Usually when we think of Forex we associate it with travelling abroad for a holiday, studying or work. Forex is an abbreviated form for Foreign Exchange and trading in Forex is also known as currency trading. The major players in the Forex market are banks, insurance companies and other financial and non-financial institutions.
Forex market is the most liquid market in the world and is growing rapidly. Retail and small investors are usually wary of investing in Forex markets but slowly the interest is growing.
When you invest in the Forex market you are making a speculation about the movement of one currency vis-à-vis another currency which means there is no physical exchange of currency.
Why Do Currency Prices Vary?
Currency trading is done because currency prices do not remain constant; it may go up or down and investors or institutions speculate on their movement. However unlike other instruments currency prices are always vis-a-vis another currency; so when we say the value of Rupee is rising then it has to be bench marked against another currency.
Also if the value of Rupee is going up against Dollar it does not mean that the same will be true for the value of Rupee against Euro. That brings us to the obvious question that why do currency prices vary?
Just like any commodity demand and supply influence currency prices but to a small extent. Other important factors that cause currency movement are the economic conditions of the country, its political environment, gold reserves held by the central bank, inflation and the monetary policies of the government. While demand and supply refers to the international trade; is a country exporting more or importing more.
Higher imports will mean outflow of Forex thus making the currency weaker; political instability will also impact the currency adversely. Often the government through its Central Bank controls the currency flow to get the desired effect on currency prices. However since the Forex market is so huge only one factor rarely affects the market drastically in the short term.
Why Trade in Forex?
As a small retail investor one might wonder does it make any sense to trade in currencies; it is not like equity where you are buying a small portion of ownership in a company. However just like you trade in commodities and aim to benefit from their price movement you can gain from speculating about fluctuations in exchange rates.
Like any speculative investment forex trading can be risky. You can benefit from exchange rate fluctuations but any speculation is a tightrope walk between risk and return so you also stand to lose money if the price movements are not what you had expected them to be.
You should therefore understand about the currency market if you want to participate in it as an investor. On the positive side: the forex market is so large that it cannot be manipulated (even by governments) and is also a low on volatility.
A Few Important Terms
Trading in Forex is different from trading in other financial instruments. Forex trading involves simultaneous buying and selling of two different currencies. Despite being the largest financial market there is no physical market for foreign exchange (spot) and all transaction are done electronically.
Forex trade is conducted throughout the day across different time zones .To understand forex trading we need to familiarize ourselves with a few important terms that are particular to forex trading.
Currency Pairs: When trading in the Forex market all quotes are made in currency pairs. A Currency Pair is the term used to describe the two currencies that make up an exchange rate. This means that when one is bought the other one is sold. The first currency in the pair is the Base Currency; while the other currency is known as the Counter Currency or the terms currency. The investor’s account is in the base currency.
If the quote is GBP/INR is 80.831 then it means that 1 GBP = Rs.80.831
PIP or Percentage in Point: A Pip represents the smallest change in a given exchange rate. The currencies are denominated up to four decimal points and one pip represents 1% or 1/100. For most currency pairs the smallest move equals one basis point but it is not true for all currencies.
Spot Market: This refers to a market or exchange that deals in the current prices of any financial instrument and in this case currency. Forex spot transactions are usually settled within two business days.
Currency Derivatives: Derivatives have no value of their own and derive their value from an underlying asset. As the name suggests the underlying asset in currency derivatives is the currency exchange rate. Derivatives help in hedging against future risk and also help in arbitrage.
Currency Futures: Legally binding contracts to sell/buy currency at a future date at an agreed price. These contracts have fixed lot size and delivery dates. For investors it can be a tool to earn profits while for corporate it can serves as an instrument to hedge risk against currency fluctuations. In these contracts the exchange acts as a counterpart and assists in settlement and clearance.
Conclusion – Forex Trading
Though basics of trading in currency are same but each country has different guidelines and rules for trading in Forex so it is necessary to familiarize yourself with these rules before you begin trading. Currency trading is monitored more closely than other forms of market trade and the rules may change depending on the economic condition and as well bilateral relations with a country.
In India the RBI along with SEBI lays down the rules about which currencies can be traded in and how.Much like anything in the investing market, learning about currency trading is easy but finding the winning trading strategies takes a lot of practice.!!!
FAQs
While it can be a lucrative venture for some, it is also known to be a high-risk activity. This is where the 90 rule in Forex comes into play. The 90 rule in Forex is a commonly cited statistic that states that 90% of Forex traders lose 90% of their money in the first 90 days.
What is the 5 3 1 rule in forex? ›
The 5-3-1 strategy is especially helpful for new traders who may be overwhelmed by the dozens of currency pairs available and the 24-7 nature of the market. The numbers five, three, and one stand for: Five currency pairs to learn and trade. Three strategies to become an expert on and use with your trades.
Is $500 enough to trade forex? ›
This forex trading style is ideal for people who dislike looking at their charts frequently and who can only trade in their free time. The very lowest you can open an account with is $500 if you wish to initiate a trade with a risk of 50 pips since you can risk $5 per trade, which is 1% of $500.
What are the basics of forex trading? ›
The most basic forms of forex trades are long and short trades, with the price changes reported as pips, points, and ticks. In a long trade, the trader is betting that the currency price will increase and that they can profit from it. A short trade consists of a bet that the currency pair's price will decrease.
What is the golden rule in forex? ›
Let profits run and cut losses short Stop losses should never be moved away from the market. Be disciplined with yourself, when your stop loss level is touched, get out. If a trade is proving profitable, don't be afraid to track the market.
Can I trade forex with $100 dollars? ›
In conclusion, starting forex trading with just $100 is possible, but it requires careful planning and risk management. You need to choose the right broker and account type that fits your budget and trading style. Micro accounts are a good choice for beginners with a low budget.
What is No 1 rule of trading? ›
Rule 1: Always Use a Trading Plan
You need a trading plan because it can assist you with making coherent trading decisions and define the boundaries of your optimal trade. A decent trading plan will assist you with avoiding making passionate decisions without giving it much thought.
What is the 30 pips a day forex strategy? ›
30-pips-a-day is a trading strategy used with the volatile currency pairs like GBP/JPY. That is because this approach requires a wide space for trading maneuvers to obtain the required profit margin. Also, volatile currencies often provide clearer market reversal points. The timeframe used in this approach is 5 min.
What is the 3 candle rule in forex? ›
The Three Inside Up and Inside Down
You should look for a long bearish candlestick at the bottom of a downtrend followed by a second candle that reaches the midpoint of the first candle. Finally, the third candlestick needs to close above the high of the first candle. This indicates that the reversal is taking place.
Do you need $25,000 to day trade forex? ›
This rule, set by FINRA, states that any trader who executes four or more day trades within a five-day period is considered a pattern day trader (PDT) and must maintain a minimum equity of $25,000 in their margin account at all times.
Forex trading is known for its accessibility, allowing traders to start with a minimal capital investment. Trading with $10 or a similarly small amount is possible, but it's essential to set realistic expectations and understand the factors that determine your potential earnings.
How much can forex traders make a day? ›
On average, a forex trader can make anywhere between $500 to $2,000 per day. However, this figure can vary significantly depending on market conditions, trading strategy, and risk management techniques. Some traders may make more than $2,000 in a single day, while others may make less or even incur losses.
How do I teach myself to trade forex? ›
Preparing for Your First Forex Trade
- Step 1: Learn About the Forex Market. ...
- Step 2: Choose How You Want to Trade Forex. ...
- Step 3: Choose a Broker. ...
- Step 4: Open a Trading Account. ...
- Step 5: Prepare a Trading Plan. ...
- Step 6: Choose a Forex Pair to Trade. ...
- Step 7: Analyse the Market. ...
- Step 8: Buy or Sell.
Traders alike must keep in mind that practice, knowledge, and discipline are key to getting and staying ahead in Forex trading.
- Define Goals and Trading Style.
- The Broker and Trading Platform.
- A Consistent Methodology.
- Determine Entry and Exit Points.
- Calculate Your Expectancy.
- Focus and Small Losses.
- Positive Feedback Loops.
So is Forex really a gamble? Many traders who are into Forex trading approach this full-fledged business in a somewhat hazardous way. This, of course, does not bode well. While it may seem that Forex trading and gambling have a lot in common - after all, both are primarily games of chance - the opposite is often true.
What is the 90 day rule in forex? ›
This rule states that 90% of inexperienced traders will suffer significant losses within the first 90 days of trading, resulting in a staggering 90% loss of their initial investment. While this may seem like an alarming statistic, it serves as a harsh reminder of the high risk and volatility involved in trading.
Do 90 of traders lose money? ›
Based on several brokers' studies, as many as 90% of traders are estimated to lose money in the markets. This can be an even higher failure rate if you look at day traders, forex traders, or options traders.
What is the 90-90-90 rule in day trading? ›
There's a saying in the industry that's fairly common, the '90-90-90 rule'. It goes along the lines, 90% of traders lose 90% of their money in the first 90 days. If you're reading this then you're probably in one of those 90's... Make no mistake, the entire industry is set up that way to achieve exactly that, 90-90-90.
What is a 90 day trading restriction? ›
During this time, you may trade only twice your firm maintenance excess. If you don't meet the call, you'll be placed on a 90-day restriction period, during which you can only trade on a "cash available basis," which is the equivalent to your current firm maintenance excess, until you satisfied the call.
