Foreign exchange is known as the FX or Forex; it is a marketplace for exchanging national currencies. In simplified terms, it is a means by which individuals, banks, & companies convert one currency to another. If you have traveled abroad, you might know about it. Forex is the world’s most traded market; it has a daily turnover of $5.1 trillion.
Types of forex
There are mainly three types of forex market:
- Spot Forex Market: Its physical exchange of a currency pair, which takes place on the spot.
- Forward Forex Market: This is a contract agreed to buy or sell an amount of a currency at a predetermined price. Need to be settled on a fixed range of dates.
- Future Forex Market: Almost similar to the forwards, except the futures contract is legally binding.
Working of Forex Market
Unlike equity markets or commodities, forex trading does not occur on exchanges but directly between two parties in an over-the-counter (OTC) market.
Trading forex involves the buying of one currency in exchange for another currency simultaneously.
In forex, traders try to profit by buying and selling currencies actively while speculating on currencies’ direction in the future.
Most of the traders make speculations for the price movement of forex. They do not take direct delivery of the currency; instead, they try to predict the future exchange rates of currencies.
Reason for movements in the Forex Market
The forex market comprises currencies exchange worldwide, making exchange rate predictions difficult as many factors contribute to price movements. It is essential to understand the influences that drive price fluctuations here.
The supply of currency is controlled by central banks, which can announce measures that will significantly affect their currency’s price.
Investors & traders have a strong outlook before investing & putting their real money in the economies. A cheerful piece of news encourages traders to increase their investment and demand for that country’s currency unless there is a parallel increase in supply for the currency.
Similarly, a piece of negative news can have harmful effects.
The movement of currency prices is heavily dependent on the market sentiment, which is mostly just the reaction of news in mainstream media.
If traders believe that a currency has moved in a particular direction, they will trade accordingly and convince others to follow suit, increasing or decreasing demand.
Economic data is essential for the price movements of currencies for two reasons – it indicates how an economy is performing and offers insight into what its central bank might do next.
Investors try to maximize the profit they can gain from a market while minimizing their risk. To be sure, investors might also look at credit ratings when deciding where to invest.
A country’s credit rating is an independent assessment. Countries with a higher rating are seen as safer for investment than ones with lower credit ratings.
How to Get Started with Forex Trading
Trading forex is very similar to equity trading. Here are some basic steps to get yourself started on the forex trading journey.
- Learn:Forex trading is a project of its own and requires specialized knowledge. There are so many courses available on the internet for beginners that teach the ins and outs of forex trading.
- Set up your brokerage account:You will need a forex trading account at a brokerage to start forex trading. Forex brokers do not charge commissions. Instead, they make money through spreads between the buying and selling prices.
- Develop a trading strategy: It is next to impossible to predict market movement consistently; you can set your guidelines and a roadmap for trading with the help of a trading strategy. A good trading strategy must be based on your real situations and finances.
- Always read your numbers:Once you start forex trading, make sure to check your positions at the end of the day. Almost every trading software already provides a daily accounting of trades. Ensure that you do not have any pending positions to fill and enough cash to make future trades.
- Develop emotional equilibrium:Beginner forex trading is a ride of emotional roller coasters and many unanswered questions. Should you have held onto your position a bit longer for more profits? How did you miss that report about low gross domestic product numbers that led to a decline in overall value for your portfolio? Such doubts & unanswered questions can create unnecessary confusion. Be disciplined about closing out your position when necessary.
Here comes the exciting part
Now, the thought of trading in forex must have excited you for starting into this. Before you start putting your real money into forex trading, you need to have a forex trading account with a forex broker.
Forex brokers facilitate trades on the foreign exchange market by providing a platform through which traders can buy and sell a wide range of currency pairs.
A broker that suits one trader is not necessarily suitable for another. The trader needs to conduct his research to find the right forex broker.
- Is It Regulated?
- What are its Trading Costs?
- What kind of Trading Platforms Does It Use?
- Does It Offer Good Customer Service?
- Does It Fit With Your Trading Style?
You can analyze your forex broker based on the above questions. Here is the list of some top forex brokers from the UK you can consider worth exploring.
- Moneta Markets
- CMC Markets
- Vantage FX
Once you are done with getting your answers for the above forex brokers, you can decide for yourself. Decide what factors matter to you the most & which forex broker will be suitable for your needs. After getting your forex trading account functional, you are good to go & start trading in forex.
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