Forex or Foreign Exchange is a process wherein one nation’s currency is exchanged for another nation’s currency, usually for reasons concerning tourism, commerce, or trading. The value of one currency divided by the value of another is how currency exchange rates are calculated.
Currencies help purchase goods and services within nations or even globally. Foreign currencies are exchanged for trade and business. The forex market is not a physical marketplace. The transactions are carried out through computer networks and by traders around the globe. Thus, the forex market is conducted through an online trading platform. Banks, central banks, investment management firms, corporations, retail forex brokers, hedge funds, and even individual investors participate in this market and earn legitimate profits. These profits can be earned through the difference in interest rates between two currencies, or through the buying and selling currencies during changes in exchange rates.
There are a few tips and tricks that an individual should know before delving into currency trading.
Know the market well
The most important thing to do before diving into currency trading is to learn the workings of the market. It is advisable to study the market before investing in it. Unless the investor knows where they are investing, they might suffer losses. Having a preliminary and thorough knowledge of currency pairs and studying what affects them would help any investor save on losses.
Decide on a trading style and the goal to be achieved
Every trader has a different risk appetite. Some can take high risks, and some are risk-averse. A day trader trades short term, and the positions are held and liquidated in one day. Day traders rely on incremental gains in a day and thus need the knowledge of the significant technical indicators and the required analytical skills to earn profits. A position trader trades long term wherein the currency is held for months or even years. They require fundamental analytical knowledge to gain from the trade. A swing trader holds for periods longer than a day- sometimes weeks or months. They substantially gain during major government announcements or economic disarray. A scalp trader relies on the profit amounts restricted per the number of pips. Here the currencies are held for minutes or even seconds. The trade is cumulative and relies on the predictability of price. These traders cannot tolerate much volatility and trade mostly during the busiest times of the day and restrict such trades to most liquid pairs.
Leverage is the money borrowed that helps trade in large volumes with lower capital investment. It can either be a boon or bane, depending on whether the trader suffers gains or losses. A lot of leverage coupled with losses can make capital repayment a tricky affair. Risk management tools, such as stop-loss orders, can help minimise losses.
Risk to Reward Ratio
Being aware of the level of risk that a trader is comfortable with and the realistic earning from a specific trade can help minimise losses. The risk to reward ratio will help determine whether a trade is worth undertaking or not.
Keeping Emotions in Check
The volatility of the forex market can make a trader feel overwhelmed. Despite the volatility, it is essential to keep emotions in check and biases out of the equation while trading in the market. Being patient and sticking to the pre-formulated plan leads to a profitable trade rather than being led by emotions and suffering losses.
Thus, the basic strategy to trade is to think through, formulate a plan and stick to it, and be patient while dealing with the ups and downs of the market. Knowledge about the market, the past and the expected future also contributes to successful trading.