How Does Foreign Exchange Trading Work?

How Does Foreign Exchange Trading Work?

Foreign exchange trading used to simply be something done by merchants or those who traveled constantly, exchanging the currency of their homeland for the local currency. However, these days, references to foreign exchange trading more often refer to a special type of investment trading. Modern foreign exchange trading, commonly called forex trading, is a type of investment trading which is based on the price fluctuations between two different currencies, and the speculation of traders on the future values of those currencies.

The premise of Forex trading seems simple enough, and many who are looking to get into it believe that it will be quick and easy money. However, forex is no quick cash grab, and 96 percent of the novice traders trying to break into the market end up walking away with nothing. Often, this leaves them feeling scammed, but forex trading, while vicious, is no scam. There is real profit potential with forex, but novice traders fall into traps and don’t adequately educate themselves before jumping in. Any novice trader should seek first to learn the market before trying to turn a profit. If you go in big at the start and make a mistake, it can be disastrous. So choose a good broker to help you – market gbp or trade111 for example.

If you’re just getting into forex, then there are a few big mistakes you can make, but by far the biggest mistake, and the one that claims the most novice traders is leverage. Leverage is not a tool to be used lightly, and, while it can help experienced traders to make immense profits, it will swallow up novice traders and their money, spitting them out with nothing. Leverage is an interesting concept. It allows you to trade with borrowed money, using your account to trade with more than you have. For example, 2:1 leverage allows you to use $10,000 to control $20,000 in currency on the foreign exchange market. Many brokers in the US will offer leverage rates of up to 50:1, and that kind of potential is alluring to novices. But that potential for profit also comes with added risk and a potential for massive loss. Leverage is one of the most dangerous things a new trader can do, and many novices learn that the hard way; by losing everything.

If you’re able to surmount the temptation to use leverage, then your next biggest hurdle is yourself. The biggest danger to your success as a forex trader is your emotions. Trading based on hunches or emotions can absolutely destroy your chances of success, and cause your money to disappear quickly. Forex is unforgiving, and it takes a cool head to succeed. One of the most important things to do when forex trading is sticking to a solid plan. Make it clear to yourself when and where you’ll buy, and when and where you’ll sell. Keep to your plan rigorously. Losing out on potential profit is well worth the stability that a plan will give you. It’s also important to keep a close eye on your progress. Keeping a forex trading journal is always a good idea.

If you can keep your emotions in check, and stick to a solid plan, then you might just make it. However, before you ever enter the real market, you should practice with a forex trading demo, and develop the plan you need in order to succeed over the long term. When you think you’re ready to enter the market, remember to avoid leverage like the plague, and start out small. Let yourself mess up and make mistakes before you put big money on the line, and always try to learn from every failure as well as every success. Never get cocky, keep your head screwed on tight, stick to a solid plan, and you might just make it as a forex trader.