Forex trading is simply when you get involved with buying and selling of currencies and in this article, you will be exposed to what you should know about forex trading. You can also say, it is when currencies are been exchanged and this exchange is mutually driven. A lay man explanation would be when you want to travel to other part of the world, that’s a country that is using a currency different from yours. You must need to make purchase in that country with its currency and this can only be possible when you change your local currency to that country’s currency. Another example will be, when your friends or relatives sent you foreign currencies, you can’t start using this foreign money in your country, that’s why is called foreign currency. You have to exchange it to your own local currency before it can be accepted.
A lot of people engage in forex trading without even knowing it, but there are deliberate professionals who carry out this transaction on a daily basis as a business and means of livelihood.
So What then Is Forex Trading?
By definition: Forex trading is the act of buying or selling (exchanging) currencies with the aim of conducting a business transaction or for speculation (for profit).
Many companies these days deal with import and export of goods and services. These types of companies have to deal with different currencies and exchange rates due to their nature of business. They are taking part in the business part of forex.
Just like every other business, there are some key factors that affects the forex industry, they are: Earth quake, war, economy of nations, policies, riot, and employment rate being down/up, these are but few of them.
Then there’s the other part of forex, speculators. Speculators are traders that buy and sell currencies with the aim of making a profit from the retail forex market.
In simple technical term, the process involved in forex trading is when you buy/sell a particular currency pair low in the hope of of selling it high, if you are right, you make money, if you are wrong, you lose money. That sounds scary, I know. But the truth is, in every business, there is the how of doing it. And forex market is no exception. And in this piece, you will be given a brief introduction to what you should know about forex trading.
Who Are The People Involved In Forex Trading?
Who are the people involved in the forex market? One can simply guess, well is buyers and sellers. You are right, but there is more to this. The buyers and sellers can be categorized into different groups. These groups are based on their activities and mode of operations. It will be wise to familiarize yourself with this buyers and sellers, especially if you have any plan of being a professional forex trader.
For example, if a business in Nigeria wants to buy cars from US, the Nigerian local currency called Naira first has to be converted to the US Dollar.
Similarly, if you are a tourist from America and you want to come to Nigeria, you cannot buy anything in Nigeria with your dollars; you have to change all your dollars to Naira.
Now, if you are speculating in the currency market, you either buy or sell a currency with the aim of making a profit.
For example, if you think that the US dollar is going to rise against the Japanese Yen, then you buy the US dollar. If price increases, you sell at the higher price and make a profit.
That’s basically how speculation in the currency market works.
Now let’s go back to the main questions: who are the participants of the forex market? Here they are:
Interbank market allows both the majority of commercial Forex transactions and also the large amounts of speculative trading each day.
Most large banks will trade billions of dollars daily.
Sometimes, such trading is done on behalf of the bank’s customers.
However, lots are done by the proprietary traders who are trading for the banks.
Central Banks / Governments
Country’s central bank always plays important roles in foreign exchange markets.
The central bank/government can either cause some increase or decrease in their country’s currency value by controlling the money supply, and (or) the interest rates.
They can also use their foreign reserves to stabilize the market.
Company’s needs foreign exchange market to settle their goods and services bills from foreign countries of the world and also to sell their various products and services in foreign countries of the world.
An important part of daily Forex market activities is the companies that are looking to exchange currency to be able to transact with other countries. A good example is the oil companies in Nigeria, like the NLNG. They move their revenues from Nigeria through foreign exchange to their country.
It is estimated that between 70% and 90% of all foreign currency transactions are very speculative in nature.
It means the person or an institution that either bought or sold a certain currency has no plan of taking delivery of such money; the transaction was instead executed with the sole intention of price movement speculation of that particular currency.
The investment firms who manage significant portfolios for their clients always use this same Forex market to facilitate the transactions in foreign securities, warren Buffet firms does this a lot.
Take, for instance, an investment manager who is controlling a particular international equity portfolio will need to use Forex market to buy and sell different currency pairs to be able to settle foreign securities bills they need to purchase.
Have you ever traveled to another country and exchanged your country’s money to a different currency at your destination airport or bank? Then you have already transacted in this popular foreign currency exchange market. What you have done there was a simple foreign exchange transaction. Or simply put, have you ever been to where this Alhaji’s (hausa men) are changing dollar to Naira, or you went there to change it yourself, you just did forex trading in layman language.
Retail Forex traders
The retail Forex trading industry is expanding every day with the establishment of different Forex trading platforms and easy accessibility via the internet.
Retail Forex traders always access the forex market indirectly either through a bank or a broker. This days brokers are coming up with incentives to make the journey easy for most retail traders. A good example is low fees, no commission trading, no deposit bonus, etc.
Is The Forex Market Different From The Stock Market?
Stock market in simple terms deals with companies and their values, if a company value increase, the shares increases and so the worth of your investment in that company, the opposite is also true. While in the forex market, you deal with currencies of different nations. You buy and sell currencies. The fact is, a stock trader is not a forex trader, although they are both traders but in different market. that’s what you need to know about forex trading. I won’t go much into details here.
How Can One Become A Forex Trader?
To trade in the forex market, you just have to follow few simple steps, and mind you, they are not as simple as it sounds. But if others can do it, you too can do even better. Below are the steps you should follow:
Get the skills of trading:
Every business requires some level of skills to begin with and this skills needs to be nurtured over time. In forex trading, to find yourself among the winners, you need to acquire the skills needed. What are the skills? They are simply the how to trade and can be gotten from different places both offline and online. But the sure way to get this skill is to undergo training in forex trading. This can be physical training or online base training. The important point here is to learn the skill of trading from someone who is experience and has some results to show for it. Care must be taken to ensure you learn from someone who has something to offer you. Do your due diligence research before choosing to learn forex trading from a company or an individual as most information out there are nothing but empty promises.
Open a forex brokerage account:
A forex brokerage firm provides a platform where traders can interact and trade in the forex market, this platform serves as your link to the market. After choosing where to learn the skill of trading, you will have to open a forex trading account with a broker and trade with the demo account that will be made available to you. This will help you to practice and develop your skills to the point where you can have enough confidence to trade with live account (real money). To know more about brokers and how to choose a good one, click here.
Have a trading strategy, back test it thoroughly, and master it over time:
Every business needs a solid strategy to succeed and forex trading is no exception to this rule.
A business without a strategy will soon be added to the endless list of failed businesses. When you have come up with a strategy to attack the market with, you must master this strategy in order to have an edge over the market. Like they say, practice makes perfect. Your overall strategy should also contain a money management plan, trading plan, and psychology. These are the factors that will distinguish you from 90% of traders who are losing money daily in the forex market.
Fund and go live:
Now is the time to test the river with both feet. Nothing can substitute the experience of trading with real money.
No matter how good you are on a demo account, the real test comes when you’re trading with real money, that’s when you’ll know how good you have become. But not to worry, believe and trust your strategy and analysis and trade anyway. Learn from your mistakes and become better by practice. what you should know about forex trading is that, your confidence grows when trading live and not when trading demo account.
Don’t be afraid to make mistake, but don’t repeat them again:
Be very glad when you make mistake in forex trading, you heard me right. This was the very sentence a good friend of mine said to me when I ask him about his reaction towards mistakes and losing money in forex trading. He went on to explain to me that there is no way he could have learn most of the great lessons in forex if not through the mistakes he made. But added a very good word of caution: “Don’t pay for the same mistake twice” try to learn from your mistakes and be wise enough to avoid them next time.
Now that you have been exposed to what you should know about forex trading, do yourself a favour, go for more knowledge. Forex trading is an ever learning business, the more you know, the more you earn. To get more details, you can download our free forex trading ebook. Or better still, get the skill of trading by taking our forex training, which will equip you with the necessary skills to become a better forex trader.