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Things you should know before diving into the world of Forex trading

The foreign exchange market (dubbed Forex or FX) is the market for exchanging foreign currencies.

By LLM Reporters  |  October 22, 2021
forex

When it comes to savvy investments, an increasing number of millennials are turning to Forex trading in a bid to grow their fortunes – and done correctly, it has the potential to help anyone do just that.

While cryptocurrencies have undoubtedly been making waves in recent years as the number one way to make money through trading, leveraging the Forex – also known as the Foreign Exchange Market – to make money through trading foreign currencies can, with a strong strategy behind it, be even more lucrative. But diving in head-first without the necessary know-how and knowledge behind you could be a recipe for disaster, as this complex system requires investors to rely on both skill and instinct to get it right.

If you’re considering dipping your toe in the water and seeing if it can work for you, then there are a few things you should know first – so here, we take a look at the basics.

Learning the ropes

First and foremost, it’s essential to get a handle on the basic concepts involved with trading Forex. The process works based on exchanging one currency for another for a favourable rate of exchange, and in contrast to stocks and shares trading, you can’t simply buy – you are always simultaneously selling, too.

For example, you might first look to exchange £10,000, purchased with USD, at an exchange rate of 1.1800, giving you a total of $11,800. Several weeks later, you might seek to trade that back when the exchange rate swings in your favour, in order to make a profit.

If you’re unsure about what you’re doing when choosing a lot size or making a trade, then you could quickly see your finances dwindle – so take the time to sit down, research and get to know the landscape first.

forex trading
First and foremost, it’s essential to get a handle on the basic concepts involved with trading Forex

Patience is a virtue

When it comes to making a profit through Forex trading, timing is everything, which means being patient is essential. Rush to make a hasty trade, and you could miss out on potentially much larger profits than had you waited a few more days or weeks – so don’t be tempted to act too quickly when you spot what appears to be a good deal.

If there’s one thing Forex trading isn’t, it’s a ‘get rich quick’ scheme – and those who go on to see the greatest success understand that they are in it for the long-haul. Good things, after all, come to those who wait – so be prepared to bide your time and you could eventually stand to reap some substantial benefits.

Devising a strong strategy

Profiting from trading on Forex relies on more than just chance, and a strong strategy is essential if you want to ensure you end up cashing in later on. In order to do so, you should first clearly define your goals, so that you can implement a trading style that aligns with this. Whilst the temptation to deviate from your plan will no doubt arise from time to time, it’s important not to be swayed by apparently shiny opportunities or anything that looks like a quick win – so be sure to keep reminding yourself of your strategy and your end goals at regular intervals to ensure you remain on track.

forex trading
When it comes to making a profit through Forex trading, timing is everything, which means being patient is essential

Choose the right brokers and trading partners

Whilst working with a broker or trading partner isn’t compulsory in Forex trading, it can make the process a little smoother – but when seeking out the right ones for you, it’s imperative you ensure that they align with your trading style first. In trading, it’s never a case of ‘one size fits all’ – so don’t be tempted just to go with the first ones you see. Take the time to investigate fully, vet your potential matches and ensure they hold valid licenses before making a decision.

Reading the markets

You won’t get far in Forex trading without the ability to read and forecast the markets, and getting familiar with the common causes of fluctuations is essential if you’re to know when to act and make your trades.

There are two types of traders; technical, and fundamental. While the former utilise analytics tools to help them understand the current market picture and any fluctuations that might be about to occur, the latter rely on news, politics and economic activity to keep them informed. Ideally, you’d employ a little of both of these tactics – keep an eye out for major events such as natural disasters, political dramas and large media events, which could be telling of imminent movements.

The bottom line

While Forex trading isn’t for everyone, those who are prepared to take the time to immerse themselves in the workings of the market and learn the skill could stand to profit handsomely in the long-term. Keep those emotions at bay and avoid letting your heart rule your head, and you could find yourself celebrating those nerves of steel in years to come.

Disclaimer: Investing money carries risk, do so at your own risk and we advise people to never invest more money than they can afford to lose and to seek professional advice before doing so.