Is Forex Trading Hard?
Detroit, MI
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March 09, 2023 06:00 AM Eastern Standard Time
The foreign exchange, or forex, market is the largest financial market in the world, with a daily trading volume of more than $7.5 trillion (as of April 2022), according to the Bank for International Settlements. However, retail traders form only 5.5% of the total forex traders globally. Multinational and investment banks, institutional investors and government agencies control over 90% of the total trades.
Retail traders often find it daunting or extremely expensive to enter the forex market because of the sheer trading size requirements and the extreme market volatility. The forex market is open 24 hours a day five days a week and is sensitive to developments in economies. Markets are most active during certain hours, so a trader has to keep up to date with market news and events and remain active during the most active trading hours to generate hefty profits.
What is Forex?
The foreign exchange market facilitates the trading of national currencies. More than 170 currencies are used in the world, but seven currencies dominate the majority of the transactions in the forex market — U.S. dollar (USD), Euro (EUR), Great British Pound (GBP), Australian dollar (AUD), Japanese yen (JPY), Swiss franc (CHF) and New Zealand dollar (NZD). These currencies form the major currency pairs in the forex market and account for nearly 75% of the total trades. USD is considered the reserve currency of the world and has been on one side of 88% of all international forex trades.
Lesser-dominant currencies, particularly the fiat money of emerging economies, are often grouped to form “exotic currency pairs.” Given the relatively lower demand for such currencies, they are not traded frequently and have higher bid-ask spreads. As they are traded in lowers volumes, exotic pairs are highly illiquid in nature and are also more volatile than major currencies.
What Makes Forex Trading Difficult?
The forex market opens at 5 p.m. Eastern Standard Time (EST) on Sunday and remains active for 24 hours a day throughout the week till 4 p.m. EST on Friday. Also, foreign exchange rates are highly volatile, as even a minor development in one country or a geopolitical event can result in massive currency rate fluctuations.
In addition, forex trades are often conducted on margin and are typically placed in lots. For reference, a standard lot size is 100,000 units of the base currency.
Investors opting for margin trading borrow funds from brokers, amplifying losses and increasing risk. Margin traders are required to put up a certain proportion of capital as minimum margin and maintenance margin.
Want to Start Forex Trading? Here’s Where to Start
Currency trading might seem unnerving, but successful forex trades can generate a higher return on investment (ROI) compared to equivalent stock trades within a shorter time span.
Follow these steps to begin your forex trading journey:
Find a Reputable Broker
Finding an appropriate broker that matches your investment requirements and risk appetite is the first step to currency trading. While there are numerous online brokers available, selecting the right broker will minimize your transaction expenses and improve profit margins. You can take a look at some of the best forex brokers here.
Start With a Demo Account
Forex trading might be confusing for beginners and can result in high losses if not strategically executed. Most online forex brokers allow novice traders to open a free demo account, which simulates real-life trading in forex markets. Traders can see in real-time how currency pairs move and practice investing in a risk-free environment.
Learn the Fundamentals of the Markets
Practicing investing in the forex market is a great way to understand the fundamentals of foreign exchange. Apart from knowing the basics such as market timing and the most popular currency pairs, a forex trader should begin researching key essential forex jargon such as lot size, bid-ask spread, pips and leverage as well as orient themselves with popular currency trading strategies. This practice will help them build adequate knowledge about forex trading.
Apart from providing demo trading accounts, some of the best forex brokers provide educational content on their websites to help beginners understand the complex workings of the currency trading market.
Pay Attention to Risk Management
Risk management is crucial while investing in forex, as the potential for losses is high. Most forex trades are placed on margin, which magnifies the risk of losses on an adverse trade. Implementing risk management strategies such as placing stop-loss orders and limiting the use of leverage can help a forex trader mitigate the market risk with ease.
Work With a Broker You Can Trust
Choosing a broker that fits your investment profile is one important part to becoming a successful forex trader. Online forex brokers that have a short processing time and low commission fees are often the most favored, as forex trades are typically required to be executed as soon as possible to capitalize on price swings. Amid the rising popularity of environmental, social and governance (ESG) investing, the world’s first eco-friendly forex trading platform CedarFX is gaining traction rapidly. You can check out CedarFX’s review here.
This post contains sponsored advertising content. This content is for informational purposes only and is not intended to be investing advice.
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