Forex Trading for Dummies: What, Why, When, Where, Who & How
The Forex market is grabbing the eyes of people dreaming of becoming a trader. With numerous profitable opportunities, high liquidity and excellent flexibility, forex is a great place to start your trading journey, and this guide will help you in doing so.
Understanding Forex Trading For Dummies
Beginners and New traders may find forex trading a complex process. But it is not when you know the 5W and H of currency trading. Being a leading forex educational provider, Market Investopedia understands the importance of learning.
So, in this blog, we will have an overview of how the forex market works and explore the key components. It will help you start trading forex and maximize your profits.
Introduction to the Foreign Exchange Market?
A foreign exchange market is a place to buy or sell centralized currencies in order to make a profit from their price movements. The workings of the forex are quite similar to those of the stock market; the only difference is in trading assets.
In the stock market, people trade in the stock of the companies, while in the forex market, people trade in the currencies of countries. Also, forex offers better market conditions than the stock market. It is the largest financial market and offers great liquidity to traders.
In addition, there is no centralized authority or financial institution that regulates forex activities. All trading activities take place over the Internet, and traders can trade in a free environment without the need for intermediaries.
What moves the forex market?
Trading in the forex market takes place due to currency price movements. Different fundamental, sentimental and technical analysis factors influence currency’s prices, giving birth to numerous trading opportunities.
A currency is the representation of currency, so every factor that affects a country also influences it. Positive news, economic data, trade surplus, and overall growth results strengthen a currency’s value.
Meanwhile, negative data, a high unemployment rate, and a trade deficit weaken currency value. Traders organize fundamental analyses to track these factors and their impact on currency. Traders can even organize technical analysis and study chart patterns, or candlesticks to predict the future movements of currencies.
Let us take the example of the US Dollar; suppose news has surfaced that the United States is all set to increase the export amount by 20% in the upcoming year. Now, the news is positive, so it can increase the value of the USD against the other currencies.
Why trade in Forex?
The only reason people trade in the foreign exchange market is to make money from money. Like the company’s stock, the price of centralized currencies rises and falls over time.
Traders take advantage of these price fluctuations, buy at low and sell at high, and earn from price differences. Making a profit from trading is an old concept; earlier, people used to trade gold, silver, and other commodities. Now, with time, traders have multiple other options for trading including stocks, cryptocurrencies, forex currencies, bonds and others.
How to trade in the Forex Market?
Trading currency pairs is all about predicting the increase or decrease in one currency against another to identify when to buy or sell. For that purpose, traders organize market analysis.
Trading forex for dummies can be a complex process, to help you out let us have a look at an example. Suppose an Australian trader thinks that the value of its native currency is all set to rise against the USD. The current exchange rate for the AUD/USD pair is 0.65, which means 1AUD = 0.65 USD.
So, the trader decided to open a long (Bullish) position in the pair. The traders enter the market at 0.65, set the take profit at 0.70 and stop-loss at 0.62.
In this case, if the trader’s prediction went right and the price reached 0.70, the trade would close at a profit, and the trader would earn 0.05 per unit. And if not then the trade will close position at 0.62, and the trader will suffer a loss of 0.03 per unit. Like this example, trading may result in both profit and loss, so risk management plays a crucial role in trading.
A quick glance
A forex market is a place to buy or sell centralized currencies in order to make a profit from their price movements.
- Traders can buy or sell currencies on the forex broker platforms.
Central Banks, Super Banks, Large commercial and multinational companies, hedge fund companies, retail ECN, and retail traders are the key participants of the forex market.
- Forex market is open 24 hours a day and 5 days a week except the weekends.
When to trade forex?
Currency traders can trade round the clock in the forex market as it opens for 24 hours and 5 days. However, on weekends and major holidays, the market remains closed. So you can trade anytime and from anywhere in the market except on these days.
There are four Forex sessions: London, New York, Sydney, and Tokyo. Each opens for different hours in the day, and at every point in time, at least one session remains open, making Forex a 24-hour market. Traders can trade in any of these sessions.
The right time to start Forex day trading for dummies depends on the currency pair and strategy. Traders trading in Asian pairs can consider Tokyo and Sydney sessions, while traders trading in USD and European currencies can consider New York and London sessions. When it comes to overall forex trading, the overlapping timing of the US and European sessions offers the best market conditions.
Who trades in forex?
Large, medium, and small, all types of participants participate in the currency exchange activities. Central Banks, including the Federal Reserve, European Union, Bank of Japan and all others, engage in high-volume forex transactions. Then comes Super or Major Banks like Deutsche Bank, Bank of America, JP Morgan, HSBC, etc.
Large commercial and multinational companies, hedge fund companies, and retail ECN also engage in foreign exchange activities to hedge the risk against currency price fluctuations. And then comes retail traders and speculators who make a profit by trading in currencies.
Where to trade forex?
In our guide to Forex trading explained for dummies, we have discussed almost every thing. However, the most important question of where to trade forex is still left.
A trader can buy or sell currencies on different regional and international forex broker platforms. A forex broker acts as a link between the market and traders. Such platforms provide traders with facilities like trading instruments, leverage, risk management, automated tools, tight spreads, educational resources, multiple order and account types, and many others.
In addition, you also need a trading platform like MetaTrader 4, MetaTrader 5, and Web Trader, where you can get access to the live market and execute the trades.
Bottom Line
We have discussed all the crucial concepts to make you understand forex trading for dummies. However, forex is huge, and an in-depth study of different market elements is required before starting trading. You can explore our forex sections to have a detailed study of the market and how it works.
For practical understanding, Market Investopedia also hosts educational webinars and live trading classes. So, you can even seek the help of our experts to get actionable strategies to succeed in the market.