The technological advancement in the field of trading has made everyone an investor. Traders use trading platforms, tools, computerised systems, algorithms and analysis with educational materials. All these make the trade progressive with the potential for earning benefits. But, we all know that the financial market involves high risk due to the uncertainties of the markets.
Trading with opportunities and risks at the same level requires a lot of effort on the side of the trader. The forex market is one of the high trade volume markets of the financial markets. It has volatility and liquidity both at the same time; traders can take advantage of ample opportunities coming across them while trading.
With this article, readers will get an insight into the forex market, how to become a successful forex trader and know the operations of currency trading. So, let’s understand the forex trade and invest to earn good profits.
A market that attracts several traders on a daily basis with a turnover of around $5.1 trillion, the forex market is one of the enormous financial markets with high liquidity and volatility. Investors trade in international currencies by buying and selling them at an exchange rate. Thus, the market provides traders with the currencies exchange rate through the process of base and quote currency.
To understand how to become a forex trader, investors should be aware of the market and its terminologies. The forex market is huge with several options to invest; the currency trade is completely online with 24 hours and five days a week availability. Traders can invest in the market with the over-the-counter system and the interbank market.
In the system, traders can invest privately or through online brokers such as Capixal, these offer facilities and services that make the trade easy and accessible. Whereas the interbank system allows banks to trade the currencies in various manners on behalf of their clients. The forex market has participants like banks, individuals, financial institutions etc., that buy and sell the currencies for speculation and hedging purposes.
The market is not based on the exchanges and works on global computer networks and online brokers. Opening from Sunday at 5 pm and closes on Friday at 4 pm. The market trades overnight and provides its services 24 hours a day.
Traders can invest in the currencies in pairs because of the process of buying and selling taking place together; thus, investments in the forex market are in currency pairs. These pairs are of three kinds major, minor and exotic. Investors can choose the one that is suitable for the trade.
In addition to all this, the forex market currencies are divided into major, minor and exotic currencies. The traders invest in these as per their trade requirements; however, most of the beginners and experts prefer investing in the major trade currency pairs.
Major currency pairs are the ones that have high trade volumes with good market worth. Some of the major currency pairs are EUR/USD, GBP/JPY, USD/JPY, USD/AUD etc.
Minor currency pairs are the currencies that are less frequently traded in the market and have low market value. For example, EUR/CHF, CAD/JPY, GBP/AUD etc.
Exotic currency pairs are the currency pairs with one major currency and one exotic currency. Exotic currencies are thinly traded, illiquid and highly erratic with low trade volume. These are currencies of an emerging market combined with a major currency and turn out to be expensive for the traders who have less market knowledge. For example, AUD/NOK, AUD/PLN, CAD/SGD etc.
Forex Market Types
The market is divided into three types in which traders can invest according to their needs. The three types of forex markets are spot market, futures market and forward market. Traders can understand the markets by the brief introductions of the three given below:
The spot market is the market where the financial instruments are traded for immediate delivery. In the forex market, the currencies are traded for on the spot delivery; the delivery is of the cash for financial tools. The spot markets are liquid due to instant transactions.
The trade of currency is on the current market price, which is referred to as the spot price in the trade. Trade usually lasts for two days between the parties as there are documentations and deliveries that take time. The market is different from the forward and futures markets. A direct market where the two parties have an instant and direct exchange of currencies.
A market that trades in currencies with over-the-counter market derivative products. The trade has a fixed price and date of delivery, with two parties trading at an exchange rate. In simple words, traders invest in the currencies through a contract by buying or selling them. For the execution of the delivery, they set a particular price and date on which the trade takes place.
Forward contracts are not binding contracts with the option to have a range of dates as per the trade requirements. To understand it better, let’s take an example, suppose a farmer wants to sell his crop for a certain price in the market but is unsure of the future prices will they increase or decrease.
In this case, the trader can go for a forward contract, where the farmer deals with the other party to pay him a fixed price at a fixed date with the option of a range of dates as per both parties convenience. The trader gets cash for the crop he sells in the market. This is what we call the forward contract of the forex market.
Similar to the forward contract, the futures market follows the same procedure but with a twist. Traders buy and sell the financial instruments at a fixed price and date with the legal binding of the contract. Thus, traders are obligated to perform the trade on the date fixed by the parties.
They cannot extend the contract as per their requirements; the buyers of futures contracts generally held the security for long term positions. A trader can invest in the market with an obligation to pay at a set date and price.
How does the forex market work?
To understand how traders can be successful with their investments in the currency market, they need to know how the forex market works. The forex market is different from the commodity, indices and other markets. It does not involve any exchange but trades directly with the parties investing.
By now, readers have understood what the forex market is and how many types it has with currency pairs available to invest. So let’s get a step closer to how the forex market operates or works. The market works on currencies being traded, but how do we calculate the worth of these currencies.
For this, the currencies are divided into two, the base currency and the quote currency. The value of the currency pairs helps traders decide whether they should invest or not. The base currency is the initial currency mentioned in the pair, which has a high market value.
Whereas the quote currency is the low value and second currency of the pair. Traders on the basis of base currency decide the value of the quote currency. One unit of the base currency gives the value of one unit of the quote currency.
The currencies are coded in three words to make it easier to understand them in pairs. For instance, the European currency Euro is coded as EUR, Japanese Yen is coded as JPY etc. Similarly, other currencies are coded into three words for quick and easy understanding of the traders.
How to become a forex trader?
Traders of the forex market can be successful in their currency investment by following certain steps. Investors have several options like futures contract options, CFDs, forward contracts directly or through online brokers. It is more feasible to invest via online brokers as they have convenient trading with the trading services. They offer trading platforms, tools, analysis, research, education and various types of accounts etc., to trade.
To become a forex trader, traders should follow the below stated steps:
Reputed Forex Broker
The first and significant thing to do is select the reputed broker that has all the facilities the trader requires for forex investment. A forex trader can have successful trading if they trade with a licensed and authorised online broker. They have excellent customer support 24 hours, advanced technologies and the latest softwares to trade.
A broker, if regulated, offers segregated funds, less extra charges and commission with spreads. Traders enjoy a high leverage ratio and other services to have access to the market anytime and anywhere.
The second point is to know the capital that a forex trader should be investing in the forex trade. It is not necessary to invest high capital to be a successful forex trader. Traders can invest on margin and use the option of the leverage ratio to have a high market position. Thus, a trader can open high with less investment.
However, traders should be aware that high leverage brings high risks.
Use the Demo Account
The third step is to use the demo account before going live in the forex market. The online brokers offer the demo or practice accounts to practice trade, know the market and analyse it to set strategies and plans. Traders with these can have strategies that can guide them in future trade.
Traders get to experience the trade without investing money and use the virtual currency to trade. So, with no investment, traders learn to trade.
Trading never stops and is vast to grab at once; therefore, traders should keep educating themselves. They can use the educational material provided by the brokers, read articles, use social media and news etc., to be updated about the market happenings.
A well aware trader makes a successful trader, so be alert and keep learning and polishing the basics to acquire skills to trade.
Begin with small
If a trader is new to the market or has some knowledge, they should always begin with small market investments. This is essential for a profitable trade, huge investments in starting could bring loss, and the trader may not want to trade again. Emotions also affect the trade, so to manage all these traders should go low.
This helps them understand the forex trade, earn or lose small amounts, to know what to do next. A trader should be careful with the investment they are making and what all factors and risks the market involves. This is a good market risk management trick.
The style of every trader is different; be it a professional trader or novice, traders have their trading style. The Forex market is the liquid market with ample opportunities for traders. Traders should therefore know their investment and currency pairs. Traders choose the currency pairs as per their trade knowledge, requirement and other market factors.
Some find a currency pair with high potential; others may find the same difficult to trade. So, in such conditions, traders set their trade styles to invest and earn.
Trading the forex market needs discipline and patience; a trader cannot do whatever they feel like. For trading, forex traders need to check the market regularly, monitor the trade, invest regularly, be updated, know news and other market factors impacting the trade.
A trader has to be disciplined to follow the process and not randomly invest in doing all this. A trade with emotions does not last long, so the calculated and measured forex trade gives the desired results.
Trading has become an important character of the financial markets; forex traders invest in the market to earn profits and double their money. The forex market is a highly traded market with ample market opportunities to invest. Traders who want to become forex traders need to understand the market thoroughly. Without trade, knowledge investment is nothing, and traders face loss.
To trade in the forex market, forex traders should understand the market, know its aspects, what currency pairs are successful should be traded, and the market should be researched and analysed before investing. However, traders should be alert as it has high market risks as well due to the volatility.