Getting Rich With FOREX Trading - All the Basics You Need to Know

By Susan

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Last Updated: November 4, 2021

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Thousands of individual traders and investors are experiencing the thrills and challenges of trading in the FOREX market every day.

Trading these days has become pretty straightforward; you don't necessarily have to be on your desk; you can use a smartphone or other devices to trade on the move.

Without a doubt, the FOREX, or Foreign Exchange Market is one of the most volatile and fastest-moving financial markets to trade. Within a very short while, huge profits or losses can be made.

Equally, currencies can exhibit long-term trends that endure for days, weeks, or even years. Most importantly, FOREX markets are continually moving, offering a trading environment that is both accessible and target-rich.

We'll go through how the FOREX market works, what drives it, and how you can trade it actively in this article. 

 

What Is Currency Trading and How Does It Work? 

Currency trading is, at its most basic level, speculating on the value of one currency against another.

Speculating and currency are the important words in that last phrase. It is critical to consider currency trading from these two perspectives. Conversely, it's pure speculation, similar to buying a stock or any other financial security with the hopes of a positive return.

The instruments you're speculating on, on the other hand, are the currencies of various nations. When taken independently, this means that currency trading is concerned with both the dynamics of market speculation or trading and the factors that influence currency value.

When you combine them, you get the world's largest, most dynamic, and most interesting financial market. 

 

Currencies as a Means of Exchange

You've most likely heard that it's the world's largest financial market in terms of daily trading volumes.

Yes, that is true; the FOREX market is great in many ways. Because the volumes are so large, liquidity is always available. It is also open 24 hours a day, six days a week, providing traders access to the market at any time.

There are few trading constraints - no daily trading limitations, no position size restrictions, and nothing stop you from selling a currency pair short. 

The major currency pairs have most of the market actions where the US dollars (USD) is against the European currencies (Euro), Japanese currency, British currency, and the Swiss currency.

The US dollars can also be traded the Canadian, Australian, and New Zealand dollars in a great number of trading opportunities. In general, there are about fifteen to twenty currency pairs that can be traded depending on your broker.

The majority of online currency trading is done on a margin basis, which gives room for traders to trade in bigger sums by leveraging the available margin on their deposits. Trading with leverage is one of the most important aspects of the FOREX market. 

The ratios of leverage and margin trading can be as high as 50:1 or more; this means that a deposit of $10 can hold a lot size of $500; this might vary by country to country, though. All trades take place against some set of margin trading.

It has advantages, but it also has its own set of rules and standards. Due to the fact that leverage is a two-faced spear, which can multiply both gains and losses, risk management is essential to any successful trading strategy. 

Read this next: Why it Pays to Diversify Your Portfolio

 

What Influences Currency Exchange Rates?

 We have identified three major factors that influence the FOREX market: 

1. Information

Every financial market is driven by information, but the FOREX market has its own set of information inputs. At every time, a lot of elements are at work in the currency market. Since the FOREX market determines the value of one currency in relation to another, you're looking at two big worldwide economies at the very least.

2. Fundamentals

Fundamentals are a wide base of information and news that reflects the large economic and politics of the nations that own the currencies being traded. Economic fundamentals are reliant on:

  •  Data reports of the economy 
  •  Rates of interest
  •  Money related policies
  •  Flows of international trades
  •  Flows of international investments

3. Technical analysis

Technical analysis is a type of market analysis that includes chart analysis, market trends, and quantitative analyses of market prices, such as momentum and moving averages, to name a few. 

There are not so many currency traders who don't follow some form of technical analysis in their trading. Even the nonchalant trade, your gut traders are at worst going to be aware of technical price levels known by others.

Because of the large volume of fundamental data that hit the market at any given time, technical analysis is extremely significant in the FOREX market.

Currency traders use technical analysis to establish and update their trading strategies on a regular basis, with many people's trading strategies strictly based only on technical indicators.

This means that even though you are familiar with the elements of a specific currency and good with technical analysis, you must also understand market dynamics; that's where trading with a strategy comes into play. 

 

Creating a Trading Strategy and Discovering Your Trading Style

To establish a trading strategy, you must first decide on a trading style. Different trading styles necessitate different trading plans, but there are a number of common trading guidelines that apply to all styles. What exactly is a trading style? It all comes down to how you handle FOREX trading in terms of:

Time frame for trading

How long will you keep a position open? Are you seeking short-term trade opportunities, or are you hoping to catch larger swings in currency prices over days or weeks?

Currency pair selection

Do you want to trade in all of the different currency pairings, or do you want to focus on just one or two?

Trading ideology

Do you prefer a fundamental or a technical approach to trading? Are you thinking about developing a trading system? What strategy are you going to use? Are you a breakout trader or a trend follower?

Risk limit

How much can you afford to risk, and what do you expect in return? 

 

Handling the Trade

Whatever trading technique you eventually adopt, you won't get very far until you create and stay glued to a solid trading plan.

Trading plans are what stop little, bad trades from becoming big, terrible trades and can also turn tiny winnings into huge winnings. They're your guide for navigating the market when hormones start to rise, and feelings start pumping, no matter what the market throws at you. 

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