What Is Forex and How to Make Money Trading Forex
As financial technology continues to advance, access to markets becomes easier and easier. With that, the methods to make a living within the financial sector become more and more diverse. From trading futures to investing in cryptocurrencies, there is a method out there to fit your needs. One market that has grown in popularity is the Forex market, which is short for foreign exchange. This is simply when currency pairs trade on the market, such as the United States Dollar compared to the Great Britain Pound.
- What is Forex?
- How Does Forex Work?
- How Can You Make Money Trading on Forex?
- Forex Indicators
- Forex Robots
- Choosing the Best Forex Broker
- Meta Trader 4 and Meta Trader 5 Compared
- 5 Ways To Avoid Losing Money In Forex
What is Forex?
The Forex market is a near 24 hour, 5 days a week market that trades every currency pair in the world. In the immediate sense, it can affect businesses that import and export products, while long-term affects include increased or decreased wages for employee. Within these two example, there are people that take advantage of the movements in the markets and these individuals are known as Forex traders.
How Does Forex Work?
Forex traders enter positions when they believe the market is moving in their desired direction. Similar to equities or futures, you can enter into long or short positions, depending on your opinion. One of the differences are when trading Forex, you choose a lot size, rather than a share of stock. Each lot size can be as little as a fraction of an amount such as .1 or large such as a 100 lot position. This depends on your balance but we’ll dive into that later.
How Can You Make Money Trading on Forex?
How you make money trading the Forex market is predicting where the market will go and enter a position accordingly. When trading in a market that is globally impacted it is critical to stay abreast of the information being published within each country. For example, within the United Stated there are the Fed meeting minutes and oil inventory numbers that tend to have an impact on USD currency pairs. Factoring these in with your decision-making is how you begin formulating a game plan to profit in the Forex market.
Taking a complimentary approach to the Forex market, many traders utilize technical indicators to help them formulate an opinion on the markets (TradingView for example). Fundamental data is important, but many need the aid of technical indicators to solidify thoughts on the market. One of the misconceptions that continues to circle social media and advertisements is there is a one size fit all indicator that is full proof and can help you earn money in the markets. While this would be wonderful, there is no such product that is the holy grail of trading.
Instead, you as a Forex trader need to begin looking at the different technical indicators out there and begin finding which ones fit your trading style best. Some of the more widely used charting tools include the Moving Averages, RSI, and Bollinger Bands. These tools are customizable to fit your trading style, whether you are a day trader or a swing trader. Certainly these tools will assist you in helping formulate an opinion but to say they predict market movements one hundred percent is simply a lie.
Switching gears, with the growth of markets and retail traders gaining access to more, there have been many claims that companies or individuals have created a ‘bot’ that will trade for you and offers a profit. In the same boat as the indicators, it is highly unlikely there are any bots out there that provide consistent returns using only algorithms. If you are ever approached by a brand selling a bot, you should stay away and stick to your original plan.
When starting in the Forex markets, first you should understand the fundamentals and know how markets react to certain news publications. From there, you can begin to find the right technical indicators that fit your trading style. At this point, if you are able, you can begin putting together some sort of automated process that either trades or alerts you to potential trading opportunities. The difference here is you understand what is being done to make the robot and it is tailored directly to your trading style and needs.
Choosing the Best Forex Broker
Now that you understand what to avoid and how to formulate a game plan, it is time to find a broker that is right for you. There are several out there but we will quickly review a couple so you understand what is out on the market.
- First up is IQ Option, which allows you to trade Forex either using Meta Trader or binary options. Binary options simply state whether the market will be above or below a specific strike and a defined point in the future. With binary options you have defined risk and profit up front, allowing for a less stressful way to access the market.
- Next up is FX Pro, which does not offer binary options, but rather utilizes Meta Trader 4 and Meta Trader 5 to place and execute trades. Later in this section, we’ll go over the difference between the two products. FX Pro also offers a detail list of their products and spreads, allowing for a picture of what it will take to breakeven in a trade.
- Lastly, there is Alpari that offers potential bonuses as well as CFD’s, along side Forex trading. One area to consider is the education that each platform offers. Continued education, regardless of Forex or equities is critical. Not that it is necessary for the platform to provide educational content; it is certainly a move that shows they are invested in their clients.
Meta Trader 4 and Meta Trader 5 Compared
The most popular product used to trade the Forex markets is Meta Trader. From there, the most widely used of their products are version four and version five. It’s easy to gather that you can access the market using these platforms, this section will focus on the differences that may sway your opinions one way or another.
One of the main differences between the two platforms according to Forexboat.com are the markets. MT4 is unable to access certain markets so with the introduction of MT5, this allows for more brokers and clients. This can benefit the trader by having more options to choose from when attempting to access the Forex markets.
Another main difference is the background information that allows for algorithm trading, which was briefly mentioned in an earlier section. One of the key features that MT5 allows for is Object-Oriented Programming. If you are only interested in indicators then this may not be as important. However, should you have an interest in building an algorithm for yourself, you may benefit from Meta Trader 5.
Lastly, MT5 is better for testing compared to MT4. When building a trading plan, if you have the ability to back test a strategy, you should take advantage of that. This can give you insight into if your strategy has merit or is completely off the wall. Regardless of which you choose to move forward with, ensure it fits your trading needs and allows you to execute your game plan accordingly.
5 Ways To Avoid Losing Money In Forex
Entering into a financial market can be intimidating and full of people ready to take advantage of you. It is important that you take as much time to inform yourself so when you move forward, you know what to look for and how to avoid losing money trading in the Forex market.
Ensure You Are Finding a Reputable Broker
First, ensure you are finding a reputable broker to process your trades. With a plethora of brokers on the market, there are some that provide better rates than others. In order to save you money, take the time to understand their fees, as well as the spreads between the currency pairs. If you can save money in those two spots it will benefit you greatly over time.
Diversification Is a Must
Second is easily the most obvious in finance is ensuring your holdings are diversified. Diversification is critical because for example, if you are trading strictly USD pairs and there is negative news in the United States, it could impact your whole portfolio negatively. Ensure you have exposure across many of the pairs and diversify your risk away, allowing for a more balance portfolio.
Learn First and Trade Second
Third is to learn first and trade second. Before opening a live account, see if your chosen platform allows for a demo account. From there, you can begin building your trading and investing plan, then test it without risking any of your hard earn capital. Places you can consider to educate yourself include YouTube and any material the platform you utilize provides.
Smart Money Management
Fourth is money management when implementing a trading strategy. When trading, it is important to limit your position size to only require roughly 2% of your capital, this way you do not become overextended. To compliment that, ensure you are not leveraged greatly because certainly you can make money quickly, but you can lose money quickly as well.
Avoid High Leverage
Lastly, ensure if you use leverage that it is in line with your current strategy and it won’t cause you to lose capital quickly should the market move against you. You can leverage 1:100 or even 1:1000, which is likely excessive. Instead, look for a 1:10 or something more customizable should you be afforded the option.
Earning money in any financial market can certainly be done. However, with Forex it may take a little extra time due to the global reach it has. Not only that, but depending on what market you choose, it can become increasingly sensitive to information.
First you need to know there are no free rides in Forex. If you are approached with a product that claims to give you returns through a robot or indicator, odds are it is too good to be true. From there, ensure you have a trading strategy of your own in place and stick to it. Then you can take your requirements and shop around to find the right platform and broker to process trades. Lastly, ensure you have the right money management plan in place because Forex and quickly give you returns, but quickly take your money as well. Forex is an interesting and ever evolving market, and if played correctly can provide you with a healthy return.