Forex Trading Explained

Are you a beginner investor looking to enter the forex market? We’ve got you covered from start to finish. In this article we’ll make it easy by teaching you all about forex trading orders, forex trading strategies, and the best trading platforms.

The Different Trading Orders in Forex

Entering the forex world may seem intimidating as a beginner, but it doesn’t have to be. We’re going to break down everything from forex trading orders to trading strategies and platforms, to make it easy for you. Let’s start things off with its definition: forex or FX stands for foreign exchange-the act of trading one currency for another, i.e. EUR/USD. Other than needing to change currencies to use on a foreign holiday or conduct foreign business, some use forex trading as part of their investment strategy. Forex trading can be done by trading online or between a buyer and seller. Since trade, commerce and finance are far-reaching on a global scale, forex is not only one of the largest, but also one of the most liquid markets. Let’s learn more, shall we?

 

Starting with an explanation of the basic trading orders: while there are many, it’s best to keep things simple in the beginning to avoid over-complicating things so soon. At a basic level, there’s something called a “spot order,” which means the FX transaction is executed as soon as possible (“on the spot”), while a “forward order” refers to an agreement for a future FX transaction between a buyer and a seller at a price they agree upon (normally it’s cheaper than the current price, but it doesn’t have to be). Then, there’s something called a “futures order” which is similar to a standardized forward order, but made in an FX market (i.e. it doesn’t have to be “over the counter” between the buyer and seller). I know this may sound a bit daunting to start but hang in there.

 

Different Forex Trading Orders Explained

Source: https://www.financeorigin.com/different-forex-order-types/

 

At a more advanced level, there are also derivative contracts. A “call order” refers to a contract that allows the buyer to purchase FX at an agreed price at any time allowed in the contract. A “put” order is just the opposite-- obliging the seller of the put contract to buy the forex at a specified price when the buyer of the contract wants to get rid of the forex. These are two very common types of options which is enough to get started. If you want to take a deeper dive, stay tuned for more in-depth forex articles going forward.

 

Now, let’s discuss two common trading terms: long & short. To “long” a financial instrument (i.e. FX, stocks, etc.) means to invest in a financial instrument. The idea is that you hold the instrument for a “long” time to benefit from an appreciation in value. In the case of FX, you could long currency (through a spot order), some futures, or even some derivatives. In contrast, to “short” means to sell or borrow a financial instrument for cash, and buy it back at a lower price when possible. People “short” something, because they think its value will fall, resulting in them being able to make a profit. Of course, this could turn out profitable, but could also be very risky without a solid understanding of the markets and the ability to find an upcoming trend (that’s how profit is made).

 

Let’s now look at the concept of a position when holding financial assets. To close a trading position means to eliminate risks– for instance, by utilizing a smart combination (i.e. if I sell you a futures order for next March, but I don’t know how expensive USD might become, I could close my position by buying a call order from somebody else), or by simply selling the position for cash, which results in a take-profit order. By contrast, if you open a position you take on a certain amount of risk. Now risk is created by a lot of things, including a high leverage—this means borrowing a lot while investing little to purchase an asset. Understandably, high leverage can produce huge profits as well as huge losses. This is where stop-loss comes in: if things are not going well with your investment and you’re already losing, you can sell your FX at a cheaper price which creates a loss, but allows you to regain cash and stop yourself from losing more.

 

Forex Trading Strategy

A forex trading strategy is created based on analyzing past trends and creating future predictions. Sounds simple enough right? Well, in regards to money management, there are more methods on how to trade than we can cover now, and as many strategies as there are forex traders. Let’s just start with the basics:

 

Technical analysis makes the assumption that the price of a financial instrument depends on its historical trends and patterns; here charts are used to predict future pricing. Though the past can be a good starting place, in reality, markets do not reflect all of the available information needed. There are mainly two different ways to conduct technical analysis: either the top-down approach or the bottom-up approach. Generally speaking, short-term traders prefer top-down while long-term investors take the bottom-up approach. What does that really mean? Essentially, the top-down looks at the whole economy first to see which economic changes could lead to profitability, while the bottom-up prioritizes the health of individual stocks.

 

At this stage, trading signals come in. Following technical analysis, buy signals indicate positive market conditions one should buy in, while sell signals indicate that investors should sell and get out (stop loss). At this stage, MACD (Moving average convergence divergence) can be used to extract signals to determine a moving average and come up with a new trend. With the right trend you can create a winning trade (where you are profitable).

 

When a market is trending, you can use Fibonacci retracement levels to determine possible support and resistance levels indicating upcoming price changes. When the market is trending up, most investors go long (or buy) at a Fibonacci support level, while when the market is going down, they go short (or sell) at a Fibonacci resistance level. The Ichimoku Cloud can be used to show these groupings of support and resistance levels. Not only that, but the Relative Strength Index (RSI) can also be used in technical analysis to measure recent price changes in order to determine whether a financial asset has been overbought or oversold, which can indicate future price changes.

Chart showcasing the RSI used within technical analysis for Forex Trading Strategy.Source: https://www.investopedia.com/terms/r/rsi.asp

 

The Best Forex Trading Platform

So far, we’ve covered FX trading orders and strategies to help beginner investors better understand FX markets. While forex trading is an exciting world filled with possibilities, without the proper knowledge and a straightforward platform, forex trading quickly becomes complicated. FlowBank realized that the needs of the modern trader weren’t currently being met, and decided to do something about it. Private and institutional investors need to be able to invest from anywhere at any time, and that’s why FlowBank was created. This new banking and trading experience gives customers access to virtually all conceivable product and asset classes, including shares, bonds, currencies, commodities, ETFs, futures, warrants in cash, and CFDs. Uncomplicated and easy to use, their trading platforms are the best on the market. Even as a beginner, it allows you to do simple trading from your mobile or with your computer through online trading. As a secured platform, you can trade over 50 currency pairs instantly-- buying one and selling another, benefiting from FlowBank’s competitive pricing and low spreads. Not to mention, receiving the assurance you’re getting an unparalleled trade execution speed to guarantee the best price.

 

Uncomplicated and easy to use, FlowBank’s trading platforms are the best trading platforms on the market.

Source: https://www.flowbank.com/flowone

 

Volatility of Forex Products

An important consideration when looking at forex trading is the volatility of the market. Influenced by global events both political and financial, technical analysis can help look at historical trends, but still doesn’t always show the bigger picture. When online trading, the choice of which trading platform to use becomes just as important to your success, due to its ability to streamline the trading process. With FlowBank you can trade over 50 currency pairs; the most traded major currency pairs include: EUR/USD, GBP/JPY, and NZD/USD.

 

Given the volatility of FX products, there are various forex trading strategies utilized to produce the best possible outcome—as mentioned, in positive market trends investors go long (or buy) at a support level—meaning that it’s very difficult for the price to drop even further, and it’s the right time to get a good deal. In contrast, when the market negatively trends, and investors think that prices will drop further, they tend to go short (or sell) at a previous resistance level. When you’re doing well in trading and decide to close your position in order to remain profitable and with relatively low risk, you create a take-profit order.

 

Trading forex allows you to use leverage—a situation in which you generally use a small amount of your own funds and borrow a larger amount to increase the volume of your trade. At FlowBank, leverage can be expressed at a ratio up to 1:200 meaning you can control positions up to 200$ while only investing 1$ at the start. While leverage can help investors increase profits, it comes with a large amount of risk that needs to be managed correctly. Normally, currency pairs are quoted with a bid-ask spread, which is measured in pips (one-hundredth of one percent or 0.0001).

 

While forex trading is an excellent addition to an investment strategy, market volatility and the inherent risks involved with FX trading, mean that it’s not only important to educate yourself on the FX market before entering, but to also utilize a solid trading platform, such as the ones offered by FlowBank. Happy trading.

 

Sources:

https://www.investopedia.com/articles/forex/11/why-trade-forex.asp

https://www.investopedia.com/articles/active-trading/102914/technical-analysis-strategies-beginners.asp

 

 

 

 

 

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