The FOREX market attracts hundreds of newcomers on a world wide basis, every day. It is one of the best markets where one gets to see the impact of various economic, political factors at play. Not only is it possible for anybody to become a trader, but also opens up a lot of opportunities. Although, it is one of the most lucrative markets, trading in trillions every day, it is also easy to put all your investments at stake, in one go.
Any decision made, whether to purchase or sell, can be detrimental to making huge losses or making huge profits. Which is why there are some factors that need to be carefully thought about and planned ahead, in order to minimize such losses?
What is the FOREX about - Currency is bought and sold in the FOREX market. This does not mean however that the prices remain the same daily. Instead the market itself being highly unstable, and prone to frequent changes in one day alone means that the prices of currency go up and down many times. Breaking news tends to be the hugest influencer on fluctuations. A careful trader would be able to predict such fluctuations before it affects him. Also, remember that the market does not have any one central point, but instead transactions are made over the counter. Think of the FOREX as a global marketplace.
Having proper knowledge about the market - As in any other financial market, one must have a proper knowledge about the FOREX market as a whole. As stated earlier, traders on a world wide basis simply buy or sell currency. Any trader first has to deposit a small amount as an initial deposit before starting any trade. It is also important to carefully plan every move before you make any beginning with how much capital you are actually willing to trade on. It is important to remember never to trade on any asset that you cannot afford to lose. Trading in the market is more of an acquired skill based on certain other analysis made. Being strong mentally and staying alert at all times should become a second nature.
Why should one trade - This is a very subjective question, as every trader has his own reasons as to why he trades, but it is generally agreed that the FOREX market offers more benefits than other financial markets. First of all, the 24 hour market is accessible from your laptop or phone at home or from work. Secondly, the high liquidity offered is a huge enticer. The term ‘liquidity’ refers to the sale or purchase of an asset, where there is minimum or no loss in value. This is very important in a market , which runs on sales and purchases. Thirdly, there are no hidden costs involved in any deal, other than the costs that the broker would charge you as a client; and the sale or purchase deals struck with other traders. Lastly, the market also offers immense leverage, which means you could trade on much higher amounts of money without actually having it.
Where does one start - Begin, by looking through a directory of brokerage firms or simply by going through their websites. Do remember that signing up with a reputed and certified dealer is of utmost importance. Go for a firm that has been around for atleast a few years and avoid any new startups. If you have friends who are already in the trade, take their opinion about their respective brokerage firms. Striking a good relationship with your dealer is also important because he will be the mediator between the market and you. Taking his opinion from time to time, and ensuring he hears yours is important. Try learning as much as you can about the market with him. Lastly, ensure that you read thoroughly and understand whatever contract you sign with the firm.
When does one trade – Simply put, there is no one perfect or appropriate time to trade. The reason is that the FOREX is a 24- hour market where trading happens round the clock. It is difficult for a trader to predict when the prices will fall or rise, and that is where making an analysis or forecasting steps in. However, observing certain changes in the market, or fluctuations in currency rates and the respective reasons behind them, itself give a lot of clues as to where the currency is headed next. Some analysts however say that the best trading times would always be when trading in the market has just begun or is at its peak. The more the number of people trading at one time, the easier it is to find willing buyers and sellers.
How does one trade – As we have seen earlier, using various analytical tools is important. Analysing any movement in a currency and the respective country should be the first step before actually making any moves. Fundamental Analysis’ refers to looking at various economic factors of a country such as the GDP, expansion plans, inflation etc. Whereas ‘Technical Analysis’ refers to taking a closer look at price trends, data generated from the market, volume etc. It is often believed that it is alright to lose small amounts of money, but that in the long run, having a sound strategy for risk management is a must. Various graphs and charts, are also used to compare many currencies at once. However, many traders would also agree that with experience, it is intuition which also becomes a major factor in trading.