Fortunly’s Guide to Finding the Best Broker for Forex
Over the course of several decades, forex trading has become very popular. Today it’s somewhat fashionable to have an understanding of the basic concepts related to forex market trading. Until the advent of the internet and the abrupt development of the IT industry that now provides the necessary support for foreign exchange trading, currency trading was reserved for large players – banks and powerful financial institutions that conducted currency trading through electronic platforms created for this purpose.
To begin trading forex, you first have to know what that actually means. Forex is short for foreign exchange and involves the trading of one currency for another.
As any experienced top forex broker will tell you, foreign exchange trading is actually trading in currency pairs (simultaneously buying one currency and selling another) with the aim of making a profit based on the difference in price, i.e. the exchange rate difference. This process is far from random – it’s a well-designed trading strategy that, among other things, implies efficient FX risk management.
FX risk management involves a series of actions by which the trader seeks to reduce to a minimum any exposure to foreign exchange risk - the risk of loss due to sudden exchange rate fluctuations.
A currency trader should know that higher risk could translate into more profits or lead to significant losses. Effective management of foreign exchange risk, as well as risk in general, requires setting stop-loss orders and emotional discipline, which means that trading must be based on verified facts and exact calculations. The idea is to avoid getting carried away by sudden jumps or drops in certain prices and by prospects of unexpected earnings.
So, what are some short and long positions you can take on currency trading platforms? When a trader takes a short position, he expects the value of the currency that he is trading with to depreciate. Taking a short position means selling a currency that’s expected to depreciate in value with the intention of buying it back in the future, but at a lower price. The trader takes a long position when he expects the price of a certain currency to appreciate. In other words, traders buy that currency with the intention of selling it in the future, but at a higher price.
In order to be the greatest broker you can be, you should also know that forex trading takes place on the so-called OTC (over-the-counter) foreign exchange market which means that it’s decentralized. It doesn't have a specific physical location – it represents a global network of all interested participants. The OTC FX market works 24 hours a day, and the prices of currency pairs constantly fluctuate due to continuous trading and offerings.
The forex spread represents the difference between the buying and selling FX rate of a certain currency pair. The forex spread varies during the day because the prices of currencies depend on their supply and demand. The leading forex trading platforms have news feeds because a currency’s supply and demand is influenced by a number of factors, such as the monetary policies of central banks of the currency being traded and geopolitical developments.
It’s important to note that some currency pairs, such as emerging market ones, have a wider spread when compared to those of major currency pairs. Under normal circumstances, higher trade volumes tend to lead to lower spreads.
The Most Traded Currency Pairs
You can trade in any currency pair, but the safest options are those that are traded the most. Odds are that the prices of those currencies are checked and reliable. The most traded currency pairs are those in which the USD (as the world’s former spare currency) is one of the two currencies. According to some estimates, about 75% of forex trading is realized in those currency pairs. If we add the GBP/JPY pair, we get a list of 8 major currency pairs. Currency pairs that don’t include the USD are called crosses.
How to Start Trading Forex
The best way to start is to choose a few leading forex brokers, such as CMC market or IG Group, and learn as much as possible about currency trading from the information available on their sites. Most Forex brokers offer demo versions of their trading platforms, which is a very good way to try your hand at trading currencies without the risk of losing money.
If you’re still unsure about how to invest in foreign currencies, even with all the excitement involved, you can always entrust this job to those who have extensive knowledge in the field. Check out a top forex brokers list on any reputable website and hire a forex broker who will invest in foreign currencies on your behalf.