Many online earning enthusiasts are eager to start their journey in forex trading.According to the Triennial Central Bank Survey of Foreign Exchange, the 2019 forex market has the highest trading volume (more than 6.6 trillion dollars). To capitalize on such a vast marketplace, one has to be well-equipped about concepts related to it. Some basic concepts of forex trading: what is forex, what is forex trading, its types, essential graphs used in forex trading, and some fundamental terminologies will be discussed in the article.
Understand what is Forex and Forex Trading.
Forex combines two words, “Foreign” and “Exchange.” In forex, currencies of different nations are exchanged for business, tourism, etc. For centuries, forex has been traded to earn profits. In the current globalized world, a marketplace has been created where forex is traded by people, banks, and other financial institutions from around the globe, called forex trading. Forex trading is gaining popularity primarily because of the boom of electronic brokers. These brokers ensured the participation of common people in this marketplace, which was done by firms in the past. Forex market works almost 24 hrs. a day. It is a decentralized market run and controlled by networks and computers
What are The Types of Forex Trading?
Although many strategies are used for forex trading, there are four main types of forex trading in practice: Day Trading, Swing Trading, Position Trading, and Scalping.
Day Trading
Day trading is a technique where a trader is involved in a trading activity (completes his trade) before the market’s closure on that day. This technique requires more focus on graphs’ technical aspects rather than long-term fundamental analysis. Trades require patience about entry and exit points. This type of trading involves higher volumes (bigger lot sizes) and depends on volatile currency pairs to earn a good profit.
Swing Trading
Swing trading focuses on longer and broader movements of the market/graph. Traders need to hold their trade for longer periods, usually days or weeks. Traders must have a strong fundamental analysis of the market and a technical analysis of graphs (resistance and support). Generally, traders use lesser trade volume (smaller lot sizes) and prefer a less volatile market. Entry and exit points play an important role.
Position Trading
It is the opposite of day trading; traders hold their position (entry point) for longer periods (usually months and years). In this type of trading, smaller lot sizes are used to avoid risk. Technical analysis is less important, whereas a strong fundamental analysis of the global economic outlook is very important. Financial institutions like banks and investment companies are mostly involved in this type of trading.
Scalping
This is not technically a recognized trading strategy. Rather, it is a much shorter form of day trading. Strong technical analysis and knowledge about entry and exit points play a crucial role. It is a high-risk, high-gain technique generally avoided by traders when the market is too volatile. Most new traders unknowingly exercise this technique as they are unaware of entry-exit points and graph movements and end up losing money.
Which Types of Graphs Are Used in Forex Trading?
There are three types of graphs used in forex trading: Candlestick graph, Bar graph, and Line graph.
1. Candlestick Graph
The bars in this graph are most important in forex trading. Candlestick bars carry maximum information about the trend. Bars in this chart are colored red or green. The green bars show an upward trend, and the red bar shows a downward trend. Candlesticks also carry information about opening and closing points in that specific period. The Wick of the candlestick bar shows the maximum and minimum points of the bar in that period.
2. Bar Graph
As its name represents, bars are used to represent the information of that specific period. Bar graphs and candlestick graphs usually give the same information but in a different way. A bar in the graph contains data about a certain period (say, for instance, a day). Bullish and bearish bars are color-coded with opposite colors (red and green or white and black). The only difference between a bar graph and a candlestick graph is that bar graphs represent opening and closing differently. A dash on the left of a bar represents the opening, whereas a dash on the right side represents the closing.
3 Line Graph
A line chart or line graph is a linear continuous graph connecting all the closing points in the chart. Line charts are used to understand larger and broader trends. As it is drawn by continuously connecting all the closing points, it gives much more insight into future trends. It removes all unwanted noise and saves the trader a lot of time and energy. Line charts are also very helpful in understanding resistance and support ranges.
Some Important Concepts about Forex Trading
Let’s discuss some of the important concepts of forex trading in simple layman’s words.
1. Leverage:
All the brokers offer high leverage. Leverage allows trades to open larger positions than his actual amount allows. For example, if a trader sets leverage size 200:1 and has only a hundred dollars in his account, then this leverage allows the trader to open a position of 20,000 dollars.
2. Spread:
Spread can be seen on the graph; it is the same for all the currency pairs except in pairs where the Japanese Yen is involved; the larger the spread, the more you see loss when you place a trade. So, always position your trade when the broker offers less spread.
3. Pip:
When you start trading, you will often come across this term. Pips with lot size are used to calculate profit or loss in a trade. Pip is the smallest size of a currency pair, which can move up or down.
4. Resistance:
Knowledge of resistance levels is important for identifying entry and exit from a trade. The resistance level is measured from previous highs of the market. Resistance is the range where the graph finds it hard to move further up, so it provides an important entry point for selling.
5. Support:
It is recommended that if you want to enter into buying, support provides the ideal entry point. Support range is measured using previous lows, which is the opposite of resistance. Support is the range from where the graph has very low chances of going further down and high chances of retracement or moving up.
6. Lot Size:
Lot size, in simple words, is the risk you are taking for the trade; if your lot size is high, you earn/lose more, and if your lot size is low, you earn/lose less. Lot size is very important for risk management. Just remember, if you open a trade with a lot size of 1 lot, a single Pip value will be 10 dollars.
Bottom Line
Forex trading is a vast field; this is a beginner’s guide before starting your journey. Some basic concepts about forex trading are covered in this article. To learn more about forex trading, keep following us.
Best of Luck!
