Currency trading can be complex and risky. Forex instruments are not standardized, and the interbank market has varying levels of regulation. In some parts of the world, forex trading is completely unregulated.
Banks trading with each other is what the interbank market is made of. These banks decide and accept sovereign risk and credit risk. They also set internal processes to make themselves safe. For the protection of each bank, these regulations are industry-imposed.
The pricing mechanism of the market is based on supply and demand since each participating bank provides offers and bids of a certain currency. It is hard for traders to influence the price of the currency because there is a large flow of trade within the system. This creates transparency in the market for the investors who have access to interbank dealing.
It is usual for small retail traders to trade with quite small and semi-unregulated forex dealers or brokers because they can or sometimes re-quote prices. They can even trade with their clients. There can be some government and industry regulations based on where the dealer is but those protections are not always consistent in any country.
Retail investors must spend time conducting research on forex dealers to know if it is U.S or U.K. regulated (dealers in these countries have more errors) or in a country with careless rules and errors. Finding out what kind of account securities are available in case there is a market crisis or if the dealer becomes a problem is also a good idea.
Since you now have an idea of what is forex trading, let us discuss some steps to get started on forex trading. Trading forex is the same as equity trading.
- Learn more about Forex
Forex trading is still different and requires specialized knowledge. For example, the leverage offered in Forex is higher compared to those for equities. There are also drivers for currency price movement that are different from those in the equity market. Online courses are available for beginner traders that can teach in-depth forex trading.
- Create a brokerage account
Create a brokerage account to start forex trading. Forex brokers do not charge commission fees instead they profit using spreads (also called pips) between the buying and selling prices.
It is good for beginner traders to create a micro forex trading account having low capital requirements. These accounts have a variety of trading limits and it lets brokers limit their trades up to 1,000 units of a currency. The standard account lot is equivalent to 100,000 units of currency. Micro forex account trading aids in becoming more comfortable with forex trading and know more about trading styles.
- Develop a trading strategy
Having a trading strategy will help in setting broad guidelines and plans for trading since it is not always possible to predict and time market movement. A better trading strategy depends on the situation and finances. It is important to determine the amount of money that is willing to put up into trading and the amount of risk that can be tolerated without losing the position. Take note that forex trading is a high leverage system, but it also gives more rewards to those who are risk-takers.
- Always be in control
Always view the position at the end of the day once you start trading. A lot of trading software provides a daily accounting of trades. Make sure that there are no pending positions that need to be filled and there is a sufficient fund in the account to make future trades.
- Practice Emotional Balance
Beginners in forex trading are worried which results in emotional rollercoasters and having unanswered questions. Obsession of unanswered questions can lead to confusion. It is important to not be carried away by trading positions and practice emotional balance on profits and losses. Closeout positions when necessary. Knowing fully “what is forex trading” may not be as easy as ABC but being prepared helps in building confidence in currency trading.
