How To Make Money in Forex Trading?
Forex or FX trading is a stylised abbreviation for foreign exchange trading. Forex trading implies conversion of one currency to another with the objective of making forex trading profit. If you have ever travelled abroad, you would have converted the Indian rupee into the currency of your travel destination country, and, therefore, made a forex transaction. However, to enter the foreign exchange market and engage in trading for forex earning is an entirely different ball game.
To be able to trade in the foreign exchange market, you need to be aware of certain basics which will come in handy to enable forex earnings.
- Price Quotes: Usually a commodity is priced based on its utility value. However, in currencies there is no measure of its absolute value. The value of a currency is always relative to the currency it is compared against. Hence, in forex trading, the US dollar is used as the base currency for determining the value of other foreign currencies. Say, in terms of Chinese yuan and US dollar, the price quote could look like 0.1547 CNY/USD. Currency quotes are always listed up to four decimal places, and it implies that you would require 0.1547 US dollars to buy one Chinese yuan. Decoding the price quotes is an essential point to remember.
- Understanding Arbitrage: In simple words, it implies exploitation of price differences in different markets, and capitalising on this difference to make forex trading profit. While the concept sounds inviting, you must remember that forex markets use state-of-the-art trading systems which leave little chance for imperfect price imbalances across markets. The corrections are almost instantaneous; hence the arbitrage technique might be rendered futile at times.
- Choosing the right trading platform, broker: When you look to engage in the forex market, choosing an appropriate trading platform is absolutely necessary. Some of the factors that must be considered while choosing a trading platform are:
- User-friendly and easy to access
- Less commission obligations
- Ability to copy trade of other users
- Access to multiple currency pairs
- Great research materials
- Fast bank transfer deposits
- Heavily regulated
While it is not mandatory to engage with a broker to trade in the forex market, considering the complexities, if you are a beginner, it is highly recommended that you tip toe with the help of a licensed broker who has the experience in forex trading.
Bring the Money Home
While understanding the basics of the forex market is prerequisite to begin trading, the real challenge remains to crack the market and make forex trading profits.
- Currency Pair Trading: When you are transacting in the forex markets, you are essentially speculating and putting in trades for the values of currency pairs. One of the most traded pairs in the forex markets remains EUR/USD which implies that euro is your base currency against which the US dollar becomes the quote currency. For beginners, it is highly recommended that they transact in major currency pairs which involve strong currencies such as USD, EUR because they hold high liquidities. Another reason for transacting in major currency pairs is because they hold narrower spreads which imply less difference between the buy and sell price of the currencies, leading to limited loss exposures.
- Fundamental and Technical Analysis: An important aspect of forex trading is the skill to read the market. By way of technical analysis, you will be able to read and interpret charts of pricing trends, and make educated speculations about the currency price movements. The fundamental research, on the other hand, implies being in touch with the news, updates of the economies whose currencies you’re transacting with to calculate the impact of a particular situation on a currency’s value.
- Follow Trading Strategies:With respect to your financial goals, you should explore a trading strategy that could serve you the best. Trading strategies are not fool proof because the market is always changing, but relying on a tried and tested move has high probabilities of success. For example, to apply a swing trading strategy and focus on only major forex pairs may serve you well in your initial days of forex trading.
As an investor, it is important that you remember your place in the forex market which is exactly like being a very small fish in a vast ocean. Your research, skillset to read technical charts can deceive you because the market can move in unexpected ways. The best you can do is to start small, learn along the way and gain momentum to crack big forex trading profits gradually.
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