We find that many people often jump into the market when they have only a partial understanding of the market, and may not even understand the basic knowledge of the market operation, trading orders and so on.
This is like a sheep into the jaws of a tiger.
Today, we have put together a guide for novice investors to understand the basic workings of the forex market, the types of forex orders, and the types of forex analysis.
I hope you have a clear understanding of the market for their own trade, think twice before you leap.
01. What is Foreign exchange trading?
A foreign exchange transaction is a transaction between one currency and another.
Like other financial markets, the goal of currency trading is to make a profit.
The foreign exchange market is the world’s largest trading market, with daily turnover of about $6.6 trillion.
By comparison, about $200 billion is traded on global stock markets every day.
The exchange rate is the relative price of two currencies in two different countries.
Movements in the foreign exchange market are changes in exchange rates that allow traders to profit from them.
02. How does forex trading work?
In the foreign exchange market, traders buy and sell currency pairs;
The single currency cannot be traded “separately”.
A currency pair can also be defined as the exchange rate between two currencies.
So, how do we trade currency pairs?
Let’s say we want to exchange pounds for dollars.
We checked online and the pound is now trading at 1.2420 to the dollar.
This means that a pound is trading at $1.2420, so in order to buy a pound, you would have to pay $1.2420.
If the pound is trading at 1.2480 against the dollar later in the day, this means that the pound is now worth $1.2480, so the pound has appreciated against the dollar.
Conversely, if the pound falls to 1.2360 against the dollar, then the pound is worth $1.2360 and the pound is weaker against the dollar.
Just like any stock, currency pairs can move up or down.
In fact, it is helpful to think of the currency as the “national stock” of the country.
Like the stock market, exchange rates are constantly fluctuating.
Traders are always looking to profit by “buying low and selling high,” which in the case of foreign exchange means buying a portfolio of currencies at a low rate and selling them at a higher rate.
03. Types of Forex orders In order to learn how to trade online, it is important to understand the different types of orders that can be placed on the forex market.
Note that not all forex agents are created equal — different agents will accept different types of forex orders.
Let’s review the most common order in forex trading: a market order – this is an order executed immediately based on the price your broker offers on the trading platform.
So if you want to buy GBP/USD at 1.2410, your broker should offer 1.2410, or very close to it.
Limit Delegation Order – an order to be executed at a later time at the price you specify.
This price can be higher or lower than the current market price.
Stop-loss order – A stop-loss order used to end a trade when the market price reaches a specified price.
It is often used to avoid additional losses when the trade goes against the trader.
Stop order — This is the opposite of a stop loss order.
When the market moves in his favor, the trader places an order at a pre-determined price so that he can lock in a trading profit.
04. Types of Foreign Exchange analysis There are three main analytical methods used by foreign exchange traders to predict market movements.
All of these methods can be used in foreign exchange trading as follows :1) Technical analysis Technical analysis includes the study of price movements.
Traders examine trends and patterns on K-charts, which represent historical information about currency pairs.
Identifying the right patterns can be used to predict future price movements.
According to technical analysis, all current market information is reflected in currency movements.
Technical traders will analyze indicators such as support and resistance, as well as price – or volume-based indicators.
The basis of the technical analysis is the use of the K-chart.
It provides detailed information on all assets, all cycles.
Technical charts can show a range of useful information, including trends, volume, volatility, momentum, and market cycles.
Don’t worry if, at first glance, the technical charts look confusing.
Many brokers offer online forex trading courses that will teach you how to read and use technical charts.
Of course, technical analysis cannot predict the future.
However, it can help identify trends and thus create FX trading opportunities.
2) Fundamental analysis Fundamental analysis examines economic, social, and political forces and developments that may influence the movement of money prices.
Such events often affect a country’s economic base.
The most important events include gross domestic product, the jobs report, inflation and interest rate announcements.
These economic and political events are called “fundamental data.”
Let’s look at some examples of how fundamentals can influence the direction of a currency.
If the UK jobs report is better than expected, this will be positive for sterling and could push GBP/USD higher.
Suppose the Fed raises interest rates – which could push the dollar higher (meaning that GBP/USD would weaken).
Major political developments can also cause currency volatility.
If Britain and the EU suddenly announce a Brexit deal, the pound could surge, sending GBP/USD to higher levels.
When trading forex, you should pay close attention to the economic data that comes out that day (and a few days before).
An important tool used by currency traders is the economic calendar, which lists economic and political events that are likely to have an impact on the currency market.
Both technical and fundamental analysis are popular in trading, and some traders choose one or the other.
It is important that you become familiar with and comfortable with both methods;
You can use either or a combination of both when trading forex online.
3) Sentiment analysis Basic analysis and technical analysis are the most common methods used by forex traders.
There is, however, a third method, called emotion analysis.
This approach looks at how other traders feel about a particular currency mix.
If the fundamental or technical analysis of the market suggests that the pound should move higher, either approach could be proved wrong, as the sentiment of most traders is that the pound will move lower.
When a trader uses sentiment analysis, he is measuring “how the market feels.”
This method is not a scientific one, but sometimes listening to your “gut” and acting on it can be a successful trading strategy!
Since not all traders are familiar with this analysis, it is clearly in your interest to learn this method and incorporate it into your trading strategy when appropriate.
It cannot be stressed enough that a deep understanding of the forex market is essential to being a successful trader.
In order to learn how to trade currency pairs, each trader needs discipline and a trading strategy that fits his needs and goals.
The right start, of course, comes from your basic understanding of the market, which is like laying the foundation.
Some of the most basic common sense, perhaps often overlooked by us.
