Foreign exchange trading used to be something that people only did when they needed foreign currency to use while traveling in other countries. This involved exchanging part of their home country’s currency for another currency at a bank or foreign exchange broker, and they would receive their foreign currency at the current exchange rate offered by the bank or broker.
Nowadays, when you hear someone refer to foreign exchange trading or forex, they are usually talking about a type of investment trading that has become popular now. Many people wonder how foreign exchange trading, also known as forex trading, works because they are interested in learning how to trade currencies themselves.
Forex Market for Beginners
It seems to be something that most people find easy, except that in this particular industry, there is a high failure rate among new traders due to a steep learning curve.
Even traders who are aware of this typically start with the mindset of “it happened to them, but it won’t happen to me.” Ultimately, an average of 77% of these traders end up with nothing, completely unsure of what happened to them, or perhaps feeling deceived.
Forex trading is not a scam; it is just an industry that is primarily set up for people who understand it. The goal of new traders should be to survive long enough to understand how internal foreign exchange trading works and become one of those people who understand it, and that will come through studying the market, understanding the terminology, and learning trading strategies.
Forex and Leverage
The biggest thing that causes most traders to fail is the ability to use a trading feature called leverage. Using leverage allows traders to trade in the market using more money than they have in their accounts.
For example, if you are trading at 2:1, you might have a deposit of $1,000 in your brokerage account, yet you can control and trade $2,000 worth of currency in the market. Many forex brokers offer leverage of up to 50:1. This can be dangerous, as new traders tend to jump in and start trading with this 50:1 leverage immediately without being prepared for the consequences.
Trading with leverage sounds like a really good time, and while it can indeed increase the ease of making money, the thing that is not often talked about is that it also increases the risk of loss.
If a trader has $1,000 in their account trading a certain currency pair with 50:1 leverage, that means they will be trading $50,000 in the market, and each point that moves will be worth about $5. If the average daily movement of the currency pair price is between 70 and 100 points, your average loss in a single day could range from $350 to $500. If you make a really bad trade, you could lose your entire account within two days, and of course, this assumes that conditions are normal.
Most new traders can be quite optimistic, saying, “But I can also double my account within a few days.” While this might be true, watching your account fluctuate like that is incredibly hard.
Many traders assume they will not be emotionally affected by volatile currency price changes; however, reality proves otherwise. When they feel they are losing money in real-time, they may react impulsively due to their illogical desire to quickly recover what they lost. This leads to hasty decisions that can exacerbate losses.
The Market and Your Emotions
Assuming you can avoid the leverage trap, the next big challenge is dealing with your emotions. The biggest thing you will face is your emotion when trading forex. The forex market can behave like a rollercoaster, and it takes mental strength to cut your losses in time and not fall into the trap of holding trades for too long.
You should
Forex trading should be a method executed regularly and without emotions. When traders become fearful because they have money in a trade and the market is not moving in their direction, the professional adheres to their trading method and closes their position to minimize losses. In contrast, the beginner remains in the trade hoping the market will return. This emotional response can cause the beginner trader to lose all their money very quickly.
You will be tempted by the possibility of using leverage, and if it works against you, your emotions will affect your decision-making, likely causing you to lose money. The best way to avoid all of this is to create a trading plan that you can stick to, with methods and strategies you have tested that lead to winning trades at least 50% of the time.
Conclusion
The forex market operates similarly to any other market trading assets like stocks, bonds, or commodities. The approach you choose to trade the forex market will determine whether you make a profit or not. You may feel when browsing online that others can successfully trade forex while you cannot. This is not true; it is just a subjective perception that makes it seem that way.
Many people trading foreign currencies face difficulties, but their pride prevents them from admitting their problems, and you will find them posting in online forums or on Facebook about how great their performance is when they are struggling just like you.
Understanding the forex market and winning at online currency trading is an achievable goal if you get educated and remain calm while learning. Practice on a demo forex trading account first, and start with a small amount when you begin using real money. Allow yourself to be wrong and learn how to handle it when it happens. People fail at forex trading every day because they lack the ability to be honest with themselves. If you learn to do that, you have solved half the equation for success in forex trading.
FAQs
How do I start trading forex?
Starting to trade forex is similar to starting to trade stocks, and the main thing you need to get started is a brokerage account. However, the brokerage account you use for trading stocks may not allow you to trade forex markets, so you may need to open a new account with a forex broker. Aside from that, you simply need the required capital to meet the minimum deposit requirement.
What is a pip in forex trading?
In forex trading, a “percentage in point” or “pip” refers to the movement of the traded currency pair. It is a small movement, and it may be the smallest measurable movement, although some brokers may measure fractional pip movements. The size of a pip varies depending on the currency pair being traded, so learning the size of a pip should be part of your research when trading a new product. Pips are not used in stock trading, as all price movements in stocks are measured in dollars and cents.
Source: https://www.thebalancemoney.com/how-does-foreign-exchange-trading-work-1345162
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