What is Forex Trading? Important need-to-know before you begin
What is forex trading? Why do individuals aspire to trade forex?
Updated on 20 June 2018
Forex trading is an activity that involves buying and selling foreign currencies also known as foreign exchange, forex or FX. Forex traders buy a currency and sell another concurrently. The objective of these trades is to close the position at a profit. The activity has a short term horizon as opposed to the long term investing in foreign currency. Because of the short term nature of forex trading, it is deemed by some as a form of speculation. Proponents of forex trading point out that there are high probability techniques and these techniques make forex trading highly profitable.
Forex trading is not a managed product. It is a ‘do-it-yourself’ activity by forex traders.
What does forex trading involve?
Buying and selling is done on a trading platform over the Internet. Trading platforms are provided by forex brokers. Buying and selling takes advantage of the daily price movement of currencies to make quick gains. To amplify gains, forex traders make use of forex leverage. Products that allow forex traders to trade with the use of leverage include Contracts For Differences or CFDs, futures and options. Because forex traders are driven by short term profit, they do not require contracts to be delivered but place emphasis on quick turn-around on the use of trading margin. This makes CFDs very popular for forex trading among individuals.
Forex trading takes these forms
Forex trading can be done on a personal device through the Internet. Mobile devices are popular as they allow full access to the trading platform. Trading activity can last as short as minutes in a form of trading called scalping. Longer durations are also possible as some traders hold a position of hours, days or weeks. It is not important for forex traders to differentiate between the various approaches to forex trading. Successful traders each follow a personalised plan that looks at various factors such as expectation of returns, risk tolerance, amount of trading capital, lifestyle and the trading instrument being used. It is essential for individuals to develop their own plans.
There are two general ways to approach forex trading: discretionary trading and system trading.
Discretionary forex trading
Discretionary trading is a decision-based trading approach where traders decide when to open and close a position as well as execute the order manually. It requires judgement from the individual. Many forex traders make trading decisions based on technical analysis although decision could also be made based on other cues. Technical analysis gives the discretionary trader a view of where the market is going based on indicators or market levels. Discretionary trading retains a high level of control for the trader. To succeed at discretionary trading, traders require a view of of the market as well as experience.
Forex system trading
System trading has many names such as mechanical trading, automated trading and algo-trading. The individual trader who adopts system trading employs software or pieces of code that are installed in other software such as MT4. These software are sometimes called trading robots or expert advisors. There are three key features of system trading:
- The trader delegates trading decisions to the expert advisors. An expert advisor determines when to open or close the trade and executes it on behalf of the trader as well.
- The second feature of system trading is that expert advisor does not act randomly. Decisions are rule based.
- New traders without the ability to determine market direction are adopting system trading. While there may be highly successful expert advisors, new traders are also led to believe that all expert advisors work.
TerraSeeds has developed its own suite of forex robots to perform automated trading. Goto product showcase at OnlineForexMaster.com. Discretionary traders can also find proprietary indicators to suit niche requirements.
What are the benefits of forex trading?
Forex trading is a very good source of alternative income. (See ‘Mother, Entrepreneur, Trader And A Stress Free Income‘) It enjoys the following benefits that make it very easy to adopt for individuals:
- Very little trading capital required to start since cost of trading is low and very little start-up deposit is required
- Market access is available around the clock since the global forex market operates 24-hours a day
- Trading platforms are virtually free
- Traders can use any device that grants the user Internet access to log in and trade
Besides trading for an alternative income, forex trading can be a form of diversification away from other investments such as stocks and bonds.
What basic knowledge should I know before forex trading?
This is the best answer in our opinion, original article in Quora:
- Find out how the forex market works.
- Learn technical analysis.
- Get a trading platform and find out how to operate.
- Find out risk involved in trading and work out your own risk management.
- Combine steps 1–4 above and apply to a demo trading environment.
- Continue step number 5 until you feel ready to take on live trading. Once you are ready, go to live trading but start your trading at only 5% positive size of what you expect to do. This is because live trading can be frightening; many individuals fail to overcome their fear while others make fatal mistakes that wipe out their trading capital when they take their baby steps.
- If you go past step 6, upsize in small increments while constantly checking your performance, verifying that you have gotten steps 1–4 correctly.
- Constantly check your psychology. If you reach a point you are not sleeping peacefully at night or if you are nervous, cranky, angry etc. or if you are glued to your terminal or rejecting social contact, you may either over-trading or your psychology may be in bad shape.
If you can get steps 1–8 correctly you should be fine. Give it time, don’t be surprised that this process (especially step 8) could take many months, even years for you to become totally comfortable.
You want to make money in a sustainable way so that it becomes a career/lifestyle, not a-flash-in-the-pan-brilliance built on shaky foundation.
Alternative look up this article Survival Guide To Currency Trading with10 essential to-dos.
There are many paths to success. The requirements and challenges of each is different and may or may not suit/work for you. We recommend trying a number until you find one that fits. At OnlineForexMaster.com, take up the Advance Forex Course which is free and suitable for new traders or traders with some experience.
Forex trading scams
Forex trading is growing in popularity among individuals. This success has also led to the emergence of forex trading scams. Scams are likely to take the following forms:
- Unregulated brokers or bucket shops entice traders to deposit monies into trading accounts. However the bucket shops disappear after collecting money leaving the trader with no remedy. This type of scam by bucket shops are common in countries with weak financial regulation and little or no investor education.
- Internet vendors that tout super forex trading robots that can make 100% returns.
- Education providers that promise methods to trade the market with instant success or methods that have no risk.
Important to note:
There is no defence to forex trading scams except self awareness. If it is too good to be true, then there might be a scam involved. Investors should take note:
- Trade with regulated brokers (why is regulation for brokers important?). To check, visit the website of the regulator or look for a contact to call.
- There is no 100% product in the market. If you have been touted one, make sure that you pay a price that you can afford to lose and be prepared to lose it.
Law and regulation
Forex is regulated in many countries. Notable regulatory bodies are:
- Australian Securities and Investments Commission (ASIC)
- Monetary Authority of Singapore (MAS)
- Financial Services Agency of Japan (FSA)
- National Futures Association of USA (NFA)
Regulation is different from country to country. MAS-regulated forex brokers in Singapore.