How To Do Forex Trading Step By Step

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How To Do Forex Trading Step By Step – Learn more about Forex trading, how the FX market works and what drives currency rates, various trading strategies and instruments. Continue reading to learn how to trade Forex with CFDs.

Forex trading is the process of buying and selling international currencies with the aim of profiting from exchange rate fluctuations between different currencies.

How To Do Forex Trading Step By Step

How To Do Forex Trading Step By Step

The word ‘Forex’ refers to foreign currency. The forex market allows fiat currencies of different countries to be traded against each other. For example, trade the British Pound against the US Dollar (GBP/USD).

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What is forex trading and how does it work? Currency or foreign exchange trading – often known as FX – involves trading currency pairs to try to potentially profit from exchange rate fluctuations.

While assets such as stocks and commodities are traded on regulated central exchanges, currencies are traded over the counter (OTC) – meaning trades are conducted between institutional counterparts at major forex trading centers worldwide. This is called interbank market.

The largest and most liquid of these FX trading centers are London and New York. Tokyo, Hong Kong, Frankfurt and Singapore are also important currency trading centers.

Forex is the most active market in the world in terms of trading volume and around $7trn is traded daily, the largest market in terms of value.

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Given the international reach of the market, foreign exchange trading is conducted 24 hours a day, except on weekends, and sets foreign exchange rates for all currencies in the world.

How does forex trading work? Forex investors trade currency pairs – sometimes called crosses for pairs that do not include the US dollar – to assess when one currency is likely to rise against another.

Forex trading basically means buying one currency while selling another. Traders attempt to make a potential profit by selling a currency at a higher price than buying it. A currency pair consists of a base currency and a quote currency. The exchange rate represents how much of the quote currency is needed to buy one unit of the base currency.

How To Do Forex Trading Step By Step

Each currency is represented by a three-letter code, with the first two often referring to the country and the third to the currency – for example USD for the US dollar, CAD for the Canadian dollar and NOK for the Norwegian krone. There are exceptions, such as EUR for the euro and MXN for the Mexican peso.

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The most frequently traded forex pairs include the Euro against the US Dollar (EUR/USD), the US Dollar against the Japanese Yen (USD/JPY) and the British Pound against the US Dollar (GBP/USD).

A forex trader buys and sells pairs when he expects the value to fluctuate. For example, if a trader believes that the euro will rise against the dollar – perhaps due to strong economic data from the eurozone – they may take a long position in the EUR/USD currency pair. If they expect the euro to fall in value, they may short the pair.

Before you learn how to start forex trading, it is useful to know some common language used by traders. Here’s a general glossary of some of the terms you’ll come across:

Base Currency – The first currency shown in a currency pair – the US dollar is the base currency in USD/EUR.

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Basis point – 1/100th of 1%, or 0.01% – or 0.0001 equals the price of a currency pair. Often called a “pip”.

Counter Currency – The Euro is the counter currency to the second currency in the currency pair – USD/EUR.

Day Trading – Entering and exiting a forex trade on the same day. This is the common strategy employed in CFD trading platforms

How To Do Forex Trading Step By Step

Dollar Index – A measure of the strength of the US currency against a basket of other currencies that includes the euro, pound and yen. Its symbol is DXY

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Leverage – This allows a trader to open a position much larger than his up-front cover. This means that you can significantly increase your profits by winning trades, but risk losing much more than your initial deposit. Note the risk warnings on trading platforms and trading apps that offer leveraged trading

Liquidity – A highly liquid market has enough trading volume to ensure smooth price movements. Illiquid markets tend to have low levels of trading activity and may result in price volatility

Lots – Forex is traded in units of currency known as lots. The typical lot size is 100,000 units, although you can also deal in mini lots of 10,000 units and micro lots of 1,000 units.

Margin – Margin is related to leverage, and represents the minimum amount of cash you need to deposit to trade at your specified leverage.

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Margin Call – When your open position goes against you, your broker will make a margin call to provide you with additional funds to cover your margin.

Pip – Stands for “price interest point” and is the smallest amount by which the price of a currency pair can change. In the quoted currency pair, a single pip would be 0.0001.

Spread – This is the difference between the bid – or sell – price and the ask – or buy – price in a currency pair.

How To Do Forex Trading Step By Step

FX rates fluctuate constantly throughout the day based on whether one currency is in greater demand than another. Since the forex market covers currencies from around the world, there are many factors that can dictate the direction of different pairs based on their perceived value for paying for goods and services or investing.

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If you want to learn forex trading, here are some factors that can affect currency values ​​that you need to know about.

The value of a country’s currency is largely determined by the health of its economy. Foreign exchange markets react to key economic data releases, as they give a picture of how a country’s economy is doing and how it compares to other countries.

Gross Domestic Product (GDP), which measures the value of all finished goods and services produced by a country over a period of time, is one of the most important metrics for measuring a country’s economic performance.

Currency prices also react to political news and events domestically and internationally. As the global reserve currency, the US dollar is considered a safe haven, increasing its value in times of macroeconomic uncertainty and political instability.

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An example of the impact a political event can have on a currency is the Russian ruble, which lost a third of its value in the two weeks after Russia invaded Ukraine and Western countries imposed sanctions. The ruble later reversed price action, quickly recovering to pre-attack levels and above amid higher oil and gas prices.

A country’s monetary policy stance is an important driver of inflation response because higher interest rates attract investors to earn higher returns on their money. Because of this, foreign exchange rates tend to move in favor of the currency with the highest interest rate.

Commodity prices can move currencies in different directions depending on whether their countries are net importers or net exporters. Countries that export large quantities of goods, such as the Australian dollar, New Zealand dollar, and Canadian dollar, are called commodity currencies.

How To Do Forex Trading Step By Step

If you are interested in forex trading, there are several instruments you can use depending on your trading strategy and market forecast.

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The vast majority of FX transactions are carried out by large institutions through the interbank market, often running several million dollars at a time. But with the advent of online forex trading platforms – as opposed to physical exchanges – retail traders can now also engage in the currency market.

Accounting for $2trn of the total FX market, spot trading is a direct contract between two counterparties to buy one currency against the sale of another and take delivery at an agreed price on the settlement date.

The spot market does not involve private investors. Unlike other instruments such as futures, options and exchange-traded funds (ETFs), which are traded through centralized exchanges, spot forex contracts are traded in over-the-counter (OTC) contracts between counterparties.

The primary spot forex market is the “interdealer” market, where dealers trade with each other. It is also known as the “interbank” market, as banks are the main dealers. The interdealer market is only accessible to institutions such as banks, insurance companies, pension funds and large corporations that deal in large volumes.

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Options are financial instruments that give the buyer the option to buy/sell an asset at a set price on a specified expiration date. If a forex trader buys an option, they are able to buy a currency at a specified exchange rate on the expiration date.

Unlike spot forex contracts, options and futures are traded on exchanges. However, while the forex market trades around the clock, trading options are limited to exchange operating hours and liquidity is less than in the spot and futures markets.

Forex futures were created by the Chicago Mercantile Exchange (CME) in 1972 and continue to trade on the exchange.

How To Do Forex Trading Step By Step

Futures are contracts that oblige the trader to buy or sell an asset

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