Explaining How Foreign Exchange Trading Works!
Updated: Nov 13, 2021
Before, the only interaction the average person had with foreign currency exchange and markets was when they needed foreign currency to travel abroad. That would involve them using a bank or foreign exchange broker to exchange the currency of their resident country to the country they want to go to. The bank or broker then would give out the foreign currency at the current exchange rate.
Nowadays, whenever you hear about FOREX or foreign exchange trading, it usually refers to a type of investment trading. However, people worldwide are now interested in foreign currency trading and are looking at how foreign currency exchange platforms work. We here at Zed specialize in providing payment orchestration layers for FOREX exchanges and brokerage firms.
Zed Founder and entrepreneur Alan Safahi know all there is to know about foreign currency exchange and FOREX market trading. So we decided we should explain how it works. Now, foreign currency exchange works just like trading stocks. The FOREX traders like stockbrokers can speculate on the fluctuating values of currencies between two countries, and that’s how they profit from their foreign exchange investment. So now that you know what FOREX currency exchange is, let’s get into the details!
The FOREX Market For Beginners
Now, the concept of a market should be the most straightforward concept, but it’s actually the opposite for foreign currency exchange. The learning curve in this industry is quite steep, resulting in a high rate of failure among new traders.
However, we’ve seen many new FOREX traders come in the mindset, “It happened to them, but it won’t happen to me,” but in the end, an average of 77% of these traders walk away with nothing. These traders usually don’t even know what happened to them or even feel a bit scammed. Don’t worry, and FOREX market trading isn’t a scam.
It’s an industry that is primarily set up for insiders that understand it. Now, if you are a beginner, your goal should be to survive long enough to understand the inner working of foreign exchange trading and become one of those insiders. Now, that will only come if you survive long enough to study the market, understand the terminology, and learn trading strategies.
FOREX & Leverage
According to Safahi working with FOREX brokers and traders, we saw that most traders strike out when trying to understand a feature called forex trading leverage. It allows traders to trade in the market using more money than they have in their accounts. So, for example, if you are trading at 2:1, then you can have 1000 dollars in your brokerage account, but you can control and trade 2,000 dollars worth of currency on the market.
Now, many FOREX brokers offer 50:1 leverage. However, starting with a 50:1 leverage as a beginner is one of the biggest mistakes you can commit without being prepared for the consequences. While trading with leverage may seem like a grand idea and the perfect option, you should be aware of the risks as it also increases your risk for losses. So if you have 1000 dollars in your account and are trading with 50:1 leverage, you would be trading with 50,000 dollars on the market, with each pip worth around five dollars.
If the average daily move of a currency pair’s price is 70 to 100 pips, then your average loss could be around 350 dollars. Now, you can even lose your entire account in three days if you make a bad enough trade, assuming the conditions are normal. Of course, you can be optimistic in thinking, “but I could also double my account in just a matter of days,” and that is true, but watching your account fluctuate that seriously is very difficult to do.
Many new FOREX traders assume that they won’t be affected by the volatile price changes, but from our experience, we found that seldom to be true. We’ve seen many traders act reflexively when experiencing loss of money in real-time out of an irrational desire to gain back what they have lost quickly. It leads to rash judgment where traders may take riskier trades which inevitably accelerates the losses.
The FOREX Market & Emotions
Ok, so you may be strong enough not to fall into the leverage trap, but that’s not all. The next big challenge is to get control of your emotions. If you want to make it in the FOREX world, then you will need to know how to tackle your emotions. Remember, the market can often be like a rollercoaster ride, and you will need nerves of steel to cut your losses at the right time and not fall into the trap of holding trades too long.
You have to make sure it’s all about formula and a method that is enacted consistently and without emotion. The difference between a new trader and a professional is that when the market fluctuates, the inexperienced will start to freak out and may even stay in the trade, hoping the market would come back. Whereas a professional sticks to their trading method and closes out their trade to limit their losses. Now, that sort of emotional response will ensure you lose the money very quickly.
So the availability of leverage, along with the volatility of the FOREX market, can make you emotional, and that may for you to lose the money you came in to trade with. That’s why the best strategy is to develop a trading plan with tried and tested methods and strategies that result in profitable trades at least 50% of the time. But make sure that the plan you create can quickly be followed. You can even keep a forex trading journal to keep track of your progress.
The foreign currency exchange market is exactly like any other market that trades in assets such as stocks, bonds, or commodities. According to Safahi, how you approach your FOREX trades will determine whether or not you make a profit. However, if you lookup FOREX traders, it can seem like other people can trade forex successfully, and you can’t; that’s not true at all. It’s just your self-perception that makes it seem that way.
Besides, there are plenty of FOREX traders out there who are struggling, but their pride prevents them from being open about it. Instead, those people go on online forums or on Facebook and post about how wonderful they are doing even though they are struggling just like you. Finding success in the foreign currency exchange market isn’t hard at all. All you need to do is learn about the industry, keep your head together, and learn to control your emotions.
Make sure to practice on a forex trading demo first. Then, when starting with real money, make sure you start using real money. Don’t be afraid to make mistakes but also learn how to move on from them. Many fail at FOREX trading because they cannot be honest with themselves, and once you have that mastered, half of your job is done. Now, if you run a FOREX brokerage firm and need a comprehensive payment orchestration layer to handle the currencies and transactions, then Zed can help you out. Our cutting-edge solution will ensure you have the necessary infrastructure to grow your business sustainably. So make sure you get in touch with us. If you have any more questions regarding the foreign exchange currency market or payment processing, then you can drop your questions in the comments below or hit us up on our socials, and we will answer all your queries. And with that being said, that’s about all we have for you today. We will come back with something new for you soon. Until then, see ya!