The Forex market is a tempting venture for many traders. It is one of the most lucrative and technologically advanced markets in the world. This highly liquid exchange market provides an abundance of profitable opportunities for both investors and traders.
However, it can also be a challenging and overwhelming environment to step into, especially for newcomers.
So if you are considering venturing into the Forex market, here is some crucial information you need to know from the very beginning.
What is Forex trading?
First, let’s cover some general facts such as what The Foreign Exchange Market (Forex or FX) is, and what that means for you.
It’s essentially the trading of international currencies in which all the transactions are conducted through an online channel.
It is one of the largest and strongest financial markets globally, trading trillions of dollars (or other currency) daily. International currencies are arranged and traded in pairs.
These pairs include a base and a quote currency. The transactions are conducted by simultaneously purchasing and selling the two currencies.
There are a few types of pairs:
- major (EUR/USD, USD/JPY, GBP/USD, USD/CHF)
- minor (AUD/USD, USD/CAD, NZD/USD)
- cross-currency (trades that are made directly, without conversion to USD)
- exotic (currencies of emerging markets).
PIP and spread
PIP (price-in-percentage) is the basic unit of measurement to convey the change of value in any particular pair. This is important to know because traders make (or lose) money based on a PIP differential.
On the other hand, Spread is the difference between the ask (the number which you buy the base currency) and bid price (the number at which you sell). You can make a larger (and quicker) profit with a smaller spread.
The spread is also the broker’s commission.
There is an initial transaction fee charged by the broker. It’s not a fixed fee, and it varies depending on the size of the account and a few other factors.
Several major types of participants could be distinguished within the Forex market.
Commercial and investment banks are the largest group of traders in FX (in terms of the total dollar values).
Banks tend to invest and trade large amounts of currencies on behalf of their customers (primarily those involved in international business and various trade operations). But, they also trade in the FX on their own account.
Another major group of traders is governments, through their central banks.
The main reason for their involvement is that national banks are trying to control the currency’s relative value by buying or selling their currency. That way, they are aiming to improve the country’s balance of trade or possibly combat inflation.
It is a common practice that big profitable companies that operate internationally are, to a large extent, involved in Forex trading.
They can use FX to further support and strengthen their main business operations (especially in foreign countries with different currencies).
Perhaps the smallest, but far from an insignificant group of participants is an individual trader.
Whether they are professional traders such as Forex brokers in Lebanon (that could help you make optimal decisions and work the market) or an individual small investor, this group is the most diverse one.
They all approach the Forex market with different tactics, skills, previous experience, and resources.
The most enticing features of Forex trading are:
- Liquidity – high liquidity of this market provides a lower spread, making it easier for traders to enter and exit trades.
- Leverage – is based on small increments of price movement, which could provide a sizable gain for a small investment.
- Volatility – it allows plenty of opportunities to turn a profit within the daily price fluctuation range of 100 PIPs or more.
It is important not to get carried away by the mear notion of a large profit and ‘’easy money’’.
In all honesty, Forex trading is complicated, unpredictable, and comes with plenty of risks. The payout can be significant, but losses can be even bigger.
The main risk for small traders, in particular, is that some brokers can re-quote prices and even trade against their customers.
Forex brokers are held by different regulations, depending on the country (the regulations are stricter in the UK and USA than in many other countries).
Two main strategic approaches are:
- Fundamental analysis – based on specific (to a particular country) and global economic conditions
- Technical analysis – based on past market behaviour and price movement calculated by technical indicators.
The key is to learn how to handle the Forex market and to manage your expectations.
Make sure that you have a well-thought-out strategy, patience, discipline, and risk management. Until you can assess a winning opportunity and get a good feel for the market in general, it’s better to invest small and be calculated.
By trading with excellent knowledge and some caution, you can turn a sizable profit in the world’s most active and accessible market.
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