Forex (short for ‘foreign exchange’) trading is becoming very popular, as it allows traders to buy and sell various currencies online. If you’ve gone on a holiday to another country, chances are you’ve dabbled in a little Forex trading when you exchanged money.
But how exactly, you mask ask? Let’s say you’re travelling to America, and you want to exchange your naira for dollars. However, you don’t end up spending all of it, and when you exchange your remaining dollars back to naira, you receive more naira this time around due to a different exchange rate. Forex trading also functions in this manner because you’ll hold on to money and trade it to make a profit, except most traders deal with larger amounts of money and a much bigger market.
With this in mind, let’s take a closer look at why and how you should get started in this exciting market.
Why is Forex Trading a Good Idea?
The Forex market is the largest of its kind, with a trading volume of 6.6 trillion USD per day — greater than all the stock markets in the world, combined. And that’s because there are plenty of benefits to trading in Forex. For one, FXCM highlights the convenience and accessibility of Forex trading as its key strengths, given that not only is the market open 24 hours a day, but a prospective investor can also begin with just 50 USD (18,100 NGN) in their pocket. This makes it significantly easier to trade, with many investors starting as part-time traders during their free time from work.
How to Start Trading Forex
Of course, actually trading Forex is more complex than exchanging your money before and after a trip abroad, as it’s an electronic network comprised of different banks, brokers, and major institutions. This is why it’s important to familiarise yourself with the Forex world, instead of simply opening your own account. Here are the key things you should do before you start trading international currencies.
1. Learn the Basics of Forex
When trading in the Forex market, transactions always entail the price quote of buying and selling two currencies, called a ‘currency pair’. With a currency pair, the value of one currency is quoted against another.
Additionally, it’s important to have a basic knowledge of Forex jargon so that you can enter and navigate the market with ease. One of the most common terms is ‘pip’, which Investopedia points out is an acronym for ‘point in percentage’ — the smallest unit of measurement for a currency’s value against another. Other key terms are ‘spread’ or the difference in the price at which you can buy and sell a certain currency; ‘going short’ for someone selling; and ‘going long’ referring to someone buying.
2. Practice Analysing Forex Charts
On that note, every Forex trader has to know how to analyse charts. The Forex market is highly competitive and currency rates change quickly, so you’ll need to grasp how the three different charts work — namely, the line chart, the bar chart, and the candlestick chart — to see if you’ve made a profit or not.
Moreover, as we shared in ‘A Guide to Multiple Time Frame Analysis in Forex’, you should also pay attention to the time frames in the charts, since they guide you in increasing the number of profitable transactions and also decreasing the risks made in exchange.
3. Find a Reliable Broker
Forex is fairly new and the array of terms and charts can be overwhelming for many, especially beginners. This is where brokers come in — The Balance shares that they serve as intermediaries between you and the interbank system. Not only are they well-versed in the Forex world, but they also help individual traders buy and sell foreign currencies. Be careful when choosing a broker, as you’ll want someone whose commission isn’t too high, and with strict regulation to help secure your funds.