Unlike trading between different types of cryptocurrency pairs, forex trading involves trading between different fiat currencies — and can be much more complex.
Crypto markets are currently in the doldrums, largely due to the Federal Reserve’s quantitative tightening policy that aims to curb record inflation (June 2022’s CPI numbers: 9.1%). This has led to a surge in the value of the U.S. dollar against other currencies such as the Euro, one of the strongest surges in years.
With this enticing new volatility in USD vs trading pairs, many crypto traders have been drawn to Forex trading, an area where many actually operated before they switched to “Bitcoin and company” during the lucrative 2017 and 2021 bull runs.
Here follows an introduction to forex trading and all that it entails. Please note that as with cryptocurrency trading, this requires deep knowledge of market technicals and fundamentals and is for the experienced trader only. Buyers beware!
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What Is Forex Trading?
Forex trading is the process of converting one national currency to another through a foreign exchange marketplace. Tourism, trading and commerce are all common reasons to exchange currencies, but forex trading can also be done for profit.
Foreign exchanges (forex or FX) are the largest and most liquid marketplaces in the world for swapping national currencies. Currency swaps can be done locally at banks or airports, but usually at a much worse exchange rate. Large transactions are usually done through forex markets.
Major currencies such as USD, CNY, EUR and others are paired up to show their proper conversion rates. Conversion rates constantly fluctuate along with a surplus or shortage of trade between major countries. For example, the CNY/USD currency pair calculates how many Chinese yuan are needed to receive 1 U.S. dollar.
What Is the Basic Concept of Forex Trading?
Storing value in a strong, in-demand currency is the simplest way to profit while forex trading. Many other trading strategies exist that entail different amounts of risk or possible rewards, however.
Below are the possible forms of trading that can be done on a forex exchange:
Spot trading. Spot trading is the simplest (and often thought of as the safest) trading strategy in forex markets, as it only requires an exchange of one currency for another. National currencies can become volatile due to international events or inflation, creating an opportunity for investors or day traders to profit if timed correctly.
Options trading. Options are a contract that gives an investor the ability to purchase X amount of an asset (in this case, currency) in the future for a predetermined price. Two investors must enter this position together, as an option is purchased from another trader who owns X amount of the asset you are speculating on.
Options are extremely volatile and carry a large amount of risk. If the price does not go up or down as the holder of the options expected, then their option will expire, worthless, and the seller of the option will profit.
If the option expires “in the money (above or below the price they expected),” the buyer has the right to purchase the currency at that price, profiting from the difference.
Futures. Futures and options are similar, except holders of futures contracts are obligated, not given the option, to purchase the asset at the specified price and date. This can be avoided by selling the futures contracts long before their expiration date, but contract holders must be prepared to purchase the asset if trading in the futures market.
Similar to options, futures contracts are created when two traders agree to take opposite sides of a trade.
Derivatives. Forex exchanges also host a derivatives market for investors. Derivatives are synthetic assets that mirror the price movement of any asset assigned to them. Bonds, stocks, interest rates and many other financial instruments can be speculated on by trading derivatives.
Can You Get Rich Trading Forex?
Trading in any market requires a deep understanding of the assets available and good timing to profit consistently. One lucky trade does not guarantee a profit in the future. Consistent profits from forex trading require patience and a proper investment strategy.
Understand that like the cryptocurrency and stock markets, retail traders, or traders who make transactions on their behalf, are at a huge disadvantage to institutional investors. Institutional traders can trade large sums and move markets more easily to spook and take advantage of illiquid markets.
Forex exchanges facilitate a tremendous number of trades daily, making it harder for institutions to take advantage of smaller accounts, but substantial risks still exist if trying to make a significant amount of money too quickly. Making no trades is better than making a bad trade, many prefer to wait for the right moment if trying to net large returns on a single trade.
Is Forex Suitable for Beginners?
Little to no experience is required to begin forex trading, but understanding basic investing principles would be helpful. Knowing how and when to use a stop loss, taking note of trading fees and predetermining your risk tolerance are highly recommended before funding an account. Don’t lose the race before it begins.
Forex exchanges have a very low barrier to entry. Minimum account balances can be as low as 10 USD, and little personal information is needed when setting up an account.
Exchanges will usually have a variety of educational materials such as videos, articles and step-by-step guides on how to invest or trade on the platform. Beginners will find forex markets welcoming if it is their first time investing.
What Is a Forex Broker?
Forex brokers provide traders access to a platform for buying and selling foreign currencies. Customers are often global and can use their financial services 24/7 on weekdays to participate in the forex marketplace.
A single forex broker can only handle a small portion of the overall market, so many brokers exist across the globe to service clients. Different brokers may not always provide the same services or access to market tools such as leverage, futures or options trading, so decide on a trading strategy before committing to a forex broker.
What Is the Difference Between Forex, Stocks and Crypto?
Various financial markets share a lot of financial services, investment strategy and speculation tools, but their main difference is their underlying assets and how they are valued.
Forex vs Crypto
If you’re interested in forex, you may have considered trading cryptocurrencies as well. While they both involve trading currency pairs and are open nearly all the time, the similarities end there.
Cryptocurrency markets are relatively young compared to stock or forex exchanges. New exchanges appear almost daily and virtually zero exchanges are adequately insured if a theft or hack occurs.
A lack of proper regulation has also been a problem looming over the crypto industry since its inception. Few governments have come to a consensus on how to deal with so much value being traded internationally with semi-anonymity, or how to tax gains or losses properly.
Forex vs Stocks
Both marketplaces are popular and have relatively strong safeguards for fraud, but stock markets are not as easily accessed as a forex exchange.
The New York Stock Tokyo and Hong Kong Stock Exchanges are easily accessed if in your country of origin. For non-residents, such as Europeans, purchasing from a foreign stock exchange can be difficult and expensive. Stocks are also only paired with their native country's currency, such as USD or HKD.
How Do You Trade Forex?
A few steps must be completed before trading foreign currencies.
- Open a brokerage account. A forex trading account is needed before you begin trading. Research the most convenient, beginner-friendly brokerage in your home country and open an account. A variable trading account is suggested because it permits smaller trades and has a smaller minimum balance.
- Develop a trading strategy. Before funding your account, create an investment plan and decide on a timeframe and risk tolerance. Are you purchasing foreign currency to hold for several years? Do you plan on using leverage or purchasing options or futures contracts? Decide on these before you begin trading to avoid making careless mistakes.
- Fund your account. Most brokerages should accept nearly every form of payment to fund your account. Bank and wire transfers, credit cards and other traditional payment methods should be accepted.
- Take advantage of advanced trading tools. Once you are comfortable with forex trading, you could consider other forms of investing. Leverage, options and futures are high-risk, but a competent investor can profit immensely if well planned.
Conclusion
If done right, forex trading could be very lucrative for savvy traders who can read the macroeconomic tea leaves correctly. However, as the crypto downturn has proved again and again, fools and their money are soon parted when they FOMO in with little understanding of what they’re doing. Trading is not gambling, and should be treated with the respect it deserves. Stay safe!
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