How Do I Trade Forex?
The foreign exchange market or forex market is the largest financial market in the world, comprising more than $5 trillion per day in transactions as it spans currency trading activity in various exchanges, institutions, and banks all over the world. At this rate, it dwarfs even the major stock markets such as the NYSE, London Stock Exchange, and Tokyo Stock Exchange... combined!
Forex - very large and liquid market
Because of that, it's no surprise that many people want to be part of this very large and liquid market. If you've ever exchanged your local currency to foreign ones in an airport or forex counter, then you have had a bit of experience in forex. You probably noticed how the buying and selling rates fluctuate over time, making a particular currency cheap or expensive at some point.
To trade forex, you first need to understand what makes these rates change. Simply put, the exchange rate of the currency reflects the relative strength or weakness of its economy compared to others. Currency appreciation is usually spurred by improving economic performance while currency depreciation is typically caused by slowing economic activity.
Forex traders tend to pair a strong currency with a weak one in order to see a lot of movement in price action. If you are predicting or seeing strong activity for a particular economy, then you should buy that currency against another one whose economy is weaker. To learn more about these, visit the section on Economic Indicators. Monetary policy changes and central bank biases also come into the picture, but let's save that for a more in-depth lesson on fundamental analysis.
How profits and losses are calculated
Next up, you have to gain a solid understanding of how profits and losses are calculated. Currencies are traded in pairs, with changes in exchange rates often referred to in pips, which are the last few decimal places of the quotation. These are then multiplied by the lot size or the number of units that you bought or sold. If the math already sounds complicated, don't worry because brokers typically provide profit/loss calculators on their platforms or websites that you can easily use.
From there, you can delve into technical indicators to supplement your economic analysis. Most forex platforms offer a wide range of technical indicators you can apply and customize, depending on your trading strategy, on top of regular economic updates that you can use in gauging which currencies are stronger or weaker. These indicators can give you an idea of whether trends are set to continue or reverse or if support and resistance levels might hold or break.
Of course, where there is opportunity, there is also risk. Risks of losing the money you’ve invested into your trading account on each trade. The markets are unpredictable and can move very fast, so if you want to trade forex now it's important to have a risk management plan in place before depositing any funds or taking any forex trade setups. If it's your very first foray into trading, we suggest you start with a demo account first to get a feel of its trading platform, understand how orders are executed, and put your trading strategy to the test.