Trading forex has become one of the most attractive investment opportunities of the 21st century. The reason is the many advantages the forex market holds over all other financial markets combined as well as the high return on investment potential compared to a savings or a fixed-term deposit account at your local bank. Online trading does have some pain points, but the savvy forex trader can use the available tools to set up a solid risk management strategy that safeguards his investment and guarantee consistent positive returns.
In an attempt to get everyone on the same page, it’s best that we start with the basics. The forex market or foreign exchange market is a decentralized financial market which is just a fancy way of saying that it’s not ran or controlled by a single institution. Much like the internet itself – it’s made up of multiple nodes that connect to one another with the purpose of facilitating the trading of the hundreds of financial instruments available.
To make things clearer, the participants in forex trading can be split into four different categories.
Even though we established that the forex market is mainly decentralized, the big banks like JPMorgan and Barclays, that comprise the interbank, are actually the ones that control market pricing due to the huge volume of forex trading they make on a daily basis.
When you are trading forex, you are actually buying a currency and selling another at the same time. This is why forex orders are quoted in pairs e.g. EUR/USD = 1.4796 with the first currency (EUR) known as the Base currency while the other (USD) is called the Quote. Of course, this all happens over the counter with a forex broker facilitating your trade and the important distinction here is that you don’t actually buy/sell or own any physical money at any point during this transaction.
Moreover, your trading platform will probably show each forex pair with a BID and ASK price, where the BID being the price the owners of the currency are willing to sell and ASK being the price everyone else is willing to buy. Each currency pair you are willing to buy or sell as a forex trader is quoted at a price which is determined by the exchange rate of the two underlying currencies. The difference between the BID and ASK price is called the SPREAD and that is the cost incurred for trading forex.
Stage 1: “The Money Maker”
Taking your first steps into the world of financial trading can bring about feelings of both excitement and apprehension.
The opportunity to make fast money in the markets is possible but the new trader must ensure that they have the necessary knowledge and skills to make it happen!
At this stage a new trader will have a lot of ups and downs along the way as they look to find their way in achieving their goal of making money in the markets.
Many won’t consider the risks they are taking to achieve high returns in a short space of time and their consistency will be affected by a lack of experience and skills.
These new traders will recognise that to become a consistent “Money Maker” they need a strategy and a plan, and for that to happen they need to increase their trading knowledge.
The first place that many go for answers is Google.
Stage 2: “The Googler”
The “Googler” is in the experimental trading zone, trying out new strategies and systems and looking for magic trading formulas.
A Google search for “Forex Trading Strategies” will give you over 40 million search results. Try “Technical Analysis” and you will find close to 100 million results.
The new “Forex Googler” has a tough time trying to identify the truth from the myths.
After trying countless news systems and every technical indicator they can find the trader eventually learns a few new lessons…
Some reflection happens at this stage resulting in a major change in behavior, as the new trader starts to think a bit deeper about what behaviors and actions will make a real difference to their trading performance. Time to get a little bit philosophical.
Stage 3: “The Philosopher”
The Philosopher has learned a lot of lessons along the way at this stage and has now identified a better way of viewing, interpreting and trading the forex market.
Conclusions reached at this stage:
Many philosophers can now see the light at the end of the tunnel as they grow and nurture their trading approach, strategy and experience.
In the process, they see a major upturn in their consistency in generating profits.
They are nearly there but not quite yet. The philosopher adapts, improves and moves forward in their trading development getting closer to the professional stage.
Stage 4: “The Professional”
The professional has amassed enough knowledge at this stage to be able to read the market with a high degree of clarity and have the confidence and skills to recognize trades that offer the highest probability of success.
The forex game is about making money. Every trader needs to identify what stage they are at now, and evaluate what they need to do to be a real “Money Maker” in the forex markets.
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