Making that extra income has never been that important especially in our times when real wages are on the decline, massive unemployment is the order of the day, and job security is no longer guaranteed. One of the most lucrative ventures through which that extra cash may be obtained genuinely is forex trading.
Making cash and attaining success through forex trading requires some level of enlightenment and experience which a newbie i.e. a completely inexperienced person may unfortunately have. However, this should not be so much of a worry anymore since the entire gist of this article is dedicated to that subject matter.
In the forex trading guide for beginners that follow, the subject matter of forex trading is going to be investigated and discussed in finer details by among others examining the benefits of the trade, learning the step-by-step procedure of getting started in a forex trade, as well as all the other pertinent issues with the aim of aiding complete novices in getting started.
WHAT IS FOREX TRADING?
Forex trading is simply the practice of buying and selling currencies at predetermined prices. Unlike most other forms of trade, it is not localized. Instead, it is globalized and may take place any day anytime and at any point on earth. It is by far the largest market in the world, with conservative estimates postulating that around $5 trillion worth of foreign currencies is traded in a typical day.
WHY FOREX TRADING?
Forex trading comes along with several benefits, some of which are discussed below:
Volatility is the measure of how rapid the price of a commodity varies with time. The values of currencies world over do fluctuate rapidly from time to time in reaction to political changes, economic cycles, natural disasters, and so on. It is the existence of this volatility that acts as the incentive that allows traders to capitalize on the fluctuation of exchange rates for speculative purposes.
Liquidity is the number of players in a market that are willing to trade at any given time. As has already been stated, forex trade is very liquid. It is by far the largest and the most liquid market in the world with over $5 trillion worth of currencies being traded daily and almost every other person being eligible to enter the trade.
This form of trade is not at all restricted by time and space. It may be carried out round-the-clock, anywhere in the world, and every day including public holidays and weekends. This flexibility allows traders to open their businesses at a time when it is most convenient to them. It also enables them to accrue as much profit as possible since there are absolutely no restrictions as pertains how long they may operate.
Low Overhead Expenses
On the whole, forex trading is burdened by very low overhead expenses. This stems from the fact that there are no commissions charged, no government fees/levies, no exchange fees, and no brokerage fees. In addition, forex brokers spend less on wages by reason of hiring fewer workers and also spend less on rent by reason of leasing very small office spaces.
The profit margin in forex trade, technically called, leverage, is quite wide. This is due to the fact that a very small deposit has the ability to control a contract value that is much larger. This obviously grants the brokers the leeway to make very handsome profits while at the same time keeping the risk capital to an absolute minimum.
Low Start-up Capital
A relatively small amount of capital is required to start the process of forex trading. In some jurisdictions, as little as just $100 is all that is required to get started. Moreover, as has already been alluded to previously, most of the overhead expenses such a rent and wages are also very low, a fact that further opens the trade to just about anyone who wishes to enter.
Possibility of Short Trading
Short trading is the selling of securities or financial instruments which are not owned by the broker or which the broker has borrowed elsewhere. It is motivated by the belief that the future price of those securities or financial instruments will decline and thus allow them to be bought at a much lower price and in the process make a profit.
Fewer Barriers to Entry
Very little, if any, barriers are usually imposed on the trade or the brokers who take part in it. Apart from license fees, there is hardly any other levy which the players in the forex trade may be required to part with. This coupled with the free-market nature of the trade, means that it is open to just about anyone who may desire to engage in it.
The lack of middlemen and unnecessary bureaucracy, combined with the fact that it may be carried out via the internet platform and on a round-the-clock basis makes the trade in foreign currencies a very efficient venture. Less time is wasted, a very high turnaround is enjoyed, and players are not at all required to expend too much effort in order to make a killing.
Excellent Support Structures
There is plenty of support and goodwill to the forex brokers and other players in the field of forex trading by the general public. Several brokers have demo accounts that are set up to aid new entrants to get started, some application software has also been designed with the aim of expediting the process, and several television programs are also dedicated to enlightening the general public and players with the relevant pieces of information such as the prevailing currency exchange rates, to mention but a few!
HOW TO START FOREX TRADING (BEGINNERS GUIDE STEP BY STEP FROM OPENING ACCOUNT TO
OPENING TRADE AND MAKING PROFITS)
Step I: Understand Basic Forex Terminologies
This entails understanding and familiarizing you with the key terminologies that are used in the field of forex trading. Some of them are explained below:
- Forex – It is a foreign exchange market in which world currencies are bought and sold.
- Currency Business – It is the business of buying and selling foreign currencies.
- Base Currency – This is the currency that is being sold or gotten rid of.
- Quote Currency – This is the currency that is being bought or acquired.
- Broker – This is the individual or business entity that buys and sells foreign currencies at a fee.
- Spread – Is the difference between the ask price and the bid price. It is the incentive that keeps a broker in business.
- Bid Price – The price at which a broker is willing to purchase a base currency in exchange for the quote currency
- Ask Price – Also called the offer price, it is the price at which the broker is willing to sell a base currency in exchange for a quote currency.
- Long Position – It is the buying of a base currency in exchange for a quote currency
- Short Position – It is the buying of a quote currency in exchange of a base currency
Step II: Open an Appropriate Forex Account
At the moment, there are three main types of forex accounts. These are:
- Demo Account – This forex account enables a prospective investor to preview and test the features of a given trading platform first, before depositing money in the account or placing any orders. It is ‘funded’ using the simulated money. It allows investors to conduct dummy trades in order to familiarize themselves with what the platform entails, experiments with the various financial products, acquaints themselves with the various tools, and test the different trading strategies.
- Live Account – This type of account enables you to buy and sell currencies via the online platform. It is also called online account. It is cheaper, more profitable, and less costly than the other types of accounts.
- Trading Account – It is the final account that is actually used for the purposes of buying and selling foreign currencies. For you to be successful in opening such an account, you will have to conduct thorough research of the various brokerages, request the application form (in case they do not have online application options), fill the appropriate paperwork or online forms, and activate the account upon approval by the respective brokerage.
PS: If you are completely new to the field of forex trading, then it is advisable that you open a demo account first, then a live account and finally a trading account. This is for the obvious reason of gaining experience and expertise required for successful forex brokerage.
Step III: Analyze the Market
You will then have to analyze the market through several methods outlined below:
- Technical Analysis – It entails the review of charts, past trends, and historical data in order to accurately predict the future trends. Such pieces of information may also be accessed from platforms like Metatrader 4.
- Fundamental Analysis – This involves studying and analyzing a country’s macroeconomic climate such as inflation rates, unemployment levels, and per capita income e.t.c. to have a rough picture of how profitable your venture is more likely to be.
- Sentiment Analysis – This is the gauging of the ‘moods’ of the market i.e. whether it is bearish or bullish in order to ascertain whether the brokerage venture is more likely to be profitable or not.
Step III: Deposit Money
After you are completely certain that you have what it takes to successfully participate in a forex trade, you will then have to deposit money and commence the trade thereafter.
Step IV: Place Orders
Placing of orders is actually the core component of forex trading. It is basically the act of instructing your broker to execute a purchase or a sale of a foreign currency. There are three main kinds of orders namely:
- Market Order – This requires the broker to buy or sell currencies at the prevailing market rates.
- Limit Order – In this order, you set the price you may wish your broker to sell or buy the foreign currencies.
- Stop Order – This gives the broker to buy a currency above the prevailing market rate or sell it below the prevailing market rates.
Step V: Understand the Associated Trends
Finally, watch your profits and losses. The forex market is very volatile. This may often cause panic and anxiety but should not be so much of a course of concern at all as the trends are usually subject to change.
It is the business practice of revealing the potential risks, terms, conditions, and rules that are ordinarily associated with futures trading and options and which may subsequently influence investment decisions. It is a requirement by the Commodity Futures Trading Commission (CFTC) that oversees trade in financial instruments, currencies, and securities.
The Significance/Benefits of Risk Disclosure to a Forex Broker
Compliance with Statutory Regulations
Most jurisdictions world over require the players within the forex trading market to provide accurate information regarding the risks, dangers, terms, and conditions that may influence investor decision and profitability of the players. It is therefore not optional to do so. In fact, it is the failure to do so that may endanger a business entity by way of unnecessary litigations and fines.
Aids in Sound Decision Making
Such disclosures generally aid investors and other players in the field of forex trading in making the right decisions. They may choose to scale down their investments and expectations whenever they foresee a future slump in profit or may choose to shore up their investments and expectations should they sense a future rise in profitability.
Aids in Minimizing Losses
People enter business primarily to make a profit. By accessing such disclosures, it will usually be possible for the players in the sector to put in place foolproof strategies to ensure that losses are kept to an absolute minimum.
Getting started in forex trading, as may be clearly seen from the foregoing forex trading guide, is very intriguing, intricate, and potentially challenging undertaking. It requires the consideration of so many factors at a time. Moreover, the field is so saturated that it may require an investor extra aggressiveness to stand out from the rest. For these reasons, this is a battle that is ideally fought by and with the intervention, direct involvement, and active participation of an expert in the field of forex trading. It is only in this way that all the potential hurdles may be navigated with ease and the very best results realized.