How to make a successful trade in the forex market? – A guide for a beginner – Star of Mysore
Even though forex trading has a huge volume per day, for a beginner it can be a real daunting affair. From understanding the currency pairs to estimating the quote prices, it is indeed a challenge to fight the odds and have the ball in your court. For this reason, we have devised a befitting paradigm that will help you with the trading decisions. However, before moving to the details, let’s study the basics of forex trading.
Basic things to know about forex trading
Forex market types
The foreign exchange trades can be initiated in several different market forms. Trading international currencies is not an easy task, and when you have different FX market options in hand, you need to know the details for choosing the particular type.
· Spot forex market
If you want to trade quickly, the spot market is the ideal option. Here, the transactions will involve international monetary payments at the present exchange rates around the globe. Once the contract is made, it hardly takes a day or two to settle the transaction and close the trade. About 33% of the global forex trading is based on the spot market, which provides the traders an exposure to the market’s volatility.
· Forward forex market
In the forward market, two participating bodies agree on a certain currency pair that will be traded later on, at a future date and time. Here, the parties can negotiate the currency price and types as per their convenience. Since negotiations can be done, the forward forex market trades are often chosen for long positions.
· Future forex market
For making large trades with an expectancy of consistent profits or returns, a future forex market is the ideal option. Here, the involved parties sign a standard and non-negotiable agreement for a future trade at the future exchange rates. Since the terms cannot be changed, risks are mitigated to a great extent, thereby ensuring high returns.
Currency pairs in forex market
The currency pairs in the forex market have two units- base currency which is the independent unit and the quote currency which is the dependent unit. The pair price determines how much one unit base currency is worth the quote currency. These currency pairs are divided into four major categories:
· Major currency pairs
These include the top traded seven currency pairs which form about 85% of the total forex transactions- USD/JPY, EUR/USD, USD/CHF, GBP/USD, USD/CAD, AUD/USD.
· Minor currency pairs
These pairs usually consist of major currencies pitted against each other except the US dollar. Examples are EUR/GBP and GBP/JPY.
· Exotic pairs
In the exotic pairs, a major currency is paired with an emerging currency, the latter being used in a small number of trades. For example, USD/PLN is an exotic pair as PLN or Polish zloty is an emerging global currency.
· Regional pairs
These pairs are categorized based on a region like EUR/NOR or European euros VS Norwegian krone.
Spreads, lots, and leverages in forex trading
Spreads are known to be the differences between the bid (selling) prices and ask (buying) price of a currency pair. The spread is declared at the time of quotation and it is the amount that has to be paid to the broker. The spread is measured in PIP or Points in Percentage.
Forex trades are moved in lots, where each lot contains a definite number of the base currency units in a particular pair.
Leverage in forex trading is related to having an exposure to huge investment amount in terms of a base currency. However, your contribution to the investment amount will be very less which is termed as margin. For example, if you have gained a leverage of 100000 USD, it doesn’t mean your capital is equivalent to that currency amount. It can be $1000 USD or $5000 USD.
How to trade in the forex market?
Choose the forex trading method
Forex trades can be done in two ways- CFD trading and through a Forex broker.
· CFD forex trades
CFD or Contract for Differences allows the trader to form a conjecture on the future prices of a currency pair. He will be able to exchange the difference between the position opening price and the closing one.
· Trades through the forex broker
When you are dealing through a broker, you will receive a quote price based on which you will make your speculations about the future price movements. Here, you won’t have ownership of the asset or the currency.
Learn and choose the currency pair
Once you have decided the medium of forex trading, you need to choose a currency pair. Before that, you have to understand the four categories namely major, minor, exotic, and regional pairs. Once done, you can choose any of the pair for predicting the future price movement against it.
Understanding the quote price of the currency pair
After choosing the currency pair, you will be provided with the quote price of the same pair. This quoted price is divided into two parts: the bid or selling price and the ask or buying price of the pair. For example, if a EUR/USD currency pair is quoted at 1.07175/ 1.07178, it means $1.07175 is the bid price and $1.07178 is the ask price. You will see that 0.00003 is the price difference. This is known as the spread amount.
Open the suitable position
In forex trading, you can either open a long or a short position. Based on what you are predicting about the quote price, your position type will change. For instance, if your gut is telling you that the currency pair price will increase, you can open the long position. If in future, the base currency price strengthens against the quote currency, you will have the profit or else suffer loss. Short position is opened when a trader predicts a decrease in the quoted price. Profits are earned if the base currency weakens against the quote currency.
Devising the forex trading strategy
With a proper forex trading strategy, you will be able to determine how the trading will benefit you. The strategy will help you in making decisions after you open the position and hence, find opportunities to make profits in the forex market. Several trading strategies are there like:
· Swing strategy ‘
· Price action strategy
· Positing trading
· Forex scalping strategy
· Range trading
Just like any other trading platform, the forex price movements are controlled by the demand and supply factors like interest rates, international economy, political stability, recession period, inflation rates, and so on. So, based on your understanding of these factors, you need to proceed with the trade.
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