What is forex trading?

What Is Forex Trading?

Forex (exchange) or foreign exchange market, it can be abbreviated as forex is a type of trade or transaction that trades the currency of one country against the currency of another country (currency pairs/pairs) involving the major currency markets of the world for 24 hours continuously. sustainable.

In simple terms, forex trading is like buying a foreign currency and then storing that currency for a certain period of time and reselling it when the currency’s value increases or the exchange rate strengthens.

Forex trading history

In its history, forex trading in the late 90’s, only the big and rich financial institutions like central banks, private and government banks and big commercial companies like Apple or Toyota did this business. They do forex trading usually for trading, debt repayment, hedging or investment purposes. The capital required is also quite large, and not just anyone can do forex trades.

After the development of the internet all over the world in the late 90’s, the forex market can finally be followed by almost every individual, from entrepreneurs to housewives, parents and young people. Brokers also started structuring forex so that it could be retail traded by every individual. So now, from money changers, banks, mototaxi drivers who leave can also enter the Forex market.

History of Modern Forex Trading

Money trading has been going on since time immemorial, but the history of modern forex trading as it is today actually only started after WWII. For information, there was a lot of chaos and economic crisis at the end of the Second World War, so the governments of the allied countries felt that they needed a system that would later be able to unite the global economy. So the “Bretton Woods System” was formed to fulfill that dream.

In the Bretton Woods System, which was born in the city of Bretton Woods, New Hampshire, United States, in 1944, for the first time there are official rules to regulate monetary relations between countries. The United States, which at the time held two-thirds of the world’s gold reserves, insisted that the system be based on gold and the US dollar. Finally, this system requires all countries involved to relate the value of their currency to gold and the US dollar. However, it didn’t last long.

On August 15, 1971, the United States unilaterally severed its monetary relationship with gold, automatically ending the Bretton Woods system. The dollar’s value is no longer derived from its gold reserves, but only from the US government’s promises. This action certainly makes the US dollar a reserve currency for many countries in the world. At that time, exchange rates between currencies were no longer determined by the standard, but following a simple economic system, that is, demand and supply. A new phase was born in the history of forex trading, namely the floating exchange rate system.

Era Trading Forex Online

The development of the global economy between the 80’s and 90’s led the world to a new development in the history of forex trading where people could participate in the world, which was previously dominated by big banks and international companies. Transactions through banking intermediaries no longer need to be initiated by telephone contact, but simply with instructions via the internet. In fact, a trading platform has been created that allows anyone to see the “price” (currency exchange rate) and trade currencies in real time.

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The development of this technology is a pivotal point in the history of forex trading because it has boosted the trading volume in the forex market so far to become the biggest financial market in the world with daily liquidity reaching $5.3 trillion in 2013. At this time Also, you can find out which currency only those that are heavily traded and seek to profit from strengthening or weakening exchange rates.

How Forex Trading Works

Forex trading is basically the simultaneous purchase of one currency and the sale of another. Currency pairs are then traded simultaneously. For example, EUR/USD = 1.23700.

The currency on the left (in this case the Euro) is the base currency and the currency on the other side is called the quote currency. The above notation shows that 1 unit of the base currency is equal to 1.23700 of the quote currency (1 euro = 1.23700 USD).

So you have to pay 1.23700 USD if you want to buy 1 Euro. On the other hand, if you want to sell 1 euro that you own, you will receive 1.23700 USD.

Forex trading is a foreign currency transaction that is increasingly being chosen as a way of investing. This forex trading involves certain currency pairs as chosen and can be traded as per certain conditions to get maximum results.

Advantages of Forex Trading

1. Forex trading tends to be flexible

In fact, forex trading can be done anywhere because it is very flexible. Transactions in forex trading can be done through apps provided by online forex brokers.

With the availability of internet access almost everywhere, of course, it will also make trading easier for traders. The rest, you just need to prepare the following things, like:

  • Hardware such as your computer, laptop, tablet or even your smartphone.
  • Download and install the application provided by the trading broker
  • Adequate internet network availability

Not only flexible about location, forex trading is also flexible in terms of time. The forex market can be accessed 24 hours a day. Also, the market is closed only on Saturdays and Sundays.

2. Benefit from Exchange Rate Differences

The name of investing, definitely want profit. Well, the “salary” or income of a forex trader for those who plan to trade forex is the profit in the form of the difference between the exchange rate when you buy and the exchange rate that is currently happening. The trick is to buy dollars when the value is still low and resell at a higher price, or buy at a high price and resell at a higher price.

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In general, there are three possibilities of dollar movement, namely, bullish or uptrend, flat or sideways, and bearish or downtrend. If it is going up, big profits will be made. But if it goes down, the value of the currency will tend to go down as well.

3. Forex Trading is liquid

For information that not all shares are liquid. This means that not a few stock investors find it difficult to buy and sell stocks quickly.

This phenomenon is a testament to illiquid stocks, usually occurring in fried stocks and stocks that are not included in the LQ45 index. Stocks that are suspended even make investors’ money hang on, who knows how long the suspension will stay open.

When trading forex, you don’t have to worry because the forex market has very high liquidity. The high number of transactions proves that there are almost always people buying and selling every second.

Traders can also quickly make profits as per their chosen forex trading strategy without worrying that their money is stuck or they cannot spend money because the market is quiet.

Due to high liquidity, the forex market does not recognize a “stock trader” or a person with a lot of money who can handle low-liquidity stocks. These “bookie” figures certainly have their respective origins and goals in carrying out buy and sell actions that can affect retail investors’ emotions.

4. The results of Forex trading profits can be felt immediately

Another advantage that can be gained by traders is that they can take advantage of price increases that come from the difference between the buy price and the sell price in the buy order. However, when making a sale, the profit will be obtained by the difference between the sale price and the purchase or closing price.

5. No Additional Fee

It should be noted that there are no transaction fees in the online forex market, only that there are several fees that vary in number. An example is the cost of withdrawing funds from a forex account.

6. Forex Trading has a margin system

The last advantage is that there is trading through a margin system, which can make investors’ purchasing power greater than the capital they have.

Forex trading learning tips for beginners

1. Understand common terms used for Forex trading

Before making any investments, you need to understand the various terms used in the trading process. Some general terms to know are:

  • A pip is the change in value between two currencies, referring to 4 decimal places behind the decimal point in the exchange rate. If EUR/USD is at 1.1205 and then moves to 1.1206, the difference of 0.0001 is 1 pip.
  • The base currency is the value of the base currency or the first currency in a currency pair. It is written to the left of the sign, for example Eur/ (the opposite).
  • Currency of the pair is the exchange rate of a currency pair in forex, eg Euro/USD.
  • A lot is the number of units of currency bought or sold, divided into mini, micro and nano sizes.
  • Buy is a position to buy. Usually, the purchase is made if the price is predicted to go up.
  • The sale is made if the price is expected to fall. You sell at a high price and then buy back when the price is low. The difference will be in your favor.
  • Leverage is a loan granted by a broker to help a trader trade in large volumes.
    Spread: the difference between the bid and ask prices, usually for a brokerage firm.
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2. Understand how Forex trading works

The currency being traded is in the form of a pair (pair), for example EUR/USD. For example, EUR/USD = 1.1215.

The currency on the left (Euro) is the base currency, while the currency on the other side is called the quote currency. The above notation shows 1 euro = 1.1215 USD.

The following is an example of its application in trading. It is known that the buy price position and the sell price of EUR/USD are:

The ‘Buy’ price shows that the 1 Euro bid price is 1.1215 USD, while the ‘Ask’ price shows that the 1 Euro ask price is 1.1212 USD.

3. Use Leverage When Trading Small Capital

With leverage, you can make large amounts of transactions with minimal capital. Leverage is a loan from a forex broker that is given to traders.

In addition to leverage, there is also term margin, which is a security deposit temporarily held by the broker when you trade. To be able to carry out this operation, of course, the funds possessed must exceed the guarantee fund. The types of leverage are:

  • 1:1 = Warranty is equal to contract value or 100%
  • 1:50 = 2% guarantee of the contract value
  • 1:100 = 1% guarantee of the contract value
  • 1:200 = The guarantee is 0.5% of the contract value
  • 1:400 = The guarantee is 0.25% of the contract value
  • 1:500 = The guarantee is 0.20% of the contract value

4. Understand Forex Trading Risk Management

To survive long in the world of Forex trading, you also need to learn to manage risk. First, use cold money or money that is ready to be ‘lost’. Also, never use cash for daily necessities. As Forex trading is quite risky, you must be prepared if you suffer losses. In addition, you must also set a Stop Loss. Because your position will be closed automatically if the loss reaches a certain predetermined amount. In contrast to Stop Loss, there is Take Profit.

With Take Profit, if the position is profitable, the platform will automatically close the position. Without Take Profit, you may be induced not to take profit, even if the target has been reached, because you expect more profit. And you can guarantee the profit that has been achieved not to be ‘eaten’ by the risk of loss or loss from price drops that may occur.

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