Stocks have always been the big daddy of trading and investing, but recently, crypto has taken the crown. However, forex trading has been around for quite a while now and is viewed by many as a great investment choice for both new and seasoned investors.
However, many may ask, what is forex? How do I buy forex and begin to trade it? This post will detail everything you need to so you can start to trade forex today.
What is Forex?
Forex stands for foreign exchange, or in more simple terms, currency. A forex market is a place where you can buy and sell dozens of different foreign currencies. Buying and selling forex is actually trading currencies and making a profit using the exchange rate.
Unlike stocks or crypto, you aren’t buying one thing and leaving it to make money. In forex, you invest in currency pairs, something that will be discussed later.
How Do You Make a Profit?
The biggest question you may have is how do you make money doing this? Profit is made through the differences in the exchange rate of two currencies. For example, you have $20 and want to buy pounds.
$20 will get you £25; you buy the pounds and wait for them to strengthen. Once your £25 is worth $23, for instance, you sell them back for dollars. You now have your initial $20 back, as well as $3 in profit.
Once you have set up your brokerage account, the next thing you need to do is practice. Almost every broker will offer a dummy account with fake money that will allow you to get a feel for trading, how to do it, etc. A great way for novice traders to get a sense of how the world of Forex trading works is to create a dummy account with a broker. Such a practice account enables users to familiarize themselves with various features and trading techniques using virtual funds. Before collaborating with brokers, you must research their reliability, for example, you can research reviews about XM broker to learn more about their brokers and services.
These accounts are also very beneficial when it comes to teaching new traders how to spot patterns, as these patterns are what will help you make money.
As mentioned already, forex trading works differently from buying stocks and crypto. When you invest, you invest in a currency pair; this means you need to be cognizant of two separate currencies and their performance.
The strength or weakness of both currencies is important when trading, and as the trader, you need to be understanding the forex, research, and keep up with both.
Once you understand the forex market and you’re ready to start investing, the next thing you need to do is to choose a trading strategy. There are multiple strategies you can use, but for beginners, scalp trading and day trading are the easiest to understand and grasp.
Scalping is relatively easy to learn but takes up a lot of time. Scalp traders will sell positions when they increase by 2 or 3%, making a tiny profit on each trade. However, the profit adds up if you are doing this constantly throughout the day.
Day trading is precisely what you think it is; day traders will hold positions for a few hours at a time and will look for bigger swings and profits. Day trading is perfect for those who want to trade regularly but don’t have the time needed to the scalp.
A significant aspect of trading that many newbies get wrong is their inability to control their emotions. Trading is a game of logic and problem-solving, not one of emotion and passion. Those who think logically and make “smart” trading decisions will be successful more often than not.
You must realize early on that there will be wins and also hits to your capital constantly, and it is part of trading. Being able to react to these swings in a logical fashion is not only how you get your money back but also how you make more.
The last thing you need to understand is leverage. Unlike stocks and other trading methods, most forex brokers will offer large leverage amounts. Since forex profits can be so small, leverage allows those with small budgets to make larger trades and, therefore, potentially larger profits.
If a broker offers 20x leverage, and you have $100 to invest with, your $100 now becomes $2000, and you can invest with that. As mentioned, forex profits are smaller on an individual level but much bigger as your investment increases.
A 3% return on $1 is a couple of cents, but a 3% return on $1000 is a lot of money; this is how leverage helps those with small budgets.