There are numerous guides available for learning forex trading online, as well as offline, through seminars, articles, and videos. However, will we be able to immediately engage in forex trading practice after acquiring this knowledge? Novice potential traders require more than just an understanding of forex definitions; they also need clear instructions on easily comprehensible trading methods.
Furthermore, novice potential traders must also grasp the various risks inherent in forex. The profit potential in forex trading is undoubtedly remarkable. Nevertheless, risks exist in any business venture, including forex trading. Without comprehending these risks, we might stumble into significant losses that could have dire consequences for our financial well-being.
Now, the purpose of this article is to provide a complete guide to learning forex, enabling you to gain a comprehensive overview of the necessary steps to take in order to independently conduct transactions on online forex trading platforms. Let’s explore together from start to finish.
What is Forex Trading?
Have you ever engaged in foreign exchange (forex) transactions through a Money Changer? Or perhaps you’ve visited a bank where the exchange rates are displayed on the walls? In both money changers and banks, you’ll observe that the exchange rate between two currencies (forex rate) is constantly fluctuating over time.
These fluctuations in forex rates present opportunities for all of us to gain profits by buying and selling currencies at different exchange rates. For instance, if you purchase 200 Euros at a rate of 1.2 US Dollars per Euro today and then sell them again at a rate of 1.3 US Dollars per Euro tomorrow, you’ll earn a profit of 20 US Dollars. Isn’t that truly remarkable?
That’s a basic overview of forex trading. However, forex trading isn’t exactly the same as exchanging currency through banks and Money Changers. What’s the difference? Here are some distinctions between forex trading and regular currency exchange:
When exchanging currency through banks and Money Changers, you need to prepare the full amount equivalent to the currency you want to sell or buy. Nevertheless, forex traders can set aside only a fraction of the value of the currency they’re trading, thanks to the existence of margin and leverage. For example, if a forex broker offers a 1:100 leverage, a trader can engage in transactions worth $20,000 US Dollars, with just $200 US Dollars as margin.
Currency exchange requires face-to-face transactions and involves the complete transfer of funds from your account to the bank and Money Changer’s account. In contrast, forex trading doesn’t require physical presence as it’s conducted online. Forex brokers provide online trading platforms in the form of software that can be installed on devices like MetaTrader 4 or MetaTrader 5 on laptops, as well as mobile applications for smartphones.
While Money Changers and banks typically profit from the difference between buying and selling exchange rates, forex brokers charge a more varied set of trading fees. Forex trading costs encompass the spread (the difference between buying and selling rates) and trading commissions per lot (applicable only to transacted volumes).
In essence, forex trading involves profiting from the buying and selling of foreign currencies using leverage and online trading platforms. Forex trading is facilitated through brokers that connect traders to the currency market. Hence, traders need to carefully select a forex broker to access advanced features and receive top-notch services.
Advantages of Forex Business ?
After comprehending the definition of forex mentioned above, undoubtedly, you grasp the alluring profit potential in forex trading. However, the benefits of this forex business are even more substantial than your current perception, as they encompass more than just material gains.
The allure of the forex business captures the attention of many individuals due to its substantial profit potential. Surprisingly, it can be pursued anywhere and anytime with minimal capital. How is this achievable? The following is a more comprehensive explanation of the five foremost advantages of forex business.
- The Foreign Exchange (Forex) Market is the Largest Financial Market in the World
Data from the latest triennial survey by the Bank for International Settlements (BIS) in 2016 indicates that the daily trading volume in the forex market reached a staggering USD 5.1 Trillion. This market’s scale is significantly more immense when compared to the global stock market’s scale, which stands at only USD 84 Billion. The forex market is also global in nature and operates outside of exchanges (over-the-counter), thus avoiding the constraints of national boundaries, similar to stock trading.
The enormous global forex trading volume enables us to smoothly engage in buying and selling at any time, without the queues commonly seen in the stock market. Transactions take place online and continuously for 24 hours. In essence, the profit potential in the forex market is also several times greater than other financial markets.
2. Forex Trading Hours Around the Clock
As previously mentioned, the forex market is truly global in nature. Transactions take place through banks located in various financial centers across all continents. Hence, the forex market remains in continuous operation from the opening of the Sydney bank at 21:00 GMT on Monday (04:00/Monday WIB) until the closure of New York banks at 20:00 GMT on Friday (04:00/Saturday WIB). A comprehensive depiction of the 24-hour forex trading hours can be observed in the diagram below:
The forex trading hours are divided into four continuous sessions, namely the Sydney and Tokyo sessions (often combined as the Asian session), the London session (European), and the New York session (American). Forex traders are at liberty to select their trading time during any of these sessions, based on their daily schedules. You can utilize your free time after work or whenever convenient.
3. You Can Engage in Forex Trading Anywhere You Are
The essential prerequisites for commencing forex trading are merely two: a device and an internet connection. When it comes to the device, you have the freedom to opt for a PC/laptop or a smartphone (provided it possesses adequate specifications). Download the online forex trading platform provided by your broker, and from there, you can embark on forex trading from any location you find yourself in. You can trade while stuck in traffic, during the intermission at a movie theater, while awaiting your children at school, or practically anywhere.
The world’s most renowned forex trading platform is known as Metatrader, available in the forms of software, webtrader, and mobile application. All versions are equipped with the capability to monitor foreign exchange rate movements in the forex market, conduct market analysis, place buy/sell orders, make deposits/withdrawals, as well as monitor your account balance.
4. Engaging in Forex Trading with Minimal Capital
In the earlier discussion on the definition of forex, we touched upon the concepts of margin and leverage. The presence of margin and leverage enables traders to deposit a small amount of capital to commence forex trading. In fact, there are forex brokers that allow us to initiate trading with a starting capital of just 1 US Dollar!
Nevertheless, a higher capital is still necessary to achieve success in forex trading. Typically, individuals begin forex trading with a capital ranging from 50 to 200 US Dollars, and additional funds are only added as deemed necessary. Beyond the monetary capital, traders only need to prepare devices, a reliable internet connection, and forex learning materials that can serve as guidance.
5. Anyone Can Engage in Forex Trading
There is an impression that participants in the forex market are part of the elite class. Indeed, the majority of forex market participants belong to the affluent group. For instance, government bodies, central banks, commercial enterprises, financial institutions, and other entities that require continuous foreign exchange payments and receipts. However, there are also speculators who engage in the forex market with varying levels of capital, from small to substantial.
Most forex traders fall into this speculator category, as they solely target profits from currency exchange rate fluctuations without the fundamental need to hold foreign currencies. The number of forex traders increases each year, due to the significant profit potential and straightforward prerequisites. Anyone can engage in forex trading, even without an educational background in economics. As long as there is dedication and a willingness to learn, achieving success in forex trading is attainable.
Business Forex Risk
Every business inevitably possesses strengths and weaknesses. Similarly, there are certain risks in forex trading that must be comprehended by all individuals before commencing trading activities. Precisely, there exist five (5) perils: volatility, liquidity, leverage, broker, and trader psychology. A grasp of these risks will determine the level of success in a trader’s future profit attainment, making it exceptionally vital to be taken into consideration:
- Navigating the Ebb and Flow of Forex Volatility
The undulating rhythm of foreign exchange rates, characterized by their fluctuations, is aptly termed as volatility. This volatility presents an avenue for potential gains for all participants in the forex market. However, this same volatility also bears the potential of ushering in the specter of financial risk. Profits are attainable when currency rates move in alignment with our forecasts, yet losses loom when these rates remain stagnant (low volatility) or surge vehemently in a direction contrary to our prognostications (incorrect predictions).
How can we address the perils that volatility introduces? Firstly, it is imperative to comprehend that our ability to predict market movements is a capability fraught with uncertainty; a 100% accuracy cannot be guaranteed. Thus, losses are an inherent facet of this endeavor. In the face of erroneous forecasts, one must have the temerity to engage in a strategic cut loss. Opting for a controlled loss is a preferable alternative to bearing an undue burden of losses.
2. Market Liquidity Risk
The immense magnitude of daily trading volumes, reaching trillions of US Dollars, within the global forex market is a phenomenon well-acknowledged. Such elevated trading volumes underscore the robust liquidity that characterizes this market. However, there are distinct periods when this liquidity ebbs. During such instances, traders may find themselves ensnared in anomalies such as platform trading freeze, platform trading feature dysfunctions, abrupt widening of spreads and trading costs, and sudden constrictions of leverage. These unforeseen occurrences hold the potential to precipitate losses.
The question arises: How can one effectively mitigate liquidity risk? The remedy lies in a straightforward solution: grasp the optimal moments for trading and remain cautious during perilous intervals. Generally, traders hold the notion that the European and American trading sessions are the most lucrative windows for engaging in forex trading. However, traders must exercise vigilance in light of the impending release of crucial economic data, a measure undertaken to avert liquidity predicaments in the market. This schedule can be readily ascertained through the forex calendar integrated into the online trading platform.
3. The Perils of Leverage (Margin)
Drawing from the preceding elucidation, we discern that if a forex broker extends a leverage facility of 1:100, a trader can execute transactions amounting to 20,000 US Dollars, with a mere 200 US Dollars tendered as margin or collateral. However, it is imperative to acknowledge that the margin will fluctuate in tandem with the cumulative profit/loss amassed across all the trader’s transactions.
In the event of enduring substantial losses, the margin might face depletion. During such a juncture, the platform will automatically display a Margin Call (Stop Out) notification. Upon the emergence of this proclamation, the trading positions will be automatically liquidated at a loss. Consequently, a trader must exhibit adeptness in the calculus of balance and margin, ensuring avoidance of this undesirable scenario. The technique of managing leverage risk is recognized as risk management or money management within the forex domain.
4. Brokerage Peril
Any individual can engage in forex trading solely through the intermediation of a broker. Consequently, the broker plays a pivotal role in the triumph of the trader. A top-tier and dependable broker certainly have the capacity to furnish steadfast trading services and facilitate the trader’s prosperity. Nevertheless, a trader can also face catastrophic losses if the selection of a broker goes awry.
Numerous charlatans masquerade as forex brokers, peddling services with the allure of substantial profits. In truth, a forex broker merely facilitates and acts as an intermediary. The broker cannot assure profits, as gains and losses are determined by the trader themselves. However, the broker should ideally assure seamless execution of trades, the security of the trader’s funds, and expeditious withdrawal of funds.
To avoid falling victim to the deceitful enticements of faux brokers, it is advisable to align oneself solely with brokerage firms that possess legitimate authorization from regulatory authorities, such as local forex brokers regulated by Bappebti. Furthermore, do not easily succumb to bonuses or marketing promises. Scrutinize the reputation of each broker before becoming associated with them.
5. Trader’s Psychological Peril
The final peril of forex trading is tethered to our own personal emotions, such as greed, fear, and panic. Prior to commencing trading, one might underestimate the significance of this factor. However, professional traders consistently prioritize the mastery of psychological self-control as their foremost avenue to success.
Imagine, for instance, you have initiated a long position on EUR/USD with the anticipation of profit in the event of Euro strength, only to witness the subsequent weakening of the Euro. What course of action would you take? An individual inclined towards panic might hastily opt to cut losses, potentially thwarting their chances of profiting when the Euro strengthens shortly thereafter. Someone driven by greed might perceive it as an opportunity to purchase EUR/USD again at a lower rate. Consequently, the avaricious individual might incur compounded losses if the Euro continues to decline.
What measures should a trader take? Professional traders mitigate psychological risks by initiating positions based solely on tried-and-true trading systems. Subsequently, they execute stop-loss or take-profit actions according to the preconceived plan. How does one formulate a proven trading system? Firstly, one must practice forex trading on a demo account, subsequently acquaint themselves with the array of tools available on the online trading platform.