What do you get when you combine the words foreign currency and the word exchange? That’s right — Forex. In today’s article, we are getting into the details of Forex trading for beginners.
Foreign exchange is the method used when one wants to change their currency to the local currency for trading, commercial activities, tourism, or other purposes that are made convenient when one has the correct type of money.
In a recent report by the Bank for International Settlement, the Forex market is the biggest, in terms of volume, averaging more than $5 trillion every day.
The Forex market is completely decentralized and its primary purposes are to facilitate the buying and selling of different currencies. The market itself exists as a network of banks, with no central control. Everything is done over-the-counter.
So, what is Forex trading and how does it work? Let’s find out.
What Should Forex Trading for Beginners Entail?
The size of the market is big enough to have room for new traders with a wide variety of currencies to trade. The levels of volatility shift and change wildly in some cases and barely move in others, creating enough chances to make trades every day.
The market is open 24 hours a day during the five-day week. Even though there are trading times when the market peaks and other times when it is slow, you can gain access by scheduling your time properly.
We are going to answer the questions “what is trading?” and “what are Forex trading strategies for beginners” without leaving any of the basics out. Let’s dive in.
What Is Forex Trading And What’s the Market Like?
The Forex market is where currency trading takes place. To make this simpler to understand, know that every time foreign currency is involved, the market is involved. If you live in South Africa, for example, and you order a pair of safari boots from Kenya, either you or the company that is selling you these shoes has to pay the manufacturer in Kenyan Shillings.
So, the company you are buying the shoes from will have to exchange their Rand into Shillings. The same situation applies if you choose to travel to another country. If you went to Kenya, to see the scenery and whatnot, you cannot pay people using the Rand.
Before you start touring, you will need to exchange the South African Rand you have for its equivalent in shillings.
To explain further, when we say that trading takes place OTC (over-the-counter), we mean that all the transactions are done over computer networks between traders all over the world. There is no central exchange controlling this market.
There are several major trading centers across the globe. They open at different times because they exist in different time zones, allowing you to trade on a schedule you’re most comfortable with.
There are trading sessions in financial centers like Sydney, Paris, Singapore, Hong Kong, Frankfurt, Zurich, Tokyo, New York, and London.
So, if the trading day ends in the U.S., it begins afresh in other markets like Tokyo or Hong Kong.
At any time of the day, the market is in full swing making trading Forex for beginners easier.
Currency Trading For Dummies: A Historical Outlook
The stock market has been in existence for centuries. It was fully developed so long ago and the same tenets that saw it take off, are the same that drive it today. In Forex trading for beginners, it is imperative to understand that the Forex market is not that old.
Yes, people have been exchanging currency (or what stood in for currency back then) but the modern Forex market started after the Bretton Woods agreement in 1971.
The major currencies of the world became free-floating and could be traded against each other. The values of each currency vary because of variations in the state or country of origin. Because of the value variations, foreign exchanges became necessary.
Commercial and investment banks do most of the trading on behalf of their customers or clients. However, there are opportunities for a trader to speculate opportunities where one currency is traded against another.
The Three Main Methods of Trading Forex
Everyone in the Forex market can use one of these three ways to trade Forex:
- The spot markets
- The forwards market
- The futures market
The spot market is the biggest because here, you are trading the underlying real asset. The forwards and futures markets are only based on a real asset.
However, this has not always been the case, the forwards and futures market used to be the most widely used because it was available to individuals for a longer time.
However, electronic trading came up and brokers emerged from this market. Since then, the spot market has seen a surge in activity and is now bigger than the futures market as the preferred way to trade for market participants.
If you are reading about trading Forex for beginners, you are most likely learning about the spot markets.
The futures and forwards markets are usually used by companies that want to hedge their risks out to a specific future date. Forex trading for beginners involves something much tamer, in the form of the spot market.
Currency Trading for Dummies (A.K.A. The Spot Market)
The spot market is also where currencies are bought and sold, using current prices. These prices arise from the demand and supply in the present. The prices are also a reflection of many variables used in the analysis.
They can reflect economic power, interest rates, market sentiment, political issues, and future projections.
When a deal is done, we call that a spot deal. The transaction is bilateral where one party delivers the currency agreed upon, ensuring that it amounts to the counterparty and gets a specified amount of another currency at an agreed-upon rate.
When the position is closed, the settlement is done on a cash basis.
Even though we specified that the transactions done in the spot market are in the present. You may be wondering ‘what is Forex trading’s timeline before I get paid?’ The trades may take two days for a settlement to be reached. They do not happen as instantly as you may imagine.
The Forwards and Futures Markets
The forwards and futures markets do not deal with the actual currency. Instead, they draft contracts that represent claims to a specific type of currency, a specific price per unit, and a date (in the future) when the contract is settled.
The forwards market makes use of contracts that are bought or sold on an OTC basis between two parties. The parties are mandated to determine the terms of the agreement between them.
In the futures market, the contracts are purchased or sold with the emphasis placed on a standard size and a settlement data focusing on public commodities markets like the CME (Chicago Mercantile Exchange).
A futures contract is characterized by what kind of information you will find on it. They deal in specifics, including the number of units involved in the trade, the delivery and settlement dates, the minimum price increments that can’t be tweaked.
Both futures and forwards contracts are binding and are settled for cash at the exchange involved when they reach their expiry date. However, before the expiry date, the contracts can be sold or bought.
Understanding Forex strategies for beginners is a great way to get into the market.
Using the forwards and futures markets, one can hedge against risk arising from currency trading.
Speculators take part in the future and forwards too. However, this space is mostly for massive international corporations that want to hedge against any future rate fluctuations that are too volatile.
NOTE: The Forex market may be referred to in different ways. Knowing them will make it easy for you to avoid confusion. Some terms include FX, Forex, foreign exchange market, or currency market.
Forex Trading for Beginners in Hedging
Companies that do business in multiple countries are at risk, especially if fluctuations are serious.
Forex is a way of hedging the currency risk by fixing the rate at which the transaction will be completed, regardless of what happens between the time the trade is initiated and the time it is finally completed.
The way they do this is by buying or selling currencies in the forward or swap markets, thus locking in a rate at which the transaction will be completed.
Hedging of this type can be done using the currency futures market. The advantage for the participants is that the contracts operate using standards set and cleared by a central authority overseeing the transaction.
Forex for Beginners in Speculation
In the market, the currencies undergo volatility every day because of factors from each currency’s country of origin and other international events. Some factors include international trade, the economy, tourism, geopolitics, the demand for currencies, and interest rates, just to mention a few.
The opportunity for Forex trading beginners is that they can profit from these changes. In simpler terms, buy at a low price and sell when the price goes up.
So, what is trading Forex all about, in this regard?
The whole premise of Forex forecasting or predictions is built around the inevitable fluctuations experienced here. Because of the paired nature of currency trading, when you make the forecast that one currency will weaken, the assumption is that the other one in the pair will strengthen.
Let’s say you want to trade the EUR/USD. After analysis, it emerges that the US will increase its interest rates, leading to an increase in the demand for USD. The EUR/USD exchange rate will fall, because you need fewer USD to buy the EUR.
If your prediction is correct and things play out as expected, you will have shorted the EUR and went long the USD. From this change in value, you will gain profits.
Here is where you need to learn styles and be able to answer questions like “what is day trading?”.
Currency and the Asset Classes It Falls Into
Currency as an asset class has two unique features:
- A trade can earn the interest rate differential between two currencies OR
- A trade can profit from the changes caused by currency volatility
Simply put, a trader can gain profits from the difference between the two interest rates of two different economies by purchasing the currency with the higher interest rate and subsequently shorting the one with a lower interest rate.
Find out the best Forex trading books for beginners to learn the best thing you can do to advance your foray into the world of Forex trading.
How Does Forex Trading for Beginners Happen?
You might be wondering, ‘how is it that I, a regular person, can trade in the world’s largest and most complex market?’
Well, before the internet came along and connected everything to everything, it would have been difficult, if not impossible.
Most of the traders were large multinational conglomerates, hedge funds, corporations, or very wealthy individuals.
Back then, you needed a ton of capital. With the emergence of the internet, retail Forex brokers formed a secondary market, where you can get easy access to the Forex markets.
Because low net worth individuals do not have a lot of money to stake on a prediction they make, the brokers offer leveraged accounts where you can use a small amount of money to trade more than you have.
Forex Trading for Beginners in South Africa
Trading currencies is full of risk, because of the many variables involved and the complexity of analysis. The interbank market does not have standardized regulations that cut across the board. In fact, in some countries, there is absolutely no regulation whatsoever.
Some places are better off. For example, Forex trading for beginners in South Africa, Europe, the U.S., Australia, China, and a few other places, is regulated.
The market itself comprises banks that provide offers and bids for certain currencies. The mechanism driving this is all about supply and demand. Because of the massive flows in this ecosystem, rogue traders can easily influence the prices.
A system like this helps create an environment with transparency so people do not feel swindled.
Most of the time, the retail part of Forex is where problems lie. The unregulated brokers and dealers can re-quote prices and even trade against you, the customer. Depending on where you live, there may be some safeguards or not. It is all very subjective and inconsistent around the world.
For that reason, we encourage prospecting traders to make use of information available freely on the internet to check out their broker and ensure that there are sufficient protections to ensure that you do not get cheated out of your money.
Read more about How to Trade Forex with $100 here.
There are also Forex trading videos for beginners that highlight the pitfalls through awareness and education.
Understanding that there are differences will enable you to know which broker to choose. Some reviews detail everything including the protections and fees you would pay. This way, you know even before you start, which broker is the best and most well-regulated.
The Pros and Cons of Trading Forex
- The Forex markets have a large volume of currency traded daily, offering high levels of liquidity. A trader can quickly open and close a position in a matter of seconds for a small spread, yielding profit.
- The market is traded 24/5, beginning with Australia and ending with the New York session.
- It is very accessible to individuals. You just need the platform, a good broker, some capital, and a laptop.
- You can use leverage to trade larger amounts of money that you have. Consult Forex trading tutorial for beginners to understand how everything works.
- Some banks and brokers allow very high leverages, allowing traders with small amounts of money to trade more. You could become insolvent very suddenly.
- To trade successfully and be consistently profitable, requires trading knowledge and experience that takes a long time to master.
In Conclusion: Forex Trading for Beginners in India
Forex trading may be risky for beginners but here’s the thing; you can make it if you focus on a few simple steps. Start with the education part to make sure that you know everything in theory first.
To understand the answers to a question like ‘what is Forex trading?’ you will need Forex education. It is the stepping stone.
Then you can proceed to check out the demo accounts offered to simulate the experience and see how your strategy and style work in the real world.
With the advent of social trading, you can deal with the steep learning curve that exists in this market. Understanding the market first is the best chance you have of succeeding in it. Forex trading for beginners in South Africa will follow the same process as Forex trading for beginners in India. It is universal, in both scope and methodology.