Ever wondered if it pays to invest in Forex Trading? Well there are some who make a very good living from trading in currencies but then again, they are professionals that do this for a living. Having said this with the advancement in technologies nowadays anyone can try their hand at trading in the foreign exchange market and you could make quite a comfortable income if you know what you’re doing. Even if you’re not an expert, some of the online trading platforms that exist today will allow you to follow Forex experts and carry out the same trades they do. In this article we will show you how to trade Forex directly from the comfort of your own home or anywhere else for that matter.
Forex Trading: What does that mean?Before starting and understanding how to invest in Forex and start trading, let’s explain briefly what it is. Forex is an abbreviation commonly used for “Foreign Exchange”, and generally it describes the purchase and sale of Currency in the Foreign Exchange Market, in particular by investors and speculators. The familiar expression that is commonly used is “buy low and sell high”, and this certainly applies to currency trading. A Trader on the Forex Market will be able to buy currencies that are undervalued and then sell them when they increase in value, just as a stock trader buys shares that are undervalued and sells shares that are overvalued.
How to Trade Forex: The EssentialsTo invest in Forex it is important to use both fundamental analysis and technical analysis to determine the trend of currencies. As mentioned, Forex Trading is based on the exchange of currencies, and the task of the Trader will be to predict the future performance of one currency compared to another and try to profit from the movements of value. Obviously if their analyzes is right they will make a gain otherwise they will make a loss on the trade.
Currency PairsYou always need two currencies to make a trade, that is why we always talk about ‘Currency Pairs’. To understand the trend of the value of a currency it will be necessary to know the factors that will determine an upward or downward trend of the currency pairs. In summary, it can be said that the value will be determined, in the first place by the decisions of the Central Banks, and their influence when determining the quantity of the circulating currency notes and the interest rate of the currencies, i.e. the cost of money.
In essence a high cost of money will result in low demand, while low cost will prompt more demand.These two factors alone however are not enough to determine the increase or decrease in the value of a currency. You will need to analyze other economic and global factors that effect the valuation of the currency in relation to other currencies. For example, a low cost of money, will eventually support the recovery of the real economy of a country this in turn lead to an increase in the value of the currency. Other economic and regulatory factors will also affect the value of the currencies, for example data relating to the employment and unemployment rate, inflation and deflation, GDP, imports and exports, and so on. Basically all those elements relating to the economy of the countries in which a given currency circulates has an effect on the currency valuation.
Economic PolicyAnother determining factor concerns economic policy and therefore all decisions made by governments which can give support or hinder the country’s economy will determine whether a currency grows stronger or weaker. In general, it can be said that an increase in the demand for a given currency will lead to its appreciation, while a decrease in demand will lead to a depreciation. On the contrary, an increase in supply will lead to a depreciation and in turn will favor exports, while a limited offer will lead to an increase in the value of the currency itself. To be able to make gains with Forex Trading it will therefore be necessary to try and understand in advance the moves that can come from the Central Banks and from the various governments. For this it is essential that we follow closely the economic calendar, that is, the dates were relevant statistical data is revealed. For this reason, many Forex brokers offer Traders such a service, that is, they warn when there will be a statement or a press release from the governors of the Central Banks or when the statistical institutes are going to disclose the data on inflation and deflation, on unemployment, import and export figures, and so on. It is very common that in conjunction with these declarations there are movements in currency values and also substantial changes in trends.
Types of Analysis required to Trade in the Forex Market
The Fundamental AnalysisThe economic calendar and the statistical data that comes out from government entities we mentioned previously are part of what Currency Traders refer to as the fundamental analysis. This is an analysis aimed at determining the probable performance of a currency based on data from the real economy. Now doing this analysis and transforming it into relevant signals can be quite daunting, especially for beginner Traders, and for this reason it’s recommended to get Forex Trading signals based on a fundamental analysis carried out by professionals. These signals, in some cases will be offered free of charge by the Brokers, while others will provide them for a fee and send them to you either by E-mail or SMS. Relying on the fundamental analysis to invest in Forex will not guarantee 100% certainty of the outcome from a trade, but it will certainly give you greater chances to make a profit from your Forex trades.
Technical AnalysisThe technical analysis, on the other hand, will be simpler to carry out, it is based on the principle of the cycle of economics, that is, the repetition of certain conditions will also repeat the trends.
To carry out a technical analysis, it will be necessary to examine the graphs of trends that have occurred in the past.When carrying out the technical analysis, it will first be necessary to identify the level of support and the level of resistance.
- The resistance level is the highest price point, or value, in the period taken into consideration, and in theory technical analysis can also be made on the basis of the previous day’s data,
- The support level represents the minimum price value reached in the period taken into examination.
One can never completely eliminate the risk in Forex TradingTo increase your chances of ending with Profitable trades we therefore recommend trying to use data signals from both technical and fundamental analysis, by combining and coordinating the results to get the most likely outcome. It is important to know that in Forex Trading you will not only gain from an increase in the value of one currency compared to another, but also from a loss of value. By performing the correct analysis and predicting when a currency is at its weakest, you could also make a profit, if it turns out that the currency can be exchanged in the future at a much higher value, in which case it will be better to buy it now at the minimum value.
How to Trade Forex with LeverageAmong the many advantages of Forex Trading there is also the possibility of investing very little and keeping the risk of losses under control. In this regard, it is good to underline that in order to operate it will obviously be necessary to pay the minimum value as established by the various online brokers. For example there will be those that will allow you to operate by starting with just $/€ 20. Also, the minimum for the individual transaction is fixed by the Broker, therefore it is advisable if you want to risk little, to look for a Broker that will allow you to act with low sums, this is especially true for beginner Traders, because it will be essential to be careful of the ratio of Leverage, or simply the Leverage.
The leverage is a mechanism through which the gains and losses will not be calculated on what is invested, but on an exponential sum.For example, if the Broker will propose a leverage ratio of 1: 100, and if the Trader decides to invest just 1 euro, it will count as if 100 euros had been invested. How’s that? Well for every $1 that the Trader puts in, the Broker will put $99 of their own, so if there’s a 10% gain from the trade, the $100 will become $110 and $99 will be returned to the Broker and the Trader will keep all of the remaining $11 gain. Therefore with Leverage a trader can make good money by investing only a small portion of the total trade value. In the previous example if the trader only traded with the 1 euro he initially deposited then the gain would have been of only 0.10 cents. Sounds to good to be true? Well that’s because there is a catch. The leverage works the same way even in cases that the trade is unfavorable and is loss making. So, once again, looking at the above example, if the transaction turned into a 10% loss instead of profit, then the leveraged trade would result in $10 loss. The remaining balance of $90 would go in full to the broker and the trader would have lost his entire $1 invested. On the contrary if the trader invested the $1 without using leverage then he would have lost only 10%, that is 0.10 cents and would still have 0.90 cents left. In this example the amounts are ridiculously low and you might be thinking what’s the big deal if I loose $1, but when you start trading with leverage you can trade much higher amounts, running into thousands and therefore a loss making Leveraged Forex transaction would mean you can lose hundreds or thousands in one go.
Broker Leverage RatioBeginner Traders are advised to choose Brokers that will not have an excessively high Leverage ratio because of the fact that the mechanism works even in the event of a loss. In this way they will not make as much money on a gain, however they will also not lose too much on a loss. So, the margin is connected to the Leverage ratio, in fact when you invest a certain sum on a position, you will notice that not only the funds invested will be blocked, but also a margin share. This amount will serve to cover any losses and will be calculated precisely on the basis of the ratio of Leverage, this makes it clear that the losses may be higher than what was invested. If you want to understand the leverage relationship, its mechanism and also the related risks, we recommend you practice Forex Trading through a Demo Account first, before you try your hand with real money. Plus500 is an online Broker that offers a good demo account. You can check our review here. A demo account is an account which most online broker platforms offer to their users, where you can use virtual money instead of real money and perform Forex trading transactions in the real market with these virtual funds. You will obviously not gain any real money if you make a profit with a Demo account, however you will also not lose any money.
If you are a beginner trader, a demo account will help you understand exactly how Forex works, develop strategies, understand your strategy errors. In essence operate in real market conditions, using practice money, with the advantage of not risking anything.