If you’re new to the fascinating world of investment, you’ll probably have heard of the foreign exchange (or forex market). After all, this market sees an estimated $6.6 trillion traded globally every single day, while the margin and derivative-based nature of currency makes it highly attractive.
While it’s also easier than ever to access the forex market in the digital age, making your way in this space can be incredibly challenging as a newcomer.
In this post, we’ll explore the forex market in a little more detail, before asking how you can achieve success within the sector!
What is the Forex Market and What Challenges Does it Pose?
The forex market is essentially a global space where both major and minor currencies are traded. Prices are determined by a respective exchange rate, which regulates the relationship between pairings such as the USD/JPY and GBP/EUR.
There are various benefits to the forex market, particularly as currency is a derivative asset class that can be traded freely without requiring investors to assume ownership of the underlying financial instrument.
As a result, it’s possible to speculate on forecasted price movements and achieve a profit even in a depreciating marketplace, which is a huge boon for certain investors.
The reason for this is that the forex market boasts high levels of leverage, which effectively means that traders can open positions that are far larger than their initial deposit. By essentially borrowing capital from a broker as a way of funding your fx trading strategy, you can minimize your initial costs and optimize potential profits in the future.
Of course, the mechanics of the market also create challenges and innate risks, not least because the margin-based nature of forex trades makes it possible to lose considerably more than your initial investment.
Similarly, the highly leveraged and liquid nature of currency (which can be bought and sold with relative ease on a daily basis) underpins marked volatility in the marketplace.
Make no mistake; currency prices can fluctuate wildly in a short space of time, so it’s important to factor this into your trading strategy.
Top Tips for Beginners
In order to get started and initially make your way as a currency trader, it’s imperative that you use a demo account to practice and hone your strategies.
Of course, all successful trading careers are built on a solid foundation of theoretical knowledge, but this means little unless you’re able to translate this into practical experience.
Demo accounts provide this facility, by simulating a real-time marketplace where investors can trade freely without committing their hard-earned cash. At the same time, they can test theories and trading strategies in corporeal market conditions, making it easy to hit the ground running when you start trading for real.
It’s also particularly important to manage risk as a forex trader, with tools such as stop losses available to help you achieve this objective.
These entities can be applied to automatically close open positions once they’ve incurred a predetermined level of loss, enabling you to tentatively pursue riskier traders while safeguarding your capital.