Traders who are just getting started may find financial markets a bit difficult to comprehend. Even foreign exchange trading or forex trading may seem complicated and intimidating at the beginning. But rather than letting doubts cloud your mind when you’re taking baby steps into forex trading, remember that it is simply an act of swapping one currency for another.
Gone are the days when large institutions and financial houses were the only ones who could practice forex trading. They no longer enjoy that exclusivity even though they still dominate the forex company news. Technological advancements have made it possible for individual traders and investors to get access to the currency market that operates globally. While that definitely opens new avenues for passive income, the information below is something everyone who wants to consider having a forex portfolio must read:
Why Forex Trading?
The forex market attracts beginners and experienced traders alike for various reasons. For starters, it is extremely accessible and allows you to begin trading with nominal funds. As a forex trader, you enjoy the flexibility of being able to trade at a time that suits you; the forex market operates for 24 hours, Monday to Friday. Thus, traders do not have the restriction of entering the market at a specific time period. You can enter or exit the market at any given point in time during working hours.
Forex trading is a low-cost way of making more money. For each trade, you would have to pay a small trading fee that depends on the difference/spread between the bid and ask prices of the currencies. Usually, the tax laws that govern forex trades are also fairly simple. Forex traders also have complete control over the risks they want to take by setting their exit points or stop-loss orders before entering the trade.
While these were some obvious reasons why people are drawn to forex trading, below are some advantages of investing in the currency market that you should consider:
The nearly infinite number of trading hours and the availability of products that suit every investment size allow everyone to explore opportunities in the forex market. Irrespective of whether your interest lies in minors, majors, or exotics, you would find a reason to stay in the market to trade.
You can avail plenty of leveraging options when trading forex currency pairs. Retail investors can benefit from this as the size of the positions could be shaped as per risk capital’s availability and changes in market conditions. Now that there’s an option to increase or decrease the leverage figures, forex traders can also reconsider trading strategies that were taken out of consideration.
Low Barriers To Entry
One of the key features of forex trading is that you need the bare minimum of resources to enter the market. Sometimes the initial fund can be as low as $50. Reputed brokerages in the industry have no minimum account requirement and even allow access to numerous choices on their online trading platforms like low deposits and affordable transactions that draw the attention of newbies.
The forex market is easier to access and more engaging than ever. Technological advancements have made it possible to be able to trade in real-time from literally anywhere with a desktop or a mobile application. All you require is a good internet connection and you can enter or exit trades in just a few clicks.
Fluctuation in exchange rates over a period of time reflects volatility in the forex market. When there’s sudden fluctuation in prices, the volatility could bring a lot of profits, or when the price movement isn’t favorable, greater losses. In addition to being beneficial, volatility may even enhance your risk profile as a trader.
Leverage is a great tool for increasing your gains with a minimum investment. However, it is also one of the main causes of risk that forex traders may find themselves exposed to. Forex leverage indicates how much currency is being controlled in the live market. Keep this rule in mind, especially if you’re a beginner: higher leverage equals greater assumed risk.
Counterparty risk is a measure of the possibility that the other party involved in a transaction such as investment, trading or credit could default on contractual obligations. Forex traders count on brokers to ensure their transactions are carried out. Counterparty risks can be curtailed when trades are conducted through the right forex brokers. One should always remember that the best forex brokers are the ones that have a good reputation and are licensed and regulated.
How To Get Started
At first, the forex market may seem somewhat intimidating. But the more you diversify your knowledge about it and try to familiarise yourself with its functions, you will gradually become comfortable. A forex trader’s starter pack is only made of a few things like an initial fund that can be as low as $50, a trading account with a forex broker, a smartphone/laptop/desktop, and a stable internet connection.
Once your account is set and running, as a forex trader you will be able to access the price movements in real-time, enter trade orders, and put trading strategies in place. Before you start trading, know which currency pairs you want to trade with. To conduct a trade, you have to sell a currency to buy another. Even though there are many currency pairs in the market, only a few pairs dominate and make up for a large volume of daily trades.
Instead of going directly to the market with your money and a little knowledge, it is best to try out a few strategies on your demo trading account. Nearly all forex brokers offer their clients access to demo trading accounts at least in the beginning. You can use this to see how your strategy will play out in the real forex market and what will be the impact of market indicators on your chosen currency pairs. Even though you would gain real experience only through live trading, a demo trading account is a great tool that you should also use when you want to see how a new strategy would perform.