Forex trading can be for everyone but a certain skill set – which can be learned – will help you make well-informed decisions and increase the chances of successfully closing positions and mitigating high risks. The first step is having a clear understanding of what exactly is involved when trading in the foreign exchange market.
What is Forex Trading?
If you’ve ever travelled abroad and exchanged currency, you’ve already played your part in a streamlined Forex trade. Forex is short for the foreign exchange market, sometimes abbreviated further to FX.
When companies purchase goods or services from another country, they need to obtain the local currency, in much the same way tourists do when going abroad. The biggest difference being they often need to exchange very large amounts of capital.
By making large exchanges, these companies increase the demand for the target currency and consequently the price moves. Exchange rates are constantly moving on account of the total international trades, and exchange rates as a result can move by large margins.
Trading in the Forex market simply involves buying an amount of a currency and holding onto it while the exchange rate moves, hopefully in your favour and then changing it back to make a profit. A successful Forex trader simply has a strong idea of when the right times are to buy and sell in order to maximise their return.
Derivatives have become the biggest asset class in the world. They are a financial contract that ‘derives’ its value from an underlying asset – which can be anything from stocks and bonds to market indexes and currencies – even another derivative. Trading CFDs or spread betting on the GBP/USD pair, for example, would concern a contract between two or more parties to purchase a predetermined amount of GBP in USD at a specified date, with or without optional caveats – depending on the trading method.
The Differences between CFD and Forex trading
Contract For Difference (CFD) and Forex are the two most popular choices for traders. They are both executed Over The Counter (OTC) without the supervision of an exchange and carry similar transaction costs and commissions.
The biggest difference between CFD trading and Forex is that CFDs cover a wide range of markets like stocks and commodities whereas Forex only refers to the currency market. It’s important to remember that when trading both CFD and Forex, investors do not own the underlying asset which is being traded, they only speculate on whether the price will rise or fall.
The Forex Trader Skillset
● Computer literacy
Forex trading online involves using the services of a broker as private individuals are not permitted to execute trades themselves. Therefore, having a good basic understanding of IT is a recommended starting point. Online FX trading has many advantages; you can work from anywhere in the world and at any time since the Forex market is open 24 hours a day for five days a week.
● A mathematical proclivity
Trading relies on one’s ability to handle numbers, sometimes several at one time. While all the maths involved can be learned, numerically inclined people tend to enjoy the process a lot more.
As the world becomes more automated in every area, the need for water-tight mental arithmetic has diminished but understanding the principles in play does not harm your odds. In the Forex market, you’ll be concerned with pairs of currencies presented as two numbers.
As these numbers move – strengthening or weakening against one another – being aware at a glance of what that means for your position is crucial. Put simply, the more confident you are at decoding and finding meaning in the data in front of you, the more comfortable you will feel.
● An analytical mind
Much of the data that traders deal with will be presented in charts and the best possess the skill to not only analyse and draw conclusions from them quickly but also to recognise trends early. A big component of this is also having good research methods. While trading isn’t easy, it doesn’t have to be overcomplicated and putting in the legwork during the research phase often pays off.
As with anything in life and especially trading, you’re never going to be consistently on top. Your success will inevitably fluctuate over time and having the self-discipline to not overreact when things aren’t going your way is the hallmark of a good trader.
If you want to have a trading career with any longevity, emotional control is critical – maintaining a rational approach as the pressure increases. Similarly, steadily improving your stamina will keep you alert for longer periods, so errors don’t creep into your work.
Equally as important is to take regular breaks. It’s often stated that the markets never sleep with the insinuation that you shouldn’t either but this couldn’t be further from the truth. Allow for regular breaks away from any screens and ensure you’re getting enough sleep because burnout will be your worst enemy.
If you’ve got a passion for Forex trading, the expertise required to potentially be successful can be acquired over time with a combination of dedication and experience.
*Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. The vast majority of retail client accounts lose money when spread betting and/or trading CFDs. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.
*Marketing for CFDs and spread betting is not intended for US citizens as prohibited under US regulation.
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