You’ve probably heard of forex trading, but have you ever wondered exactly what it is? Or how it works? If so, you’re not alone.
Here, I will tell you everything you need to know about the Foreign Exchange Market or currency trading as a beginner and I will also explain what forex trading entails so that you can start your journey toward financial success. Don’t worry – I will make it as easy to understand as possible!
What is Forex Trading?
The word Forex comes from the word Foreign Exchange.It is the largest market in the world with over $5 Trillion circulating every day, so basically, when you trade Forex you are trading a currency for another one.
Have you ever traveled to another country? If the answer is Yes, then congratulations you have made a forex transaction before because probably you had to exchange your money for the currency that the country you visited uses.
Is Forex Legit?
It is very wise that before you invest in something you don’t quickly put in all your money because you want to get rich quickly, but first research about it to see if it is legit or it’s just fraud.
So if you were thinking that forex trading is a scam, you were wrong as it is 100% legit.
Here is proof that forex is not a scam: There are many players in the currency exchange market and you are one of them as a Retail Trader.
The Banks are the ones who controls the forex market and major players like Hedge Funds, Institution and Money managers also take part in trading .
How does Forex Trading Work?
I assume that you are a beginner and you know what is forex trading and its legitimacy but now you’re interested in knowing how forex works.
As mentioned before it involves the trading of currencies and these currencies are traded in pairs.
What is a currency pair? : It’s very simple, these are two currencies that are traded hence there is “pairs” for example EUR/USD is a currency pair that involves two different currencies (Euro and US Dollar) also the same for GBP/JPY (Pound and Japanese Yen). You see the trading of currencies just took place
Here is a short example of how forex trading works:
When I want to move from the US to live or visit any European country that uses Euro’s, I need to sell my US Dollars in exchange for Euro’s because in the European region they accept Euro, not US Dollar- You see trading of currencies just happened (EUR/USD)
You might be asking yourself how do you then make money by just exchanging currencies?-let me show you how you can make money trading forex
How to make money Trading Forex?
During the trading of currencies, there is an exchange rate. The flactuations of the exchange rate is what traders use to make money trading forex.
Exchange Rate represents how many units of a foreign currency a consumer can buy with one unit of their home currency.
e.g if EUR/USD exchange rate is 1.3000
This means that you can sell 1 EUR for $1.3 or in other words . it means that for 1 Euro you can get $1.3
Let me make you this simple example so you can easily understand how money is made in the forex market.
Example :
Let’s say you and your friend live in France (Uses Euro) and you both going to the USA (USD), but you will travel today and your friend will follow tomorrow . Keep in mind that the exchange rate will be different between the days as it fluctuates every second
So when you travel today EUR/USD exchange rate was 1.0000 which means that for every 1 EURO you sell, you will get $1 but your friend will get $2.1 for every 1 EURO he sells.
As you can see, your friend will have more money in the US than you.
- If you sell 100 euros = 100*1 which is $100
- If your friend sells 100 euros=100*2.1 which means he will get $210
I hope that the example was clear
As a forex trader, you want to buy cheaper and sell at a higher price.
You need to buy other countries currencies when they are cheap and sell them when they are high so you can make profit
When you place a forex trade, you buy one currency and sell another. You make a profit if the currency you buy moves up against the currency you sold.
For example,
The EUR/USD exchange rate is 1.3 (1.30000) If you buy 1,000 euros, you would pay $1,300 U.S. dollars. If the currency rate later moves to 1.4 (1.40000) you can sell those euros for $1,400, and make a profit of $100.
How to begin forex trading
First, start your forex trading journey by getting the right education, strategies that work and you can start by watching Youtube videos or just pay for a trading course, this will help you avoid losing your money.
Here are the 3 things you need to begin trading forex.
1.Internet Connection
Unfortunately, you cannot open trades without a stable internet but that does not mean it should always be On. You can switch it Off when you have opened your trading position and switch it back On when you want to close that trade
2.Forex broker
It’s impossible to trade without a Forex broker so you will need to create a trading account with the Forex broker of your choice.
Choose a forex broker that is regulated for an extra level of security.
3.Demo vs Live Account
Almost all forex brokers when you sign up they will ask if you want to open a Demo or Live account.
A demo account will allow you to trade with free money that is fake and it’s just for those who want to practice first trading. In a demo, you will not be able to withdraw profits as it is just for practicing.
But you can open a Real account later.
In a real or live account, you will have to deposit your own money and profits can be withdrawn
4.Download a Trading Platform
In order to start trading on your account, you will need a trading platform.
MetaTrader 4 & 5 are the popular trading platforms and there are also platforms like C Trader
You can download Metatrader on your mobile phone or Desktop for Free
After creating a trading account, your broker will give you your login details to access a trading platform.
Then you can start trading forex
Benefits of forex trading
There are a lot of benefits that come with forex trading and the most obvious is making money and getting financial freedom
Easy To Start: You do need any fancy equipment to start trading forex or Large sums of money. You can start trading forex from as low as $1 using your smartphone.
Demo Accounts: Practice makes one perfect and as a beginner to avoid losing your money when starting out you can choose to open a demo account until you can see you are profitable.
Forex Risk
Although there are numerous advantages to forex trading, it is critical to be aware of all the risks associated.
If you start trading without knowing how forex trading works you might lose all your capital or be exposed to financial scams.
But luckily for you, I have some tips that will prevent you from losing all your capital as a beginner
1. Deposit only the money that you are willing to lose. This way when you lose, you won’t have sleepless nights stressing
2. Forex is not a get rich quick so be patient and only risk 1% -5% of your trading account on each trade.
Conclusion
Forex trading can be difficult and confusing to a beginner who is just starting out.
It takes a lot of time to figure out how it works but it is a worthwhile investment for the long run.