This post covers the following topics:
- WHAT IS FOREX TRADING?
- HOW FOREX TRADE WORKS
- RISKS IN FOREX TRADING
- HOW MUCH CAN I MAKE IN FOREX TRADING
- HOW TO BECOME A FOREX TRADER
WHAT IS FOREX TRADING?
FOREX Trade has become a common word in modern market. You can hardly see any market-oriented person that have never heard of FOREX Trade within and outside Nigeria. Forex trade is a common word to everyone but only few actually understand it and how it works. It is a popular believe that people make money with forex but none spreads the negative news aspect of forex trade.
By definition, Forex Trading simply means buying and selling foreign currencies. The term ‘FOREX’ implies ‘Foreign Exchange’. Before now Forex is popular to only those in the banking industry but not like today. In a literal term, Forex is when you buy a foreign currency and sell it to someone that needs it in exchange to your country currency or another country currency.
Forex is also marketing of physical hard note currencies such as U.S. dollar and the rest. This definition was the initial term of what Forex is all about until the modern method of online currency trading and still goes with the name ‘Forex Trade’.
A good example of Forex is when a Nigerian student based in U.K. wants to pay school fees in the GBP currency but the student sponsor account is a naira currency account. The student sponsor has to use the naira currency to buy the GBP currency up to the amount needed for the school fees. To buy the GBP forex trade has to take place. Assuming the seller of the GBP in lowest in based in China all the sponsor will do is to pay for Naira equivalent of the GBP amount according to the market trend to get the GBP delivered to any GBP account the buyer/student sponsor will send.
Based on the explanation and example given in the above paragraph, you can now have an idea of what forex trading is all about. Some forex trading is carried out by stock brokers and investment managers, they understand how trading works, and have volumes of experiences in it.
In forex trade, two currencies are paired and their appreciation and depreciation values are shown in trend and charts to enable the buyers and the seller know what they are buying and how much is involved. A good forex trader always trades the frequently selling pairs such as the USD vs GBP, CAD vs AUD, NZD vs AUD, EUR vs GBP, EUR vs USD, and so many others.
Whenever buy request is made in any of the paired currency a forex trader will execute the request buy selling the requesting currency and receiving the other currency from the buyer as a mode of payment. The amount the buyer pays will be based on the current or present exchange rate as at when the trading is being carried out.
Let me illustrate a simple currency-paired forex trade using the CAD/USD currency pair as an example. Assuming a Canadian business man wants to buy a machine from U.S. based factory at the cost of $2000USD but he has not USD account rather $50000CAD in his business account. He can simple look out for forex trader in his locality who trades the USD/CAD pair and pays the Canada Dollar (CAD) equivalent of $2000USD to the trader to get the U.S. dollar (USD) that worth $2000 according the exchange rate at that moment. He then uses this money to pay for his machine in the U.S. to get it delivered to him. That is how forex trade works.
RISKS IN FOREX TRADING
There are risks involved in Forex trading some are possible to avoid while some are not under your control. The risk of loosing money is possible and the risk of making huge profit is possible it all depends on so many factors such as:
Your location can impact your forex trading either positively or negatively. If you are in area that international businessmen and businesswomen lives the likelihood of buying and selling often will be high. Those in the bank, Airports, and so popular markets as forex traders tends to buy and sell higher than forex traders in the streets. The profit-making ability depends on how many profitable trades you can execute within a short time.
You may be in a good location but fail to have enough trading capital. This will impact negatively to your profit-making ability in some cases you may be recording loss after calculating expenses made in the process of executing the trade as compared to the profit you made because your little capital could not lift the amount of profit beyond the expenses associated with the trade. Some online traders run advertisement to get clients, if such trader is having low capital the profit turnup from 24hours trade may not be able to pay for the advertisement services. Besides, having enough capital will enable to become versatile by buying all the frequently pairing currencies thereby making yourself available to carry out any form of currency exchange. Therefore, the higher the trading capital, the better chance of succeeding as a forex trader.
Experience will go a long way in helping you to make decision as at when to buy and when not to buy any currency. Experience will help you to know the maximum amount of cash you use to buy any currency so that you don’t just hang all your cash in one currency that may probably be long before it could be exchanged. Experience will guide you to prevent loss due to negligence and unseen factors.
Trade trends and charts will help forex trader to make predictions of possible changes in the future for any currency. This skill is very essential for any forex trader. You need to know when a particular currency is likely to go up or down. You need to know the best time to buy and the best time to sell. If you make poor prediction, you may lose profit by selling it lower before the price reaches it peak value. This skill is what is lacking in most of the forex traders and it could be responsible for loss of profits. Assuming you bought a Chinese Yuan in Nigeria at the rate 5% value and intend to sell it to travelers to China at the rate of 6% but suddenly after your purchase the Chinese Yuan dropped at the value of 4% such that even banks are selling at the same rate. Then you hold-on assuming that sooner or letter it could come up again but the opposite took place as the Chinese Yuan drops further to 3% value at this post you are frustrated and need to sell out the currency so that you can execute other valuable currencies with your capital tied to it and you sell the Chinese yuan at the rate of 3% just to save your money from further depreciation of the currency. At this stage you have encountered huge loss. Yu loosed 2% of your trading capital to this business not calculating the expenses you made at the cost of carrying out this trade. If such continue to happen it will not be long you will quit forex trading. That is why good knowledge of economic predictions, market evaluations, and strategies will be a bonus and will help you to secure your finance against potential loss.
Natural occurrence can impact negatively t forex traders and such loss is beyond their control irrespective of experience or skills in trading. The outbreak of COVID-19 took many unaware, some currencies dropped values against other currencies. Assuming a trader bought USD at 5% value against the CAD and later the USD dropped to 3% against the CAD as a result of the COVID-19 pandemic or other natural occurrence, the trader stands to lose the huge sum of 2% USD value from the trading capital. You can now image how such loss would be felt. Natural occurrence could be crises that broke out in the country, War, or any other stuff.
However, there are positive natural occurrences and the negative natural occurrences. The positive natural occurrence tends to help the currency value to rise up/appreciate instead of falling or depreciating in this case, traders would make huge profits instead of loss.
HOW MUCH CAN I MAKE IN FOREX TRADING
In forex trading, there is no specific amount of money you can make. Huge traders are huge profit makers and huge profit/capital losers. While low traders are low profit makers and low capital/profit losers. So, the equation is balanced. All the criteria discussed before now will help to determine how much you can make as a forex trader.
HOW TO BECOME A FOREX TRADER
To become a forex trader is not a difficult work but the hurdle is to become a successful forex trader. You can choose to become an offline forex trader or an online forex trader. Those trading currencies at the markets, the airports, the banks, and country borders are offline forex traders while the global forex traders can be found online. This category of forex traders trade currencies across continent, countries, and states without having any physical contact with the buy or seller, rather everything is done online. To enroll into such forex trading;
You need to search for reliable forex trading platforms and sign up with them.
Take your time and learn how the trading platform works.
Create audience by connecting with other traders in the platforms.
Make friends and relate with others to gain more knowledge in your new venture.
Then commence the trade once the opportunity shows up.