Forex or foreign exchange is the act of trading currency. Trading forex operates around the basic concept of buying and selling currencies at the same time with the goal of making money. Forex markets are the largest in the world in terms of the volume traded and operate 24 hours around the clock. The way a currencies value changes is determined by its intrinsic value against that of another currency. Currencies float freely against each other, this is how you can make money.
Say you bought something and it then proceeded to go went up in value. If you then sold it when the value was higher than that of what you paid for the item, you’ve made a profit. This is exactly trading works in the same way. Say you want to buy the AUDUSD (Australian Dollars/American Dollars) currency pair. If the AUD was to go up in compared to the USD and you was to sell it, you would have made a profit. In this example the trader would be buying the AUD and selling the USD at the same time. If you bought the AUDUSD pair at 1.0715 and it then moved up to 1.0800, at this point if you were to close you would make a profit of 85 pips on that trade. Alternatively if the pair had moved down in value to 1.0700 at the time the trade was closed, you would have made a loss of 15 pips.
When trading currency you need to be aware of the macroeconomic environment. A currency trader needs to have a solid understanding of various economies and how they affect each other in order to grasp what drives currency values. For certain people it is easier to focus on economic activity to inform their trading decisions rather than trying to understand the nuances that exist in futures markets that drive change in the values of currency.
Forex Trading Tips
Plan your goals. Stick to your plan.
First thing first you need know what you want to obtain from your trading. Whether it be generating some extra income or complete financial dependence, it is wise to devise a plan and timeframe for your trading career. Knowing what you define as success and what constitutes failure is imperative. What is your timeframe for the trial and error process and how much time and money can you devote to trading are important questions that need to be answered before you can gain the clear vision necessary for a patient and successful approach to trading.
Do what you understand.
Simple as it is, failure to do so has been the downfall of countless traders. As a general rule don’t do anything you’re not sure on. If you’re unsure as to what you’re doing, aren’t 100% clear on both the positive consequences and the possible adverse result, it’s probably a good idea not to invest in that trade.
The more you learn about the markets, your profitability grows. For example, if you knew that gold price has negative correlation with USD exchange rate, you could double your returns by simultaneously trading gold CFDs and major currency pairs.
Begin with small sums, increase the size of your account through organic gains
The most important tip for a rookie trading forex is to begin with small amounts with low leverage. Having a larger account doesn’t mean you will yield greater profits, if you are able to function successfully and return consistent profits you will increase the size of your account through your trading choices and organic gains. This means you’re doing well and are probably capable to go on and work a larger, riskier account. There’s no point in pumping money into an account that is just burning cash. If you’re not able to trade effectively and keep it in the black with a small amount, don’t keep stoking the fire with more money.
Finally and most importantly – Restrain your emotions.
Excitement, greed, euphoria, fear or panic should never play a part in a traders’ calculations. Allowing your decisions to be influenced by emotions in any way will eventually come back to bite you. We’re all human beings so it’s obvious that you will experience emotion. The key is to remain in control and minimize their effect. This is partly why traders are always advised to begin with small amounts. By reducing risk, we can be calm enough to realize long term goals, whilst gaining valuable, practical experience. A logical approach, less emotional intensity, developing a solid understanding and starting small is the best formula for successful trading. For more information on trading forex and how to get started visit ETX Capital.
Tarik Pierce is the founder of InvestorTrip.com and regularly contributes articles to this website.
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