FX Broker Basics: What You Need to Know For 2022
Aug 3, 2022
It’s not an easy task to get into trading on the foreign exchange market. The volatile market is huge and the trading competition feels cutthroat, which means that you have to be the best if you want to make it. It’s a fact that you’ll have to be a trader for a long time before you are able to earn from it full time. But that’s not a reason to give up if you really want to trade in currencies.
What Makes Forex Trading Tricky?
The forex market is the most liquid market in the world, which means it experiences a steady upswing of trading activity around the clock, so it's distinct from other platforms like the stock, bond, and commodity markets.
As mentioned above, the saturated and competitive market makes forex trading harder to penetrate as there are thousands of players across the world who are ready to trade in currencies. Moreover, there are big banks and hedge funds that are spending big dollars on trading too.
That’s because businesses and companies around the world need to be hedged for currency risk. In this regard, anything may happen in the forex market, making it one of the most eruptive in the world of trading.
Then there are the market makers. These are the banks and financial institutions that trade for their own accounts, or for a client or customers' account. These market makers are responsible for the “bid and offer” prices, offering the highest bid and lowest ask price.
With established market makers dominating the market, they are able to influence the landscape, which is why it's so unpredictable. This aspect makes the forex market more challenging to trade, especially for beginner traders.
Just like any skill though, aspiring forex traders can get started in the right direction with time, effort, and plenty of research every step of the way.
For Starters, What Exactly is Currency Trading?
Currency trading is a process that involves the buying, selling, and trading of currencies, which are also called foreign exchange (forex). For example, stocks are traded on the stock market, which is a centralized exchange where stocks are bought and sold.
But what about currencies? There isn't a single exchange that is specifically for currencies. When you buy or sell currencies, you do it on any of the foreign exchange markets, which is decentralized.
The advantage of trading in the forex market is that it is open 24 hours a day, five days a week. Over the period of time, the forex market has become the most liquid in the world, making it a perfect platform for currencies to be bought, sold, and traded.
In essence, currency trading is the exchange of one currency for another with the goal of making a profit. Currency trading is a relatively simple concept, but it can be easy to become lost in the intricacies of currency pricing and trading.
For instance, the terms such as “pip,” “lot,” “spread,” “stop-loss,” and so on can be confusing for new, Forex traders. What is a pip? This is the smallest increment of a currency's price movement. Think of it as the smallest price movement. You’ll often hear traders refer to the price of currency pairs in terms of pricing in pips. If a currency pair is trading at 0.5668, this is the price in pips.
What is a lot? This is a measurement of the value of currency lots being traded. A lot refers to the number of units being traded. For a standard currency pair, a lot represents 100,000 units. For example, if you buy 1.5 lots of the EUR/USD pair, this means that you are buying €1.5 million worth of a single euro and selling the same amount of the dollar
What is the spread? The spread is the profit margin that is being made by the market maker. It is the difference between the buying and selling prices offered by the market maker.
What is a stop-loss? This is an automatic order placed by the forex trader to close a trade when the market moves against them. It is an order to sell or buy a currency when a predetermined price is reached. This is also called a stop order.
There are many other terms that are used in trading currency pairs, such as a pipette, spread, and more. For new traders, it may be challenging to understand all the terms and understand how they are used, but with time and resources, you can learn them.
Strategies to Explore for Trading in the Forex Market
You'll never know what the market is doing. That's why you need a trading strategy that works for you, your goals, and the current market. There are many strategies that you can use to trade currencies, such as the following:
Position trading is a simple strategy that FX traders can use to trade currencies in the forex market. With this strategy, you're entering a trade with the intention to hold it for a longer time, usually between months to years.
The main idea of position trading is to find opportunities that offer long-term growth potential. Since it can be difficult to predict how a currency pair might be priced at a later date, position trading demands a deeper understanding of the global economy.
Position trading is a technical strategy that involves using charts to determine the direction of the currency pair. Then you enter the market with a predetermined plan. In other words, you enter a trade based on certain technical signals.
The goal of position trading is to capture the trends in the price of the currency pair.
Swing trading is a strategy that FX traders can implement to trade currencies. With this strategy, you enter a trade with a predetermined time frame, usually two to three days.
The main idea of swing trading is to stay in the market long enough to capture the fluctuations in the price of a currency pair. For instance, if you buy a currency and it increases in value, you'll hold it until the price begins to drop. Then you sell it and repeat the process.
The goal of swing trading is to catch the small and the large price changes of a currency pair. But remember, it is possible to lose money even if you follow the strategy. With that in mind, the trader that does swing trading needs to have an expert take on technical analysis.
Day trading is a strategy that FX traders can use to trade currencies in the forex market. With this strategy, you're going to be in and out of the market in a day or less.
The main idea of day trading is to find opportune moments to get into the market and get out of it. The goal of day trading is to capture the short-term fluctuations in the price of a currency pair.
In that sense, day trading is to take advantage of volatility and the relatively larger intraday price movements. You enter a trade and exit in the same day. For example, if you buy EUR/USD at 1.1290, you wait until the market gains 0.01, then you sell it.
If you decide to hold your trade until the market closes, you may not be able to do so because the price might have changed by the time the market closes.
This strategy is significantly different from position trading because the focus is to capture short-term gains and minimize losses. Day trading involves entering and exiting trades with a short time frame.
With this strategy, you're hoping to do small moves on the price of a currency pair. The main idea of scalp trading is to identify high-probability trades, take small profits, and move on to the next trade.
Scalping involves a high amount of risk because it is based on the assumption that the price of a currency pair will move in one direction. The main idea of scalping is to make profits from quick trades. For example, if you buy a currency pair at 1.1290 and the price moves to 1.1291, you sell it. It's a small move but it could be your profit.
This strategy is different from position trading because the focus is on catching small and large price changes in a currency pair. Scalping also involves a high amount of risk because it is based on the assumption that the price of a currency pair will move in one direction.
You'll find many brokers taking advantage of scalping and swing trading. But what is the difference between the two strategies? Scalping involves the use of technical analysis, and it is based on the assumption that the price of a currency pair will move in one direction.
Swing trading, on the other hand, is based on using technical analysis to focus on the volatility of a price, which is a great way to catch small and large price changes in a currency pair.
Getting Started on Forex Trading
Now that you know the basics of forex trading, you can start exploring the market at your own pace. It's important to take your time and try as many strategies as possible until you find out what works for you.
There are many options you can use to get started, such as the following:
Step #1: Start Small by Opening a Micro Forex Account
If you're new to the world of trading and forex, you won't know what strategies work best until you start trading. With that in mind, it's best to get started with a micro forex account.
Opening a micro forex account is easy. All you have to do is open a free account, deposit funds, and start trading. It's best to start with as little as $100 to $500. When you start trading with a micro forex account, you'll be able to build a trading plan, create a trading journal, and start to implement your plans.
Once you have experience and knowledge on the market, you can increase your trading capital and make bigger trades.
Step #2: Consider Your Options by Exploring the Ideal Currencies to Trade
Before you get started in the market, you should know the currencies that you want to trade. You can start with major currencies, such as the Euro, Japanese Yen, British pound, Swiss franc, U.S. dollar, and the Canadian dollar.
It is also possible to trade with the U.S. Dollar Index, which is a basket of major currencies, including the euro, Japanese Yen, British pound, and the Canadian dollar.
When you start trading with these currencies, you'll know the price fluctuations and what to do when one currency starts to move faster than the others. By trading with major currencies, you'll have a better understanding of how the market works.
It may be confusing to figure out which currency pairs are best for your situation. The truth is that there isn't a single answer to this question because the best currency pairs depend on your goals.
If you're a short-term trader, it is likely that you'll want to focus on the major currency pairs, such as EUR/USD and GBP/USD, because the prices of the major currency pairs tend to be more volatile.
Step #3: Take Your Time Choosing the Best Broker for You
Now that you know the basics of forex trading and the currencies that you want to trade, the next step is to find a broker that offers the best conditions for your situation. On that note, a broker is a trading platform where you can open and start an account.
There are many brokers in the market and they all offer different conditions. For example, some brokers offer a micro account while others offer a mini account. Some brokers offer leverage, while others offer margin trading.
It's important to determine what kind of trading is right for you. For example, if you're a long-term trader looking to make big gains, you'll need to find a broker that offers margin trading. If you're a short-term trader, you'll likely want to find a broker that gives you the option to trade with leverage.
The Bottom Line: Getting Started on Forex Trading as a Beginner
Forex trading is a complex topic that many new traders find overwhelming. After reading this guide, you should have a better understanding of the world of forex trading.
The first step you should take before you get started with forex trading is to open a free account, deposit funds, and start trading with a micro account. Then you can explore the major currencies, find an fx broker that offers the best conditions for your situation, and start your trading journey.
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