When entering the forex trading market, there are a couple of things that you must prepare first. Doing your research is important in order to make the best possible decision that will benefit you not only on the current situation you are in but also in the long run.
You must choose a trading strategy, a currency pair you would like to trade, as well as the market you would like to trade in. Some of the markets you can choose from are the following:
Foreign exchange market (Forex, FX or currency market)
This is the global decentralized or over-the-counter (OTC) market for the trading of the currencies. This market is one of the, if not the, largest markets in the financial world. It is used to determine the foreign exchange rate. The forex trading market includes all aspects of buying, selling and exchanging currencies on either current or pre-determined prices.
This is the market for financial instruments such as futures contracts or options. They are based from other form of assets. There are two divisions of the derivatives market, namely, the exchange-traded derivatives (organized futures exchange transactions) and the over-the-counter derivatives (private trade and negotiation directly between two parties).
These are investment funds traded on stock exchanges. Individuals that use retail brokers usually trade ETFs in this secondary market.
It’s important to know that there are different ways to trade forex. You also have the option to become a retail forex trader by using retail forex trading platforms. You can choose your broker depending on the service that they offer. There are typically two choices:
Brokers as agents
With this, the broker will find you the best prices in the market. They will also be the ones who will place the deal for you. This can be done for a price.
Brokers as dealers or market makers
The broker here is acting as the principal in the transaction. It is tasked to quote the deal price.
We’ll now be teaching you some of the known methods that can help you decide on how you will tackle the forex trading markets. In this article, you will be able to learn how to trade forex.
Contracts For Difference (CFDs)
Aside from the US and the UK, Contracts For Difference or CFDs have become one of the most popular means of trading in the forex trading market. The prices of CFDs are determined by your brokers. Additionally, just like with shares, you will be able to make or lose money depending on the change of price on the CFDs.
These derivatives have an over-the-counter transactions, a contract between you and your broker. It’s not possible to move a CFD between brokers. They also can’t be traded in an exchange, but are traded instead using a margin.
Margined foreign exchange
If you’re a resident of the United States, it may be impossible for you to open a CFD account. This is due to your country forbidding it. Brokers will still lend you most of the amount of the trade (at least 90 percent most of the time). But with the margined foreign exchange, you will be buying and selling actual currency rather than the broker-priced contract. Larger minimum trade sizes will frequently apply.
Most of the margined forex contracts have foxed lifespans. You must first ensure that you will be able to leave the trade before the time horizon expires.
Exchange-traded futures that are focused on specific currency pairs can also be traded for those who want to partake in the future price action of forex. Currency futures give you the opportunity to narrow down spreads and the range that can be sold by other parties.
But there is a down side. Minimum trade sizes in this part of forex trading are usually larger. It typically reaches at least US$25,000. Also, the futures can only be sold when the exchange you are listed under is open.
Most of the Exchange Traded Funds (ETFs) are cheap and classified as index tracking funds that aim to track the performance of a stock market index. They can be seen being bought and sold thru stock brokers, much like shares. A currency ETF, on the other hand, follows the price of a certain currency pair. This can make your decision to buy or sell funds based on currency prices much easier. There are also leveraged versions of these ETFs.
Regardless, Currency ETFs are more suited to you if you are an investor who is taking medium to long term views on currency prices. This is different from the short term, week to week prices.
Financial Spread Betting
This type of forex trading is only available to those living in the UK and the Republic of Ireland. Financial spread betting will give you the opportunity to trade forex trading markets using margin.
Prices for spread bets are made on a per point basis (e.g. the amount of points that the price moves while you have open trade). You, as a trader, can control the amount of risk by staking amounts per point on the trade.
Spot Foreign Exchange
For those of you larger investors, like very wealthy private individuals or fund managers, this one is suitable for you. Spot foreign exchange gives you the chance to trade currency without margin. However, if you’re not willing to use a trade that will involve your base currency, you must first acquire at least one of those currencies you want for yourself.
Your broker can offer you a spot FX swap facility. These facilities will let you swap one currency for another at a set rate for a limited time.
Options contracts offer to buy or sell forex pairs at a certain price. A trader will usually have either a sell or buy option for a currency at a future agreed date with the broker. You don’t particularly need to use the options when the date arrives. But if you do end up successfully forecasting the market, you stand to gain an advantageous position in a trade.
Options can actually be traded themselves. In addition to this, some brokers allow traders to spread bet on the price of options rather than buy the options themselves. As a smaller investor, this can be a cheaper choice.
Learn more about how to avoid losing money in forex trading.
There are different ways to partake in forex trading. You should know your options and clearly understand them before making any final decisions. Remember, due diligence should not be neglected. Do your research. Risks can be lessened the more knowledgeable you become.
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