Learn Forex Trading

Learn Forex Trading

What is Forex trading?

Forex trading essentially means the buying or selling of currencies simultaneously. The exchange of currencies between different countries is inevitable and the main reason why the forex market is the largest and most liquid financial market in the world. There is no designated centralised marketplace for forex trading but is rather executed electronically over-the-counter (OTC), which means that all transactions are carried out via computer networks between investors worldwide. Also the forex market remains open 24 hours a day and five days a week with the starting of the Asian session till the closing of the US session. Hence the market remains highly volatile at all times with fluctuations in prices within no time.

Trading of currencies through a brokerage house with the idea of earning profits can be called a more logical and organised method of trading forex. In the present times where technology plays a crucial part anyone can set up a forex trade in any part of the world at any time. When you trade forex you always buy/sell in currency pairs.

How do I get started?

There are always a few important points to be considered before initiating a forex transaction

  • Choosing a strategy that works for you

    All successful investors cultivate a strategy that works for them according to their unique personality, trading style or requirements (often through trial and error). Some rely on technical indicators, or fundamental and technical analysis tools to enter or exit their trading positions. But there is no one good or bad trading approach. One just needs to find out the trading plan that suits them.

  • Picking the right brokerage house

    One also needs to be very careful while choosing the brokerage firm to trade. One should learn to distinguish the bucket shops from the reliable ones. You as an investor should opt for a broker that is registered under a regulatory authority, offers tight spreads, good leverage and extensive tools and indicators to better your trading experience.

  • Signing up for a demo account

    Always start off with a free practice account that all good brokerage houses offer. In that way you can build your trading confidence and perfect your skills before jumping into the actual trading scene.

  • The trend is your ally

    In the forex market following the market trend is in your best interest and gives you a higher chance of making profits. If you happen to ignore the trend you must have a valid reason for going against it.

Trading with leverage and margin

Two very important terms in forex trading are leverage and margin. Margin can be understood as a security or collateral lent by your broker that allows you to leverage the funds and securities in your account so that you are able to enter larger trades. Leverage is the increased buying power that is available to margin account holders. Corresponding to margin trading the term leverage gives you the ability to enter larger positions by paying a fraction of the total cost of a trade than would be possible with your account funds alone. Leverage is expressed as a ratio. A 100:1 leverage, for example, means that you would be able to hold a position that is hundred times more the value of your trading account. If you had $10,000 in your trading account with 100:1 leverage, you would be able to purchase $1,000,000 worth of stock. However margin trading is not for the risk-averse as it can be highly risky and lead to high losses as well as gains.

Here are some common terms associated with margin

  • Required Margin amount

    It is the amount of collateral your broker requires from you to set up a trade. It is expressed in percentages.

  • Account margin

    It's the total sum of money you have in your trading account.

  • Used margin

    The amount of collateral that your broker has set aside to let you trade in your current positions. While this money is still yours, you can't use it until your broker gives it back to you either when you end your current positions or when you receive a margin call.

  • Usable margin

    This is the money in your account that is accessible to open new positions.

  • Margin call

    You get this when the amount of collateral in your account is not sufficient to cover your possible loss. It happens when your capital falls below your used margin. If a margin call occurs, some or all open positions will be liquidated by the broker at the market price.

Advantages of trading responsibly with CFDs

Transparent execution sans any fees: Majority of brokerage houses do not levy any fees for entering or exiting trades. Rather the broker earns revenue by making the investor pay for the spread i.e. to buy, a trader must pay the ask price, and to sell, the trader must take the bid price. CFD brokers also offer order types with stops and limits. Brokers that guarantee stops either levy a nominal fee for the service or earn revenue via other means.

More leverage: CFDs provide much increased leverage than other types of trading. Typically leverage in the CFD market is as low as a 2% margin requisite. Lower margin requirements mean less capital for the trader, and higher returns. However, higher leverage can also amplify losses.

Multiple Trading Options: CFD trading is available in a variety of options like indices, currencies and commodities.

No Day Trading prerequisites: A certain specific amount of capital is necessary to day trade in many markets. But the CFD market does not have these limitations and accounts can often be opened with deposits as low as $1,000.

Online access to global markets: CFD traders can have access to any market across the globe while that market is open via their trading platform. All well-known CFD providers offer instruments in all the major markets in the world.

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