Forex Trading A Beginner's Guide

Forex is a portmanteau for foreign exchange. Foreign exchange is the process of converting one currency into another currency for various reasons, usually for trade, trade or tourism. According to the Bank for International Settlements (global banks for national central banks), there are more than $ 4 trillion in daily forex trading volume.

After an agreement at Bretton Woods in 1971, more major currencies were left floating freely with each other. The value of individual currencies varies, which has led to the need for services and foreign exchange trading. Commercial and investment banks do most of the trading on the foreign exchange market on behalf of their clients, but there are also speculative opportunities to trade one currency with another for professional and individual investors.

Forex as a Hedge

Companies that do business abroad are at risk due to fluctuations in currency values when they buy or sell goods and services outside their domestic market. The foreign exchange market provides a way to protect currency risk by setting the value at which transactions will be completed.

To achieve this, a trader can buy or sell currency on the forward market or swap in advance, which locks the exchange rate. For example, imagine a company plans to sell U.S. blenders. in Europe when the exchange rate between the euro and the dollar (EUR / USD) is € 1 to $ 1 at parity.

The cost of making a blender is $ 100, and the US company plans to sell it for € 150 - which competes with other blenders made in Europe. If this plan is successful, the company will make a profit of $ 50 because the EUR / USD exchange rate is even. Unfortunately, the USD starts to rise in value against the euro until the EUR / USD exchange rate is 0.80, which means it now costs $ 0.80 to buy € 1.00.

The problem facing companies is that, while still costing $ 100 to make a blender, companies can only sell products at a competitive price of € 150, which when translated back into dollars is only $ 120 (€ 150 X .80 = $ 120). A stronger dollar generates much smaller profits than expected.

Blender companies can reduce this risk by shortening the euro and buying USD when they are at parity. That way, if the dollar rises in value, profit from trade will offset the reduced profit from blender sales. If USD falls in value, a more favorable exchange rate will increase profits from blender sales, which offsets losses in trade.

This kind of hedging can be done in the currency futures market. The advantage for traders is that futures contracts are standardized and cleared by the central authority. However, currency futures may be less liquid than advanced markets, which are decentralized and exist in systems between banks throughout the world.

Forex as speculation

Factors such as interest rates, trade flows, tourism, economic strength and geopolitical risk affect currency supply and demand, which creates daily volatility in the forex market. There are opportunities to profit from changes that can increase or decrease the value of one currency compared to other currencies. The estimate that one currency will weaken is basically the same as assuming that another currency in the pair will strengthen because the currency is traded as a pair.

Imagine a trader who expects rising interest rates in the US compared to Australia while the exchange rate between two currencies (AUD / USD) is 0.80 (it takes $ 0.80 USD to buy $ 1.00 AUD). Traders believe that higher interest rates in the US will increase demand for USD, and therefore the exchange rate of AUD / USD will go down because it will require less, a stronger USD to buy AUD.

Assume that the trader is correct and the interest rate rises, which decreases the exchange rate of AUD / USD to, 50. This means that $ 50 USD is needed to buy $ 1.00 AUD. If an investor shortens the AUD and buys USD, he will benefit from changes in his value.

Currency as an Asset Class

There are two different features for currencies as asset classes: 

• You can get an interest rate difference between the two currencies.
• You can profit from changes in exchange rates.

An investor can take advantage of the difference between two interest rates in two different countries by buying a currency with a higher interest rate and abbreviating a currency with a lower interest rate. Before the 2008 financial crisis, it was very common to shorten the Japanese yen (JPY) and buy the British pound (GBP) because the interest rate differential was very large. This strategy is sometimes referred to as a "carry trade."

Why We Can Exchange Currencies

Trading currencies is very difficult for individual investors before the internet. Most currency traders are large multinational companies, hedging funds or high-value individuals because forex trading requires a lot of capital. With help from the internet, the retail market aimed at individual traders has emerged, providing easy access to the foreign exchange market, either through their own banks or brokers that create secondary markets. Most online brokers or dealers offer very high leverage to individual traders who can control large trades with a small account balance.

Risk of Forex Trading

Currency trading can be risky and complicated. The interbank market has various levels of regulation, and foreign exchange instruments are not standardized. In some parts of the world, forex trading is almost completely unregulated.

The interbank market consists of trading banks with each other throughout the world. Banks themselves must determine and accept state risks and credit risks, and they have established internal processes to keep themselves as safe as possible. Regulations like this are industries that are applied to protect every participating bank.

Because markets are made by each participating bank providing offers and offers for a particular currency, the market pricing mechanism is based on supply and demand. Because there is a large trade flow in the system, it is difficult for rogue traders to influence currency prices. This system helps create transparency in the market for investors with access to interbank transactions.

Most small retail traders trade with relatively small and semi-regulated forex brokers / dealers, who can (and sometimes do) quote prices and even trade with their own customers. Depending on where the dealer is, there may be some government and industry regulations, but that protection is not consistent throughout the world.

Most retail investors must spend time investigating forex dealers to find out whether it is regulated in the US or the US (dealers in the US and the US have more supervision) or in countries with weak rules and supervision. It is also a good idea to find out what type of account protection is available in the event of a market crisis, or if the dealer becomes bankrupt.

Pros and Challenges of Forex Trading

Pro: The forex market is the largest in terms of daily trading volume in the world and therefore offers the most liquidity. This makes it easy to enter and exit positions in one of the major currencies in a split second for small distributions in most market conditions.

Challenges: Banks, brokers and dealers in the forex market allow a high amount of leverage, which means that traders can control large positions with relatively little money. Leverage in the range of 100: 1 is a high ratio but not infrequently in forex. Traders must understand the use of leverage and risk introduced by leverage in the account. The extreme amount of leverage has caused many dealers to go bankrupt unexpectedly.

Pros: The forex market is traded 24 hours a day, five days a week - starting every day in Australia and ending in New York. The main centers are Sydney, Hong Kong, Singapore, Tokyo, Frankfurt, Paris, London and New York.

Challenges: Trading currencies productively requires an understanding of fundamentals and economic indicators. Currency traders need to have a big picture of the economies of various countries and their relevance to understanding the fundamentals that drive currency values.

The Bottom Line

For traders - especially those with limited funds - daily trading or small amounts of swing trading are easier on the forex market than other markets. For those who have a long-term horizon and larger funds, long-term fundamental trade or carry trade can be profitable. Focusing on understanding macroeconomic fundamentals that drive currency values and experience with technical analysis will help new forex traders become more profitable.

How to Choose a Forex Broker?
TopAsiaFx.com helps you compare and choose your preferred Forex Broker. We suggest keeping the following checklist in mind when making your decision:

• Is the Forex Broker regulated?
• Account Details: Ideally, your broker should offer either a selection of account types or some element of customizability. Competitive spreads and easy deposits/withdrawals are good indicators too.
• Number of Currency Pairs offered: The variety of currency pairs on offer, as well as the quantity, should be considered (the more of both, the better).
• Availability of Customer Service.
• Quality of the Trading Platform: look for a platform that is easy to use, straightforward and offers a collection of technical and analytical tools to enhance your trading experience.

Rank	Broker Name	Special Offer	Minimum Deposit	Spread	User Score	Maximum Leverage	Regulation	Start Trading
1	NordFX	55% Deposit Bonus	$10	0.0 Pips	96	1:1000	VFSC	Open Account
2	SGT Markets	Refer a friend $10	$500	0.0	95	1:400	IFSC	Open Account
3	OctaFX	50% Deposit Bonus	$100	0.4	94	1:500	IBC	Open Account
4	Exness	No	$1	0.1	93	1:2000	FCA,CySEC,IBC	Open Account
5	IC Markets	No	$200	0.0	92	1:500	ASIC	Open Account
6	Tickmill	$30 Welcome  Account	$100	0.0	91	1:500	FSA,FCA	Open Account
7	Axiory	$50 Deposit Bonus	$200	0.0	90	1:400	IFSC	Open Account
8	Justforex	100% Deposit Bonus	$1	0.0	89	1:3000	IFSC	Open Account
9	ThinkMarkets	No	$250	0.4	88	1:400	ASIC,FCA	Open Account
10	XM	$30 Welcome Account	$5	0.0	87	1:888	ASIC,FCA,IFSC	Open Account
11	FBS	$50 Welcome Account	$1	0.0	86	1:3000	IFSC	Open Account
12	HotForex	No	$5	0.0	85	1:1000	INC	Open Account