The foreign exchange market, commonly known as forex, is the world’s most popular market, where trillions of dollars worth of trades are placed every day. Most of such trading happens on different forex trading platforms, but if you’ve ever travelled overseas, you’ve most likely made a face-to-face forex transaction. When you travel to the United States, for example, you will convert your home country’s currency into United States dollars. When you do this, the forex exchange rate between the two currencies — based on supply and demand — determines how many dollars you get for your money. This is why the exchange rate fluctuates continuously.
In simple terms, forex trading involves buying one currency and selling another currency at the same time; this is why you always see them quoted in pairs. For example EUR/USD and GBP/USD.
Which currencies can I trade?
Forex trading involves buying or selling these “currency pairs” on various offline exchanges or online trading platforms. When you buy a currency pair such as GBP/USD, it means that you are buying the GBP and selling the USD at the same time.
Currency pairs are usually -
- Major pairs — Consisting of the world’s most widely traded currency pairs
- Minor pairs — Consisting of less liquid currency pairs
- Exotic pairs — Consisting of one non-USD major currency that’s paired with the currency of an emerging economy. For example, GBP/HKD
How to get started with forex trading?
There are multiple ways to go about forex trading, you could trade forex over the counter or online, buy and sell currency, or simply place trades predicting the market movement without owning any of the underlying assets. For example, on Deriv.com, we offer binary options trading on major and minor pairs and contracts for difference on selected major, minor, and exotic pairs.
To succeed in trading forex, there are some universal pointers that will help you enter the forex trading industry regardless of your trading style.
1. Understand the language
- Base currency: The currency you are holding. If you’re from France, that currency would be Euro.
- Quote currency: The currency used as a reference to measure the value of the base currency
- Bid price: The bid price is what the broker is willing to pay for the base currency.
- Ask price: The ask price is the rate at which a broker will sell the quote currency. The ask price is always higher than the bid price.
- Spread: The difference between the ask price and the bid price, which allows the broker to earn a commission on your trade. After you cover the spread between the bid and ask prices, you can start making a profit on your position. (Spread = Ask price — Bid price)
2. Analyse the market you wish to trade on
From major political events, elections, and an increase in government debt to something as unexpected as natural disasters, there are many factors that may affect how the forex market moves. That is why it is crucial to keep an eye on market-related news and any known upcoming events that might affect the movement of the market of your choice. Good analytical skills and in-depth knowledge about the market conditions allow you to make the best possible trading decisions.
3. Choose the right broker
Working with a reputable and internationally regulated broker can mean the difference between profiting from your trades and losing money. Don’t be afraid to take your time doing research and reading reviews in order to choose the broker that best suits your needs. When choosing a broker, make sure that they
- Offer demo accounts where you can practice trading free of risk
- Have a wide suite of available forex pairs and other trading products
- Give you easy and round-the-clock access to their customer support team support
- Offer a wide variety of deposit and withdrawal options in your country of residence
- Have the required licences and comply with the necessary regulations in your country of residence
4. Practice, practice, practice
If your broker offers a free demo account, make use of it! The idea behind demo accounts is not only to offer you an opportunity to get to know the online trading interface but also to allow you to test your skills and trading strategies without putting any of your hard-earned capital at risk. Once you feel confident in your understanding of the market as well as the broker’s trading platform, you are more likely to succeed in trading with a real account.
Now that you know a few things about the forex market, forex trading and how it works, it’s time to put your skills to the test. Make your way to Deriv.com and practice your forex trading skills free of risk by opening a demo account with $10,000 of virtual funds.