Introduction - What is Forex Trading

Introduction - Forex Trading for Beginners

What is Forex Trading

Understand what you trade and how it behaves

What is FOREX?

Forex or foreign exchange is the exchange of one currency for another. The Foreign Exchange (FX) market is the largest financial market in the world. FX volume exceeds $5 trillion a day, according to the latest data from Bank of International Settlement.

What is forex trading?

Forex trading is the process of simultaneously buying one currency and selling of another. It is the most liquid financial markets in the world.

The main attraction to FX market is the potentially high return offered. The reasons for people to speculate in FX market will vary from one individual to another. It all boils down to earning extra money. Just like other forms of speculation, money is made when the investors/traders correctly anticipate the movement in a market. For example, if an investor thinks that the Euro (EUR) is going to rise relative to the US Dollar then he would open a EURUSD position by buying Euros and selling Dollars. For example the EUR was bought at EURUSD 1.3500.

Later, the Euro rises in value relative to the US Dollar, so that the EURUSD is now exchanging hands at 1.4000. The investor then sold of his EUR holding at 1.4000 for a gain of $0.0500 (USD). This move of only 5 cent does not seem very large, but given that trading in Forex involves trading on margin (leverage), investors/traders can have very large returns (or losses) with these small movements in exchange rates. The normal size of Forex transactions is 100,000 units, this small move would be worth $5000 to the speculator (0.0500 X $100,000 = $5000).

Several reasons to exchange foreign currency for domestic currency:

1. to pay for goods and services in the foreign country

2. to invest in its financial assets

3. to hedge against unfavorable rates of exchange in the future

4. to profit from currency fluctuations

Advantages of Forex Trading

High Liquidity

Liquidity basically refers to an ability to buy or sell a product. The least liquid asset you can buy or sell would be property, as it can take a long time to match a buyer and a seller. On the other end of the scale is the Forex market – it is the most liquid market available to trade. You can enter and exit an FX transaction in the matter of seconds (and sometimes milliseconds) and there will always be a buyer to sell to, or a seller to buy from.

24 hour market

The advantage of a 24 hour market is it allows you to fit FX around your lifestyle, as opposed to trying to fit your lifestyle around your chosen market. If you work full time then you would probably not make a very good day-trader in the stock market. However by having access to multiple markets around the world and around the clock you can choose a market to suit you. Currency pairs are traded 24 hours a day, across the world in an over-the-counter (OTC) market, meaning there is no exchange. The currency market is the only market that is truly open 24 hours a day with decent liquidity throughout the day. The major trading centers are spread throughout many different time zones, eliminating the need to wait for an opening or closing bell. As the U.S. trading closes, other markets in the East are opening, making it possible to trade at any time during the day, unlike stock markets.

Margin Trading

The use of leverage allows you to control a larger amount of money from a smaller deposit. Without leverage you would not be able to open a trading account because you would not be able to afford the deposit required to speculate on FX. Daily currency fluctuations are usually very small. Therefore, many investors/traders rely on the availability of enormous leverage to increase the value of potential movements. Size of leverage on offer usually is 100 to 1 – meaning that a USD 1000 margin deposit enables a trader to buy or sell $100,000 worth of currencies. However, investors and traders always need to remember that leverage is a double-edged sword. When you speculate correctly, the leverage afforded to FX traders is a wonderful thing – creating large gains on small capital. However, when speculative decisions are wrong, losses can amount to more than the original investment in short time, and investors/traders can (and will) end up losing more than original investment, and will have to make up the difference. Always remember that trading involves speculating activity, and therefore investors/traders should only risk money they can afford to lose without changing their present lifestyle.

2-Way Trading

Traditionally retail clients, particularly from the stock market, are only able to ‘go long’ (buy) hoping their market will rise in value. This means you are limited to only trading in bullish conditions and limits your opportunity to trade whilst the markets depreciate. With Forex and CFDs however you are able to take either long or short positions, to complement your anticipated market direction.

Automated Tradings: Expert Advisors (EA) and Robots

With Expert Advisors you either program or purchase a program to trade on your behalf. EA’s are exclusive to MT4. Robots are very popular within Forex trading and there are hundreds of thousands available to choose from. Some are free and others are commercial. Some EAs are designed for specific markets and for certain trading styles. Therfore it is best that you check the EAs you are interested in using. Agrodana Futures does not supply Expert Advisors but we do allow you to use any EA you choose, on any market of your choice.

Before you begin trading you should understand that trading is not that straight forward. In order to decide what to trade, how you wish to trade a particular market or when you should make the trade, you will need to analyze the markets first. We can divide analysis into two core components: Fundamental and Technical. These topic is covered in more details here.

Automated Tradings | Expert Advisors (EA) and Robots

With the advancement of technology, our MT4 trading platform allows you to take advantage of its auto trading feature. Clients can trade both manually or automatically. Manual trading is the traditional approach, where a trader analyses the markets, enters, manages and exits a trade by their own observation. Automated trading is when trading is executed by either a signal provider or an alogorithm on behalf of the trader. A common tendency for manual traders is they want to be in control of the process and the outcome of the results. Wheras an automated trader may not have time to learn to trade, monitor the market, or may wish to avoid the emotional ups and down trading can present you with.

Trading Styles

Lastly, another thing that traders need to understand is their own trading styles. How long do you intend to keep a trade? How frequent do you want to trade? When do you want to trade? Those questions need answering and will determine your trading styles. For more information about trading strategies, you can check out the “Understanding Trading Strategy” page.

Big News Extreme volatility can occur if a surprise figure is released (which is not widely anticipated by the markets) which creates opportunity to make more profit over a very short period of time. News Trading typically relates to short-term events.