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How to break into forex trading

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The foreign exchange market, also known as forex or simply ‘’FX’’, is the largest investment market in the world, right after the credit market. The forex market oversees everything related to the currency market, from the exchange, buying and selling of said currencies.

While the forex market was quite inaccessible to outsiders in the past, being reserved solely to big financial institutions, hedge funds and banks, the advent of the internet has brought along with it tons of everyday people who want to try their luck. If you want to be one of them, this article is for you. Here is how to break into the forex trading.

The big eight

The first thing you need to know before initiating your first trade is the hierarchy of the currencies. The eight major currencies (meaning the ones that are the most commonly traded) are colloquially called ‘’The Big Eight’’. Here is the list of the big players of the forex market, in no particular order:

  • Australian/New Zealand Dollar (AUD/NZD).
  • S Dollar (USD)
  • British Pound (GBP)
  • Japanese yen (JPY)
  • Swiss Franc (CHF)
  • Canadian Dollar (CAD)
  • European Euro (EUR)

Furthermore, it is worth mentioning that currencies are always traded in pairs. There are 18 different currency pairs that are used by most traders, and they include USD/CAD, USD/CHF, AUD/USD, GBP/USD, and USD/JPY.

Yield drives return

One of the most important rule of forex trading is that during every transaction, you are essentially purchasing one currency and selling another. And since very currency in the world has an interest rate set by the central bank of its country, traders must pay the interest on the currency that they have sold. On the upside, traders, in turn, earn interest on the currency they have just bought in.

Learning how spread works can bring a lot of money

Another thing that all rookie traders must remember is the concept of spread. In the broadest sense possible, spread describes the difference between the price at which a currency is listed for purchase, and the price at which it can be sold. The spread is calculated in what forex market experts call ‘’pips’’. A pip or percentage in point is the smallest unit of measurement in forex trading.  If you have wondered how brokers make money since they do not charge commission, this is how.

Technical Vs. fundamental analysis

While every trader is different and there is no definitive best trading style, a large majority of successful traders use a combination of both technical and fundamental analysis. Technical analysis is by far the most popular – it is mainly focused on cold numbers and statistics, with the use of common methodologies such as pivot points, the Elliot Waves and the Fibonacci sequence.

But as ideal as technical analysis might be, skillful traders will always be aware of the broader fundamental picture before launching a trade. We are talking, of course, about fundamental analysis. This technique is focused less on the market itself and more on the external factors that may or not drive it into a particular direction.

Fundamental indicators include retail sales, the consumer price index (or CPI, in short), durable goods, unemployment rates, inflation and so on and so forth. These indicators, in turn, can be triggered by major political events (elections, political crisis) and policy changes. Regardless of your preference, it is always best to give equal attention to both methodologies and adapt as the situation changes.

Tools are your best friends

While everybody can make some very large profits when trading forex, the key to achieving a sustainable revenue and protecting your existing capital is making use of some of the many different trading tools. And no, you do not have to be a mathematical genius. There are tools that handle very specific tasks, while others, such as the MetaTrader4, function essentially as platforms that integrate a wide variety of tools and indicators. The right tool at the right time can mean the difference between winning a meager sum, or spotting a trend and landing a huge profit.

Use leverage to your advantage

One of the main reasons why the forex market is much more accessible than the stocks market is because traders can get a much higher leverage. If you are wondering what leverage is, it is a process that involves borrowing a certain amount of money needed to invest in a venture.

When it comes to forex, the leverage money is usually borrowed from a broker. Leverage is a vital component of the forex market – without it, nobody would be making any money due to the fact that price deviations (which are the sources of profit) are mathematically insignificant. Another way to describe leverage is as the ratio between the total capital available to actual capital – which will determine the amount of money a broker is willing to lend a trader. The standard ratio is 100:1, meaning the broker will lend $100 for every $1 of capital.

Always take trends into account

A forex trend describes a tendency of the prices to move in one particular direction in a given period of time. Trends can take all manners of shapes and forms and can be long term, short term, upward, downward and even stationary. Whenever a trader invests in the forex market, their success is highly dependant on their ability to identify a trend and position themselves profitability, by either betting for or against the trend – going long or short, just like in the stocks market.

Conclusion

This concludes our article about the basics of forex. While there are many things that we did not have the time nor the space to cover – the most important thing being indicators, but you can check this 101 article on trading signals for more information –   these simple concepts are enough to kick-start your first forex venture. Remember to do your research, trade with caution, and soon enough you will master the market.

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