Every day, an average of $6.6 trillion is traded on the foreign exchange (FX or forex) market, making it one of the most popular and accessible investments available to investors and traders. Most participants in this market include investment managers, multi-national companies, banks, and hedge funds. Retail traders, on the other hand, only make up 5.5% of the market.
The forex trading market may sound intimidating at first, but all you need is a little patience and money to become a successful trader. But before you jump in and start trading, you need to know what you’re getting into.
The Forex Market
The foreign exchange market is where investors and traders alike trade currencies. We’ve all heard the saying, “Money makes the world go ’round.” And whether we realize it or not, it truly does play a big role in our society. Without currency, countries would not be able to conduct foreign trade or business properly. For instance, if you traveled to another country with a different currency from yours, you would have to exchange your currency for that country’s local currency based on that day’s exchange rate.
However, a central market for foreign exchange doesn’t exist. Instead, trading is done over-the-counter (OTC), meaning that trading is done digitally, making it possible for people to trade from anywhere in the world. Another unique aspect about foreign exchange trading is that the market is open 24 hours a day from Sunday, at 5 PM EST to Friday, at 4 PM EST.
This happens because trades are made in major financial centers across the globe, like Tokyo, Zurich, London, Hong Kong, New York, Paris, Singapore, Sydney, and Frankfurt. The time zones of these locations differ, making closing times in one region overlap with the opening times of another region.
COVID-19’s Effect on Forex Trading
The pandemic has hurt all sectors of the economy, but the forex trade is one exception. The market has even seen a 300% increase in trading volume during the pandemic. This increase is due to many factors, including the increased demand for the dollar, unemployment, and the pandemic. Despite forex trading’s slow volatility in the past, these factors have cut off the relationship between bonds and volatility in the market, allowing yields to decline and volatility to increase.
All these factors are accompanied by developments and improvements made in the market for years. 2021 is the perfect time to step foot into forex trading.
What You Should Know Before Starting
Before taking the leap into the market, there are a few things you need to keep in mind.
Understand What You’re Trading
The first step to trading in the foreign exchange market is to know what you’re trading. Don’t make the mistake of using high leverage and trading randomly. Taking the time to understand the currencies you’re trading and learn how to read currency pairs. Doing this helps you know what affects them, allowing you to save time and money. For instance, a certain currency may be rising after a steep decline, which may influence new traders to “catch the bottom.” If you don’t do your research, you may not notice that the currency was falling due to bad employment reports.
If you’re starting, make it easier on yourself and pick only a few currency pairs. You’ll have an easier time keeping up with economic news, and you’ll learn the ropes better.
Prepare for Initial Losses
Market movements and chart patterns take some getting used to, which may lead to some initial losses. However, it’s part of the trading journey; even expert traders lose their investments now and then. The best way to make up for these losses is to turn them into a learning experience to improve your trading strategies. It also helps to develop strategies that involve less risk for every trade so you can minimize your losses.
Choose the Right Broker
Think of brokers as mentors who can help you learn the ropes of the forex trading world. Your choice of broker is the key to helping you understand the market. This is especially true for new traders, who often face a lot of challenges in the beginning. Brokers help you build your knowledge of the market and avoid any major accidents that could lead to big losses. This is usually done by making bids on your behalf and teaching you how to trade.
Use Simple Strategies
When you’re a new trader, you may be tempted to jump in and try different strategies in an attempt to turn a profit. However, overcomplicating the process with complex strategies may lead to potential losses that are otherwise avoidable. Stick with simple strategies that you’re comfortable with and move on to more complex ones when you start getting the hang of things.
Practice
If you’re not completely comfortable investing a certain amount of money into trading yet, try creating a practice account and test out your trading skills there. FOREX.com offers a risk-free practice account that doesn’t require any capital.
Keep Your Emotions in Check
More often than not, market conditions won’t go your way. It’s important to remember that all decisions you make on the trading market need to be made objectively. Allowing your emotions to cloud your judgment could end up in potential losses or even missed opportunities. Use risk management tools and keep an eye on technical indicators to avoid any disastrous trade decisions.
Forex trading is an accessible and popular way to invest your money. As long as you take the time to do your research, make objective decisions, and develop working strategies, you’ll climb up the trading ladder in no time.
