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What is Forex Trading and How Does It Works?

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forex trading

Are you sure forex trading is difficult?
Difficulty or not trading forex is relative.

Even though you may think that forex trading is not something that is easy to do, that doesn’t mean you can’t learn it, right?

Even forex traders with decades of experience and those who have managed to make huge profits from forex trading are sure to have a difficult journey.

It is the same with the people we have considered successful – whatever the industry or business, most of them also started from scratch. Just like what you are doing right now is studying and wanting to be good at it.

The question is, are you ready to try and be persistent like them in order to make a profit according to the target you want?

Of course, I can! It doesn’t matter whether you are a beginner or an amateur, you can still be like them.

Therefore, it is important for you to understand a few things about forex trading before you really dive into the world of forex and become a pro trader:

What is Forex Trading?

Of course, it is familiar to your ears when you hear the word “Foreign Exchange” or forex, right?

Yes! Forex is the exchange of foreign currency which is commonly referred to as “foreign exchange (forex).”

If it is related to trading, forex trading is the activity of trading currencies from various countries carried out by various parties (traders) with the aim of making a profit.

Trading or buying and selling currencies between various parties do not occur in a market that has a physical form such as a building, but the transaction is carried out in a digital network called the “forex market”.

This Forex trading activity is carried out online and the currency it trades is not in the form of sheets or piles of money, but in the form of the value of the currency itself.

So, the differences in the place of the transaction and what is transacted then lead us to the following types of trading.

Types of Trading

Along with the times, forex trading is now divided into several parts in the financial market and also a commodity, each of which has its own objectives and interests. The following include:

1. The Spot Market

This market is a market in which the buying or selling of financial instruments, commodities, or other assets by cash and direct payment, as opposed to a market for future delivery.

Usually, this market is often referred to as the cash market or physical market because the trades are directly exchanged for assets.

2. Forward Market

The forward market or what is often referred to as the futures market is a market for sale and purchase transactions with delivery at a later date.

It is said that futures are the opposite of the spot market or cash market because transactions that occur are delivered on a timed basis.

3. The Futures Market

The futures market or Futures Trading is one of the markets that is quite familiar in Indonesian society because this market is one of the places where the agreement that states the standard volume of a certain currency is exchanged on certain maturity date.

Then what is the difference between the futures market and the forward market, even though they are both referred to as the futures market?

The difference lies in the way the trades are carried out. The futures market is done OTC (over the counter) while the forward market is the opposite. In other words, futures trading is carried out on a futures exchange whereas forward contracts are not.

  • Futures exchange is a place or facility to trade contracts on a number of financial instruments or commodities at a certain price.

Products that are Traded on the Forex Market

What products are traded? Foreign exchange, of course, right? So true. However, there are important things you should know more about if you want to become a pro trader.

In forex trading, currencies are traded in pairs. That is, the currencies of one country can be traded in pairs with the currencies of other countries.

Examples of currencies that are often traded on the forex market are EUR / USD which means the currency pair Euro and US Dollar. This is what is known as a currency pair.

In the forex market itself, basically, this currency pair is divided into 2 parts, namely the major currency pairs (major pairs) and cross currency pairs (cross pairs).

1. Major Currency Pairs

SymbolCurrency Pair
AUDUSDAustralian Dollar and US Dollar
EURUSDEuro Vs US Dollar
GBPUSDPound Sterling Vs US Dollar
NZDUSDNew Zealand Dollar Vs US Dolllar
USDJPYUS Dollar Vs Japan Yen
USDCHFUS Dollar Vs Swiss Franc
USDCADUS Dollars Vs Canadian Dollar

2. Cross Currency Pairs

SymbolCross Cureency Pairs
AUDNZDAustralian Dollar Vs New Zaeland Dollar
GBPJPYPound Sterling Vs Japan Yen
EURAUDEuro Vs Australian Dollar
EURGBPEuro Vs Pound Sterling
CHFJPYSwiss Franc Vs Japan Yen
AUDJPYAustralian Dollar Vs Japan Yen
GBPCHFPound Sterling Vs Swiss Franc
EURCADEuro Vs Canadian Dollar
GBPAUDPound Sterling Vs Australian Dollar
EURCHFEuro Vs Swiss Franc

Of the many products (currencies) that are traded, there are some currencies that are the most “dominant” or popularly traded because they are considered to be more volatile. What are they?

What types of transactions should you be aware of before starting trading?

Before you make a transaction in the pairs available, it’s good for you to know 2 types of transactions that can be done, namely “Buy” and “Sell“. You can carry out the buying or selling process according to the strategy that suits you, and also you.

You really believe that the value of a certain base currency will go up or down based on the analysis that has been done ..

Well, the next question is: What causes the rise and fall of prices in the forex market?

What can Affect the Forex Price?

one of the causes is supply and demand.

When the world needs more US dollars, at that time the dollar value can also increase. When there are too many US dollars circulating in the market, the price of the currency can fall.

The forces that move the stock market can also have an impact on changes in currency values. In addition, other factors such as interest rates, new economic data from the largest countries, and geopolitical tensions can also affect the price of a currency in a country.

The Best Place and Time to Trade

First of all, you need to know that forex trading time is divided into main sessions, namely:

  • Sydney Session (Australia)
  • Tokyo Session (Asia)
  • London Session (Europe)
  • New York Session (America)

Here we can see that there is some considerable time difference between Australia and America (around 16 hours). When a market in one country closes, another market is in an open position, and so on. What are you curious about?

Below are tables of the open and close times for each session:

Spring/ Summer in the U.S. (March/April – October/November)

Fall/Winter in the U.S. (October/November – March/April)

Basically, trading on the forex market can be done without any breaks for 5 days a week. That way, there will always be opportunities open to be able to multiply profits in forex trading at any time without knowing the time.

This trading activity can also be very flexible. You don’t have to worry about more time spent working or other free time that you can fill to do activities with your family.

The development of the forex market is very fast and is accompanied by the growth of forex brokers who become your partners in trading into a combination that is perfect for you to trade anywhere.

Even though it is always open 24 hours, the forex market still has certain days and hours where the trading activity will be very busy and quiet.

The more crowded the market, the greater the chance to get the profit you expect. On the other hand, if the forex market is quiet, there will be fewer opportunities to make a profit. Therefore, it is important for you to understand the times and guidelines for forex trading hours as in the table above.

What is very rarely known at every market open session is that there are several opportunities that can be exploited by using certain strategies such as the London Breakout strategy. However, to be able to find these opportunities requires carefulness and also good analytical skills.

How Exactly Does Forex Trading Work?

Not a few think that forex trading is similar to gambling or gambling because it only relies on the luck factor on the predictions made.

Is that true?

Wrong! Forex trading is not a gamble.
any price changes that occur in the forex market are not controlled by certain parties, but rather changes and price movements are influenced by economic conditions and other factors that affect the exchange rate of the currency.

In forex trading, a trader will manage and carry out each transaction independently through an intermediary broker.

For that, in addition to understanding the forex market and how forex trading works, make sure you have also chosen a trusted forex broker that has been officially regulated.

Platform for Trading

Of the various trading platforms available, MetaTrader 4 is one of the most well-known trading software among market players. Metatrader 4 or often abbreviated as MT4 is the world’s most popular online trading platform for trading forex, CFD, commodities, and indices. This platform can be installed on various devices such as PCs, laptops, and smartphones.

MetaTrader 4 provides the necessary tools and resources to analyze the price dynamics of financial instruments and make trading transactions. What are the advantages of this trading platform?

MetaTrader 4 advantages

  • This software is supported by all systems both Windows, Android, iOS to Mac.
  • Facilitating all kinds of trading products.
  • Available in multiple languages.
  • Various facilities, varied charts, and hundreds of technical indicators as tools for analyzing and trading forex.
  • Scripting facility to help traders easily modify, edit or analyze as comfortably as possible.
  • EA (Expert Advisor) facility can be added to MetaTrader to facilitate automatic transactions.
  • It is connected to an internal email system that allows traders to get forex information quickly
  • Traders can place a variety of orders both immediate and pending and can set take profit and stop loss to adjust profit gain and limit risk automatically.
  • A reliable security system, equipped with encryption and is continuously updated regularly.

Even so, there are obstacles that may arise when trading forex. So, what are these obstacles?

Constraints in forex trading

Obstacles will always remain, including when you are trading. One of the most common obstacles that occur is a lack of knowledge of risks and ways to anticipate them in order to minimize losses that result in reduced capital.

There are quite a lot of traders who apparently do not have the right trading strategy and in accordance with their character, do not have a trading plan and don’t even know how to compile a good trading plan, do not understand the application of capital, and risk management, and are very easy to give up just because they experience a few losses. time.

Tips for “comeback” from Failure in Trading

Before you decide to give up and admit defeat, try to follow these tips to gather back your enthusiasm so that you can turn failure into success in forex trading!

  1. Strengthen your will and determination

Many people stop in the middle of the road, but this is the time for you to convince yourself that you can get the profit you want.

  1. Gradually go back to learn the basics of trading

Many people who want to use sophisticated strategies but don’t understand the basics end up being zoned.

  1. Find a place to study or a good mentor

Make sure you learn about trading from the right sources and the right people. In a sense, people who really have experience and are directly involved in the world of forex trading.

  1. Understand all the important things of trading

Make sure again that you understand how to perform analysis, using MetaTrader to emotional control (trading psychology). If you are a tough fighter, success will come naturally as long as you keep trying and fighting.

Doesn’t every business have risks?

There is no instant way that your business can immediately benefit. All require a lot of processes and hard work, including when you are trading on the forex market!

Risk in Forex Trading

Remember! Forex trading will not always generate profit or profit. In many transactions that you make, of course, at one time you may experience losses, and this is very normal to happen. Even someone who has a large business must have experienced losses, right?

risk of forex trading

Likewise in forex trading. In fact, some traders who are quite experienced even consider that risk in trading is a valuable lesson so that they can better manage their capital.

Therefore, with a mindset like this, not a few experienced traders end up consistently making profits from forex trading.

Consistency here does not mean that every transaction made must always be profitable, yes. Consistency means that in addition to experiencing a number of losses, overall the trading capital actually increases. For example, the capital consistently grows 5% every month from the total profit and loss experienced in each transaction.

Therefore, before deciding to start trading in the forex market, it is extremely important for you to be able to understand the risks that you might experience and always be ready with a way to anticipate them.

In forex trading, you need to master capital and risk management well.

What is capital and risk management like?

Take a look at the following illustration

John Doe plans to trade forex with a capital of $ 2000

At that time, John Doe was willing to risk 10% of the capital he had as a reference for the risk limit that could be accepted when he suffered a loss and hoped that the potential profit he would get would be the same or even more, namely between 10% to 15% per month.

So, what Joh Doe is doing is one of the most basic things in capital and risk management. Later, there will also be rules such as lot size, number of transactions per day, capital allocation, risk mitigation, etc., according to the trading capital you have.

Talking about capital, how much capital should be spent to start transactions on the forex market?

Forex Trading Capital

Capital to trade forex is relative. Releasing capital when trading, actually depends on how big the profit target you want to get.

For example, let’s say that the average professional trader manages to get a profit of 5-10% per month from the initial capital. That means, if you want to get a target of $ 500- $ 1000 per month, then you need a capital of between $ 5000- $ 10000.

Even so, it does not mean that if you have capital under $ 5000 you will not be successful when trading. Some experts also suggest spending a minimum initial capital of $ 1000 when trading. For a more detailed comparison of the size of the capital, you can learn about it in the article $ 500 vs. capital. $ 5000 in the following.

Then regarding profit or loss in trading, this depends on how to analyze the price technically and fundamentally, as well as the use of a trading strategy that really matches your character and risk profile.

Why do you have to trade forex? Why not others?

Not a few people and maybe including those of you who are still beginners in this matter, keep asking “Why should I trade in the forex market? What are the advantages of forex trading compared to other trades? “

  • The forex market is known as a very potential market in terms of its high level of liquidity and will continue to grow rapidly over time.
  • The capital you spend on trading is much smaller (compared to the actual transaction value).
  • Transactions can be carried out in two directions (two-way opportunity), either down or up, but can still reap benefits.
  • Transactions can take place 24 hours a day, 5 days a week.
  • Can be done online, from anywhere, and anytime.
  • In forex trading, currencies are traded in various sizes with lots of units, the bigger the transaction size, the greater the chances of profit or loss. In accordance with the principle, “High Risk – High Return.”

However, this is not a problem in forex trading because there is leverage to increase the transaction value so that a trader can reap a profit when prices go up or down (two ways opportunity).

So, are you ready to become a reliable trader in the forex market?

You can prepare yourself by trying to trade on a demo account using virtual capital which you can spend up to $ 500,000 before using real capital.

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