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Forex Trading Guide 2021 - Forex Currency Trading Explained

The forex market is the largest financial market globally, with more than $6.6 trillion in trading volume occurring every day. Due to the fast-paced nature of the market, many retail traders are drawn to forex trading – and with opportunities to make returns every single day, it’s clear to see why.

This article will act as a Forex Trading for Beginners Guide, covering everything you need to know about the forex market. In addition, we’ll discuss a selection of the best forex trading platforms and show you how to get set up and ready to trade in under ten minutes.Quick Forex Trading Guide 2021  

Are you looking to get started trading the forex market right away? Look no further – by following the four steps below, you’ll be able to streamline the process and begin FX trading as quickly as possible.Step 1: Learn the basics – Use online resources such as courses and guides to gain a solid overview of the FX market and how it works.Step 2: Develop a strategy  – Research various strategies and develop one that will suit your schedule and risk tolerance.Step tiga: Choose a broker  – Open an account with a licensed and reputable broker that will allow you to trade the FX market. We recommend eToro.Step 4: Start trading forex  – Make a deposit, wait for a viable buy or sell opportunity to arise, and then begin trading the forex market.What is Forex Trading and How Does it Work?

To be able to make money with forex, you need to begin with having a deep understanding of how forex trading works. Forex trading is the process of exchanging one currency for another through the financial markets. This can be as simple as exchanging pounds for euros before you go on holiday – but when we discuss forex trading in an investment sense, it tends to refer to the process of speculating on currency values for potential gains.

According to The Tokenist, the forex market is the largest and most liquid market on earth, with over 170 currencies being traded worldwide. Due to the size and accessibility of this market, retail traders worldwide will enter the market every day and attempt to make returns on their capital. Notably, retail traders only make up a tiny percentage of dunia trading volume – most of which comprises banks and large financial institutions.

As the forex market is so large and there are so many moving parts, we’ll break down some of the critical components below, helping you understand how it works and how you can get involved.Forex Currency Pairs

The first thing to understand about the forex market is that when you trade a currency, you’ll actually be trading a currency pair. This may seem confusing at first, but it simply means you are trading one pair against another. Currency pairs are quoted as a ‘base’ currency and a ‘variable’ or ‘quote’ currency. For example, if you were trading the Euro against the dollar, it would be quoted as ‘EUR/USD’.

Forex trading works by traders speculating on a rise in the base currency against a fall in the variable/quote currency. To provide an example, if you expected the Euro to appreciate against the dollar, you’d open a buy position in the EUR/USD currency pair. If the Euro went on to rise in value whilst the dollar declined, you’d be in profit. You can read our EUR/USD forecast to learn more.

There are many currency pairs to trade, ensuring traders have lots of variety in the market. Major pairs are the most liquid and are the ones that are most traded by both retail and professional traders. In addition, minor pairs are less traded but can also showcase some great opportunities. Finally, exotics are currency pairs that are rarely traded and have pretty low liquidity – meaning these are best saved for advanced traders.Forex Trading Hours

The forex market operates 24 hours per day, five days per week. As the market is global, there will be certain times when markets are slow or certain days over the weekend where markets are closed.

The forex market opens at 5pm EST on Sunday afternoons and closes at 4pm EST on Friday afternoons. Between these times, the forex market is open to all participants across the world through different ‘sessions’, such as the London, New York, and Asian sessions. These relate to the time of day for each location and the level of trading activity that corresponds.CFDs vs Spot vs Futures vs Options

There are numerous ways to trade the forex market, ensuring that every investor type is catered to. The list below summarises some of the main ones:CFDs – CFD stands for ‘Contract for Difference’ and is a contract that provides exposure to fluctuations in the value of an asset without having to own the underlying asset. Many brokers will offer CFDs for FX trading to ensure a seamless trading experience and the ability to use leverage.Spot – Spot trading means buying/selling a currency ‘on the spot’ at the current market price. Most FX trading is conducted in this manner as spreads are narrower, allowing for quick trades.Futures – Futures are a type of contract where two parties agree to exchange a currency for a specific price at a particular future date. Traders can use these contracts for both speculative and hedging purposes.Options – Options contracts give traders the right (but not the obligation) to buy/sell a currency at a specified date in the future at a pre-determined price. Again, these can be used for both speculative or hedging purposes, e.g. if you do forex options trading.Forex Pips & Spreads

Forex trading for beginners means understanding what pips are and what the spread is. Put simply, pips are just a unit of measurement used to determine the change in the value of a currency. Pip stands for ‘percentage in point’ and, in most pairs, pips will correspond to a change in the fourth decimal place on a currency quote. For example:EUR/USD is quoted at 1.1950The currency increases by ten pipsEUR/USD will now be quoted at 1.1960

Spreads are the difference between the bid and ask prices offered by a broker. Bid and ask prices refer to the cost to buy and the money you’d receive to sell a specific currency. These tend to differ, as the broker gets the difference as a sort of ‘commission’ for helping facilitate your trade.

Spreads can widen or narrow during trading hours, depending on volatility and liquidity levels. A wider spread means that you’ll essentially be paying more of a ‘fee’ to trade that currency – so it’s a good idea to use a broker that offers tight spreads.Margin & Leverage in Forex

Leverage and margin are vital elements to understand when it comes to forex trading for beginners. Most of the time, when you trade the forex markets, you’ll be utilising leverage. Put simply, leverage allows you to amplify your position size by ‘borrowing’ money from your broker. This increases potential profits and increases potential losses, so you must be sensible when using leverage.

Leverage is quoted as a ratio – for example, some brokers may offer 20:1 leverage when FX trading. This means that you can essentially ‘boost’ your stake by 20x. If you opened a position worth $100 with your broker and then applied 20x leverage, your position size would be transformed to $2000. As your position size is now larger, potential profits/losses would be significantly increased.

Another thing to understand is margin. Margin refers to the amount of money you have to keep in your account to facilitate a leveraged trade. Margin requirements differ depending on where you reside and the broker you use and can be expressed as a percentage or ratio. To provide an example of this, if you wanted to open a position size worth $10,000 using 10:1 leverage, then you’d have to have at least $1000 in your trading account.Is Forex Trading Profitable?  

Trading forex can be an extremely profitable endeavour; however, to get to this level will take time and discipline. Many traders feel they can enter the market and make lots of money right away – but usually, this isn’t the case. Becoming a profitable trader requires developing and sticking to an effective trading strategy and becoming incrementally better over time.

Managing your risk is one of the critical components of becoming a profitable trader. Common trading wisdom states that you should never risk more than 1-3% of your trading account size on a single trade – this ensures that you avoid blowing your account. Furthermore, it also plays on probabilities because if you risked 1% of your balance on every transaction, you’d have to lose 100 trades in a row to blow your account.

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