Forex trading, simply put, is the trading of a pair of currencies or foreign exchange. Over the passage of time, currency investment has become an indispensable part of conventional financial transactions all over the world. As the economics of different countries grow or deteriorate due to political, social and financial reasons, traders who can successfully predict such downfalls and value increases can gain enormous profits from the ensuing transactions.
The Forex market, because of its lucrative prospects has quickly become the largest in the world as evidenced by the daily average turnover of $4 trillion in April 2010 which was a whopping increase of 20 percent since 2007. The trade in Forex has never been restricted to a particular category of people and so professional traders, amateur traders and retail traders all believe Forex to be a solid part of their investment portfolio.
An Introduction to Currency Trading
Transaction and trading in currencies basically involves two parties in which one party buys a quantity of a foreign currency from another party and pays for it using a different currency. The market for Forex is largely decentralized and global in which there are financial hubs all over the world where various types of currencies are bought and sold by different buyers and sellers around the clock.
In fact, the effect of these transactions is so huge on a particular country that this market for foreign exchange is what eventually determines how valuable one country’s currency is relative to another currency.
In addition to reaping great financial benefits, Forex trade helps business and professional individuals by converting one currency into another and allowing them to conduct their businesses and investments. For instance, a business located and operated in the United Kingdom wishes to import some goods from the USA. The business will pay the exporter in US dollars because they have access to the foreign currency market and they can instantly present pounds and get the required dollars in exchange.
Another very important role played in the global economies by the Forex market is that of speculation, which helps to decrease the volatility of exchange rates hence, making the markets more liquid.
Understanding the Basics of Forex Trading
The central role played in the process of the Forex markets is that of a specific pair of currencies. Individuals, retail investors and other traders speculate regarding the future rate of this pair of currencies. If a trader thinks that the price of the currencies will go up in the future, they will buy them something which is also known as ‘going long’. However, if the trader believes that the price of the currencies will go down, they will sell the currencies or ‘go short’.
There are many techniques used by the participants in a currency market and they select these strategies based on their own personal level of comfort and their investment goals.
Many traders indulge in ‘Scalping’, which is spread out over a very short time period, and traders make their transactions very quickly solely for making profits.
There are also many programs known as robot trading systems which direct the trader when to enter the market and exactly when to sell the currencies and exit the market.
Directional trading is another strategy that is based on price action in which the trader analyzes currency prices that are free of indicators. This method helps the trader to use only the core information regarding the market price in order to make their decisions.
Types of Forex Trading Accounts
One unique characteristic of foreign exchange markets is that by setting up one’s own account, individuals and small-time traders can compete with large financial institutions and hedge funds. Choosing the right account means finding out what your tolerance levels for risk are, the amount of time you are willing to put trading on the market and the amount of capital you have for investment.
Mini-Trading Account: These accounts are especially tailored to meet the needs of cautious and hesitant beginner traders who wish to have a lot of flexibility and low risk. In fact, many experienced traders also like to have mini accounts where they can test new trading strategies without putting too much money at risk. One can also diversify their risk with this account by purchasing multiple mini-lots. However, because of the low risk, there is also a low return attached with mini accounts.
Standard Trading Account: This is the most common and conventional type of Forex trading account that requires some amount of capital to trade full lots. Many Forex brokers offer live accounts as well as many perks including quality service and convenience in transacting. Since more capital is being put up in the market, the possible rewards are also higher in this type of account. At the same time, one can also lose a lot of money if the speculation of the trader goes bad which is why experienced traders that have comfortable funding prefer this Forex account.
Managed Trading Account: This is perhaps the most professional and expensive account type because the trader is eligible to put money in this account but the decisions to buy or sell the currency lies with the manager of the account. Within this category, there are pooled funds in which multiple investors with the same risk tolerance and investment goals put their money and the rewards and losses are shared equally among them. The second sub-category is that of individual account in which the money of the single investor is handled by the manager.
Before you open a new Forex trading account, it is very important to have a reliable broker that can guide you and make sure that your live trading is done safely and securely. We recommend the following brokers for which you can read our reviews here: