a trade at the end of a trading day. Some currency pairs offer positive SWAP that allows traders to earn positive revenue, while other pairs offer negative SWAP that requires traders to pay a SWAP fee. Islamic traders are exempt from SWAPs due to their religious beliefs, but such traders will have to open a SWAP-free account at the time of signing up.
Forex brokers offer different deposit and withdrawal options such as bank wire transfers, credit/debit card payments, and online e-wallets such as Skrill, PayPal, and Neteller. Each of the individual payment methods has different fees for transferring money between accounts, which are charged directly to the trader. Sometimes, the fees can vary from 1% to 10% depending on the mode of payment, but there are a few brokers that absorb the impact of the fees by providing 0 processing fees on financial transactions. Other leading brokers offer free deposit options, while all withdrawals are charged according to the existing fees applicable for a particular type of payment.
Account Maintenance Fees:
Account maintenance fees are relatively rare in the industry, but you should read through a broker’s terms and conditions to ensure that there are no inactivity fees for not trading for a lengthy period. Under rare circumstances, low-level brokers may charge an inactivity fee for not trading by deducting a certain amount of money from your trading balance. If possible, try to find brokers that offer a trading account for zero maintenance fee.
VPS, or Virtual Private Servers, are dedicated trading servers offered to traders for enjoying low latency, reliable connectivity, and standalone support for automated trading. Virtual Private Servers are extremely useful for running EAs and other automated trading strategies for traders that do not have access to a dedicated trading terminal. VPS costs start from $20/month, but you can avail free VPS services at certain brokers by satisfying their minimum deposit requirements. There are also a few brokers that offer a free VPS access for high-frequency traders that transact a minimum number of standard lots during a calendar month. VPS is extremely popular among large traders and is used extensively by professional traders and institutional investors.
Other Allied Costs & Hidden Fees:
Traders have to be extremely careful about hidden fees, as these are considered to be far more detrimental to your trading results than the losses incurred in the market. You should also account for other costs such as trading signals fees, news subscriptions, management fees, and other business expenses that might be considered to be a part of your FX trading career.
How To Use Leverage Responsibly In FX Trading
Leverage is the concept of being able to open a significant amount of position in the market using a small trading capital. In traditional financial markets, the standard amount of leverage varies from 1:2 to 1:10. However, in Forex trading, the maximum amount of leverage ranges from 1:50 to 1:2000. A standard 1:100 in leverage means that for every $1 that you invest in your order, the broker controls a $100 worth of position in the market. Forex brokers often term their leverage offering by quoting the minimum margin requirements. Therefore, for an account with a 1:100 leverage, brokers stipulate a 1% minimum margin requirement, while for a 1:50 leverage account; brokers quote a minimum margin requirement of 2%.
Leverage is always considered as a double-edged sword. On the upside, using leverage allows you to open a large position in the market and enjoy an enormous amount of profit. For a standard account using standard lots and a 1:100 leverage, a $1000 trade on the EUR/USD pair will provide a profit of $100 for every 10 pips movement in their favor. On the downside, the same 10 pips movement against a trader’s position will result in a $100 loss. The currency markets witness an incredible amount of volatility that sees an average of 50-100 pips movements within the span of a few hours, minutes, or even seconds. Therefore, using the maximum available leverage of 1:2000 on a standard account can result in a margin call for as small as a 5 pip movement.
A margin call is a broker induced stop-loss mechanism that is designed to protect traders from a negative balance scenario. High leverage can wipe out entire balances within mere seconds, leaving no time for traders to close their positions manually. Due to the volatility of the market, brokers usually introduce margin call policies the will automatically close all positions if the available margin in the account falls below a prescribed level. In most cases, margin calls and stop-outs are set at 10% to 50% of the account equity, which automatically closes all positions before the account equity falls to $0. Being responsible and disciplined in your trading will help you to avoid margin calls and to conserve your trading capital against large movements in the market.
The Role Of Brokers In Trading Forex
Brokers give you access to the FX markets and act as a vital link between you and your desired financial instruments. The best Forex brokers can serve as your trusted partner in building a successful trading career, while questionable brokers can lead you to question your involvement in the Forex trading industry. Safe and reliable brokers offer complete peace of mind, and as a trader, you should make it a priority to choose a regulated Forex broker for your investment. At times, it is common for non-regulated brokers to attract traders through promises of great bonuses and rewards, but ultimately, it depends on how much a broker is willing to follow the regulatory guidelines to ensure the safety and security of your trading funds. Regulated FX trading companies also avoid interfering with the trading environment, which can result in a smooth and consistent trading performance.
Getting To Grips With Forex Online Trading Platforms
Forex trading grants access to some of the most advanced trading platforms on the planet. Several brokerages have introduced new and revolutionary proprietary trading platforms for different devices to cater to the rigorous requirements of modern traders. The market is also home to several popular third-party trading platforms that are specifically designed for the retail trading market. The most popular third-party FX trading platforms include the MT4, the MT5, the cTrader, the NinjaTrader, and the TradeStation, which are licensed to a vast majority of Forex brokers across the world. Most of these trading platforms are also available for mobile devices such as smartphones and tablets, which allow mobile traders to access the markets on the move.
Choosing & Sticking With A Successful FX Online Trading Strategy
Forex online trading is not bound by any single hidden key to success. Successful strategies are built over time through patience, hard work, emotional excellence, and by adhering to the principles of trading. Discipline, emotional stability, analytical abilities, and a strong passion for trading are all prerequisites for developing a successful trading strategy that can factor in all market eventualities without losing it all in the markets. Time and again, we have seen the same trading strategy having entirely different results, which is why it takes some time to develop a good trading strategy according to your trading personality.
You don’t have to lose your money to build up a strategy from scratch. You have the option of demo and practice accounts that give you a great platform to hone your trading skills and get accustomed with the risks of the financial markets without losing your hard-earned money. While there is a sea of difference between a demo account and an actual live trading account, practicing your skills on demo account can make you a better trader over time. Since the FX markets offer you the convenience of unlimited demo accounts, make sure to use it before putting your trading capital on the line.
How To Make A Career Out FX Online Trading
If you are indeed a marvelous trader that is disciplined, professional, and moderately successful, you can have a lucrative career in Forex online trading. If you do not mind taking on a few additional risks, the FX market also allows you to manage other people’s money, provided you can create a history of trading performance that is free from any emotional dysfunctions. Some of the top traders in the industry have created a highly fruitful trading career by successfully managing other people’s money and by earning a hefty commission from their trading returns. However, to have a successful career in FX trading, you should start with the basics and be willing to continually improve your trading skills to be considered as a reliable professional in the world’s most attractive financial market.