What is Forex? Answer to Some Common Questions

I have been associated with the field of speculative financial markets since 2011 when I had been a student of MBA at Institute of Management Sciences, Peshawar. I started learning from free resources on the internet, and I also tried to reach my professors in Finance and Investment.

However, all turned out to be a negative experience as what professors had taught us was entirely impractical and outdated, and free resources were quite misleading. I concluded that such trading is quite sophisticated, ever-changing, and one of the most challenging works in the globe.

That’s the reason why 98% of entrants miserably fail, and 80% of them leave the field within three months and never return. I have tried to answer the most commonly asked questions in the article. I am sure it will help a lot of aspirants and intermediate level traders.

What is Forex trading?

It is a very complicated question, and understanding what’s Forex is quite a lengthy procedure because it’s a complete study having numerous facets. However, I try to explain succinctly about it.

Foreign Exchange is commonly known as Forex, and that means it’s one or another mean of exchanging one currency to another like I exchange Rs.5000 to $50 for paying a person against his services who is in the U.S. How I do it?

I go to an exchange and ask them to provide $50. He charges me Rs.100/$, and at the same time, a person comes who wants to sell his $50. The exchange charges Rs.97/$. So the transaction earns Rs.3/$. This is the difference between buying price and selling price and is called a spread.

The same is the way; currencies are traded online through registered brokers. Traders buy cheap and sell at a high price. However, online trading gets riskier because it’s not regular cash trading; instead, it is traded on unusually high leverage.

What are the different types of trading?

Depending upon timeframe, there are four types of trading

Position Trading

Traders enter the trade and hold it over several weeks and months. It is long term trading and has a low frequency of trade transactions as well as risk.

Swing Trading

Traders hold the trades for a few days. You can say that it’s medium-term trading.

Intraday Trading

Traders close the trade the same day. It is high frequency and high-risk trading.

Scalp Trading 

This is the short form of trading, and traders close their positions in few seconds to few minutes.

Switch n Bait Trading

This is performed by robots and trades occur and close in milliseconds. Depending upon modes of trading, there are different types mentioned here:

Futures Trading

Options Trading

Spot Trading

Why do most people fail in Forex trading?

People do not invest in getting professional training and directly take start with small deposits. All of the failure cases have the same reasons for failure i.e., greed and fear. The greed of becoming rich overnight and fulfilling sweet dreams makes traders take an unlimited risk that eventually leaves them with no penny left behind. They, too, have the fear factor that shatters their confidence, and they are afraid to trade because they have no sense of limiting risk. Sometimes, they become victims of overtrading or understanding.

How much is risk in Forex trading?

The risk factor in Forex is variable because every single trade you take has different dynamics, and you can limit the risk to even 0.25% per trade. On average, professional traders risk 1-2% of their capital per trade. Newbies fail because they do not consider allotting a particular portion of their money for risk absorption.

How much can we earn in Forex trading?

If you are trained well, then you can earn twice or thrice of your allotted risk. Like, you risk 1% in a trade, then you have the probability of making 2-3% or even more per trade. Always keep profit twice or more than the risk.

I have no big investment. Is Forex trading suitable for me?

You do not need huge money for that, but you need to invest in yourself and get professional mentoring. After that, you can show results to the potential investors and institutional investors who will trust once you show them your track record, no matter if it’s real or demos. The second approach is, begin with a small amount like $200, and on average, you will be making 5-10% per month. Compound half of your profit in the same account and grow it gradually. If you double $200 in 5 months, then doubling your account for nine times makes it over $1 million. That’s quite a fancy fantasy but achievable over the long run. However, I recommend the first approach.

Many people on the internet claim to be a mentor. Can they be trusted?

Yeah, there are many, but you only need to trust those who are not selling you the ordinary things. If someone is selling you the very common things like price action strategies, wave analysis, moving average, etc. then it’s worth a try because you can find that on the internet for free. I am not saying that these things don’t work, but they have a low probability of success. What’s the real deal is the supply and demand that determines the price of an asset. You should master that.

Many fund managers on the internet claim to provide high returns per month. Should we invest with them?

Do not invest with anyone in the private account; rather, go for the PAMM account of any registered broker. You should look for the drawdown, and it should be no more than 5%. The length of PAMM should be more than a year, and the winning ratio should be around 60%.

 I am not confident whether I would be successful in Forex or not. What should I do?

That’s the first-ever thing to consider while starting anything. You need self-actualization in the first place. If one can do it, then you can too. Be determined and self-motivated, learn well, and be disciplined.

Forex trading is illegal in Pakistan. What should I do?

PMEX is the only legal platform for futures trading in Pakistan, and the rest of the spot trading and futures trading is illegal. But this does not apply to individual traders; rather, it applies to the illegal brokerage houses.

Which broker is trusted, and how should I choose the broker?

The broker registered with an entity that provides indemnity insurance more than what you invest is acceptable. Simply, go with brokers of the U.K. and Australia.

I have already lost my account many times. What should I do?

You should revamp your energy and forget the past. Learn well risk management and supply n demand dynamics of the market and apply with utmost discipline.

I have not much time to trade. Is there any option for me?

Time is absolutely in your hands. You can opt for one or two assets and search for the time when the price moves abruptly. Only catch that time and trade. An alternate approach is to use higher time frames as I usually do. I analyze the close of the daily market and only trade 2-5 trades a month.

Is Forex trading very hard?

To be very honest, it’s hard for beginners but not an impossibility. You need to be consistent and disciplined. There’s no one size fits for all in Forex. You need to be flexible and learning-oriented.

Are options trading very profitable as posed by many internet marketers

Options trading has a negative risk to reward ratio. Like you risk 1%, and your maximum reward is 0.85%. So do not fall prey to such betting.

I hope many common questions have been answered. If you have not understood any of it or have any other question that is not answered, then feel free to comment below, and you will be happily replied.

Also read  How to Choose a Forex Robot (Expert Advisor)?

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