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Forex Trading


continues to attract thousands of new traders daily, many lured by the low capital requirements and profit potential. Besides being the most popular financial market, it also remains the most underestimated one. There are countless marketing-oriented campaigns, often sponsored by Forex brokers and millions of affiliates, to convince new and inexperienced Forex traders to rush into deposits under the disguise of misleading promises of quick profits with a few clicks and no knowledge. Therefore between 70% and 85% of all retail traders lose, and those with profits often remain minimal. Learning how to trade Forex will separate those who succeed and grow their portfolios to support their lifestyle from those who skip the educational section and rush into placing trades.

You can consider this as a currency trading for dummies introduction to how to trade Forex. It will help you gain a basic understanding of what Forex trading is, how to approach it, and how to profit from the world's most liquid financial market.

The Forex trading steps are simple on paper and follow the same pattern, as outlined below. It may seem like an easy process, but it is far from it.


What is Forex Trading? 


Forex trading, also known as foreign exchange or FX, refers to buying and selling currencies against each other. Over one hundred currency pairs exist, and the most liquid one is the EUR/USD. Due to global trade and finance, the Forex market, where currency pairs trade, is the most liquid one. Forex trading takes place 24/5 and has the lowest capital entry requirements, together with the highest leverage. It is also ideal for automated trading solutions, and the asset selection remains small compared to equity trading. Most brokers provide between 50 and 75 currency pairs, and the interconnectivity and liquidity allow Forex traders to deploy focused trading strategies. Scalpers often focus on a handful of currency pairs. Forex trading provides many opportunities and is accessible to all traders with few geographical restrictions. With the demand from new Forex traders rising, it unlocks new business potential for many. Our Forex trading for dummies crash course will outline strengthen your knowledge about Forex trading from where you can chart a profitable course forward. Just remember that you must learn before you can earn. Many new traders skip this part, and the outcome is always the same.



How do Currency Markets Work?


Unlike equity and commodity markets, the Forex market is decentralized and trades 24/5. It consists of a global network of banks, hedge funds, private equity funds, exchange-traded funds, mutual funds, businesses, and individuals. All market participants continuously buy and sell currencies in the over the counter (OTC) market. It creates constant price fluctuations and trading opportunities. There are no central locations, but four primary global trading hubs exist. They are Sydney, Tokyo, London, and New York. The opening and close of the London and New York trading sessions, as well as the London / New York session overlap, present five of the most significant and liquid trading times, and also when most retail traders are unable to trade due to their employment elsewhere. Forex trading is a profession, and a highly demanding one, and unless traders treat it as such, losses across portfolios are all but guaranteed. Other notable trading hubs include Zurich, Hong Kong, Singapore, Frankfurt, and Paris, with numerous emerging ones located in BRICS and ASEAN countries. Traders can buy and sell, also known as going long and short, respectively, and profit in either direction. Due to the fast-moving nature of currency markets, automated trading solutions provide a competitive edge and account for over two-thirds of all trading volume outside Japan. Since London remains the most liquid global financial center, numerous Forex trading for beginners UK editions emphasize its unique Forex trading infrastructure.



What Moves Forex Markets? 


Understanding what moves Forex markets is essential to the success of Forex traders. Remember that currency pairs always consist of two currencies. Therefore, traders must consider developments in both, as either one can move price action. The three primary Forex market movers are economic data, central bank policy, and geopolitics. Forex traders often provide the quickest reaction to any event. Since economic reports follow a set schedule, in-depth calendars give Forex traders sufficient visibility. Some traders attempt to profit from the often-volatile period before and after a release, known as news trading . Central bank meetings are equally transparent from a scheduling perspective and can introduce long-term trend changes or force breakouts and breakdowns. Geopolitical events will surprise Forex markets as they are 100% random events. It adds excitement and trading opportunities. It also adds uncertainty and losses for those who leave their portfolios unprotected and fail to deploy risk management. Most Forex for dummies courses fails to cover risk management adequately as part of a successful trading strategy.

History of Forex

Forex trading has existed since countries began minting currencies, but today's Forex markets remain relatively new. Some equity markets exist for hundreds of years, but it was not until the 1971 Bretton Woods accord that Forex markets became operational. Following the 1971 agreement, major currencies became free-floating, driven by supply and demand, economic factors, central bank actions, and geopolitical developments. It created the need for Forex markets, where operators pair currencies against each other. Over the past decades, more Forex pairs became available for trading. Demand continues to rise, and trading related services expand to satisfy it. Thousands of brokers, asset management firms, analysts, signal providers, risk managers, and lawyers cater to Forex traders. It also provides a significant boost to the economies of trading hubs. With automated trading strategies representing the fastest-growing segment of finance, the Forex market became one of the first to embrace and support the trend. It was not until the release of the MT4 trading platform by Cyprus-based MetaQuotes in 2005 that online Forex trading added hundreds of millions of retail traders. MT4 was the first full-featured version, and the vision of MetaQuotes allowed it to take a dominant position, which it continues to enjoy today.



Forex for Hedging 

Many international companies use the Forex market to hedge their currency exposure and even to lock in future exchange rates to gain clarity over operating expenses. One example is a manufacturing company producing goods in the US and selling them in Japan. The production cost and the selling price remain fixed in U.S. Dollars and Japanese Yen, respectively. Since the USD/JPY currency pair fluctuates, the product profitability will vary on the exchange rate, excluding inflation. The manufacturing company may lock a specific exchange rate in forwarding or swap markets. It offers a hedge against currency movements and provides more stability and visibility over expenses. It also reduces profit potential if the exchange rate moves in the direction favoring the manufacturing company. Airlines are another prominent example, as they hedge against price movements that impact jet fuel, which like most commodities, remains priced in U.S. Dollars. By ensuring a fixed exchange rate, the company maintains short-term price control over operating expenses. Some companies employ a skilled trading desk and use Forex for hedging to add to the operating profits, especially commodity firms and companies with dominant exposure to the sector. Equity traders also use Forex for hedging, as currency pairs offer a low-cost and highly liquid tool to hedge trading portfolios.



Forex for Speculation 

S peculation is one of the primary reasons many traders flock to the Forex market and learn how to trade Forex. Since currency pairs continuously move 24/5, impacted by numerous factors throughout each trading session, traders have many trading opportunities. It increases the profit potential, adding to the attractiveness of Forex trading. There are many ways to speculate on how one currency pair will move against another one. Some traders prefer to do so on fundamental developments like economic data, central bank announcements, and geopolitical events. Others take their trading clues from technical analysis, using indicators and past price action to predict future currency fluctuations. Both sides have proponents and opponents, often resulting in massive disagreements over which approach grants traders an edge. Profitable traders understand the importance of both, allowing them to speculate on price action in the Forex market with greater accuracy. Traders must understand which market events lead to short-term fluctuations within an established trend and which ones possess the ability to change existing trends. Forex for speculation can yield remarkable profits, especially in conjunction with leverage and risk management, but it takes years to master it. Traders use scalping to speculate on ultra-short-term Forex moves, generally based on one-minute (M1), two minutes (M2), and five minutes (M5) charts, with technical indicators as the basis for entry and exit positions. Automated trading fulfills a defining role for traders who speculate in the Forex market for a living or derive a substantial portion of their income from it.


Forex Trading Risks 


While Forex trading provides many opportunities, it also carries significant risks, as the retail market is almost entirely closed over weekends. The interbank market, where banks trade with each other and determine exchange rates, faces various regulatory oversight, depending on their location. Banks have to accept numerous risks, including sovereign, credit, and counterparty risk. Each bank deploys a risk management department to shield itself as much as possible. Forex products are not standardized, and different regulators approach Forex trading with varying degrees of rules, while a few do not regulate it at all. Therefore, trading from a competitive jurisdiction can offer traders an edge, with the EU the least competitive one. Supply and demand dictate currency pair prices, but retail traders of market-making brokers may face re-quotes, and stop-loss hunting, exposing them to risk imposed by untrustworthy brokers.


Managing the risks of Forex trading


Managing the risks of Forex trading will define the outcome of any trading strategy. Forex trading for dummies mostly covers other aspects, and misleading label leverage is why retail traders lose money. The lack of risk management leads to losses, and most traders apply a static number for their stop-loss orders in a dynamic market. While it offers protection and ensures trading losses do not exceed a set amount, it is far from an in-depth and effective risk management strategy. I urge all traders to learn about managing the risks before thinking about trading strategies and order placement.

Two order types to assist with managing the risks of Forex Trading: 

  • Stop-loss order - It closes a trading position at a set level. A stop-loss order does not guarantee the price. Execution is dependent on market conditions and the liquidity of brokers, but most will trigger at or near the set level. Some brokers provide a guaranteed stop-loss order for a fee. It ensures that the entered price is honored. A trailing stop loss will adjust with price action. Professional traders and profitable retail traders use a stop-loss order to close trades at a profit.

  • Limit order - It executes an order at a future price or superior level. A buy limit order and a sell limit order will only trigger at the set price or below and above, respectively. It offers traders more control over order placement. While the price is guaranteed, the order filling is not, and again depends on market conditions and broker liquidity. Limit orders together with stop-loss orders can protect the downside of portfolios, but traders may also miss trading opportunities in fast-moving markets.

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