A Guide To Forex Trading
- 4m0•
- 18 Apr 2023
Forex trading stands for trade in foreign exchange. This is a market where billions of rupees are traded each day. Of course, currency trading has its own complexities. If you are unsure what is forex trading, take a moment to get acquainted with the concept. It is essential that you understand the market well before embarking on your trading journey.
Why Opt To Trade Forex?
Currency rates keep changing constantly. There is no central market here. At every minute of every hour, something is changing in some part of the globe. So, forex trading offers an opportunity to trade round the clock.
Forex day trading is characterised by:
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Liquidity: It is a high-volume market that deals with currency. There is a lot of opportunity to make a trade, which translates to a higher chance to make a profit.
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Diversity: This market deals not only with major currency pairings like the euro and the dollar. Other pairings like, say, the Swiss franc and Japanese yen present an opportunity to trade as well.
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Accessibility: At all hours of any working day, you can choose to trade in this market.
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Leverage: Much of the forex currency pairings are traded on margin. Leverage helps you to trade in large quantities of currency. This can spell a greater potential for both profit and loss.
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Low commissions: Costs and fees, like commissions, are lower compared to other markets.
Read more: What is Fibonacci trading?
What Currencies Are Traded In Forex?
Foreign exchange is traded in pairs of currencies, both major and minor. The term ‘major currencies’ refers to pairs like the dollar and other high-liquid currency like the British pound. Meanwhile, pairings that exclude the dollar are clubbed as minor currencies. The US dollar accounts for nearly 88% of all trade in currency.
The major pairs include:
- EUR/USD (euro/dollar)
- USD/JPY (dollar/Japanese yen)
- GBP/USD (British pound/dollar)
- USD/CHF (dollar/Swiss franc)
- AUD/USD (Australian dollar/dollar)
- USD/CAD (dollar/Canadian dollar)
- NZD/USD (New Zealand dollar/dollar)
The most important minor currency pairs include:
- EUR/GBP (euro/British pound)
- EUR/AUD (euro/Australian dollar)
- GBP/JPY (British pound/Japanese yen)
- CHF/JPY (Swiss franc/Japanese yen)
Currencies such as the Thai baht or Swedish kroner are also traded. But such trade usually involves a greater degree of risk and volatility.
Read more: How to trade in the stock markets for beginners
Which Currencies Should You Trade In?
Since exotic currencies are riskier, it is best for beginners to trade in major and minor pairs. The trades are plentiful. However, the profits may not be as large as some of the exotic pairs. The risk is limited here.
Process Of Forex Trading
In forex trading, you buy one currency while simultaneously selling another one. For instance, say, you are trading in a major pair like GBP/USD (British pound/dollar). Here, the exchange rate reflects the number of US dollars you can buy with one British pound. Suppose you think the pound will rise against the dollar. In that case, you will use your US dollars to buy pounds. If the exchange rate climbs higher, you will sell the pound to make a profit. In the case of forex day trading, you do all this within the span of a single day.
Read more: Intraday trading formula
Forex Trading Strategy
For forex trading, your strategy revolves around liquidity and volatility. Without liquidity, it is not possible to close a deal at the ideal price. Higher volatility spells higher trading risk. However, for an expert trader, this also offers a shot at a higher profit.
Is Forex Trading Profitable?
Profitability depends on expertise, ability to read movements, and quick decision-making. However, a majority struggles to make a profit. This is nothing unusual in the sense that a highly specialised market like this needs a steady hand and a sharp mind.
Conclusion
No single strategy works for all people. Keep an eye out on volatility and liquidity when you strategise your moves. Say, you decide to do day trading in foreign exchange. Make sure to do a realistic risk assessment and study the market carefully before taking the plunge.
Read more: Is intraday trading profitable?
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