Forex trading is one of the best investments you can ever get involved in. If you want to make a lot of money regularly, one of the best things you can ever do is to venture into Forex trading. The benefits are huge and it can even help you to sack your boss. While it is possible to make money by trading Forex, you also need to know that there are risks involved in Forex trading. Yes, Forex trading has risks. As a newbie, you need to bear in mind all the risks involved in Forex trading. This way, you will be able to plan your trading bearing the risks in mind. A good understanding of the risks will help you to always make the right trading decisions.
In this write-up, we will look into some of the things you need to bear in mind as a Forex trader in Canada before you can successfully record the manner of success that you ever desire in Forex trading.
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What is Forex trading?
Forex trading is the act of trading currencies or currency pairs. Forex is an abbreviation of Foreign exchange. So, Forex trading has to do with foreign exchange trading. It is the process of exchanging one currency for another one. Forex trading is a highly liquid market. Studies show that the Forex market records an average of $5.1 trillion trading volume daily. Currency trading is done in pairs. A good example is the EUR/USD. The EUR represents the Euro, while the USD is the abbreviation for United States Dollars. The Forex market is a form of spot trading and derivatives market. It offers currency swaps, options, futures, and forwards. So, the chance of making money is so huge in the Forex market. Many participants in the Forex market make use of Forex for hedging against international currencies. It also involves speculation on diversity portfolio and geopolitical events.
Currencies are very important since it is a legal trader. So, there is a constant movement and exchange of currencies. This is one of the factors that is responsible for the liquidity in the Forex market. The liquidity makes it possible for people to make a profit by trading Forex. The beauty of Forex trading is that you do not need to own the currencies. This is made possible by the Contract for Difference (CFD). CFD makes it possible for the trader to make money from either the rise or fall of currencies. Forex trading occurs over the counter. The trading activities take place electronically. This means that all the trading activities take place through computer networks. Forex trading is a global activity. This means that involves traders from different parts of the world. It is, therefore, not a centralized exchange.
The Forex market is available all week long. It opens 24 hours of the day and 5 days of the week. Some said it opens 5 and a half days of the week. Forex trading occurs in major cities across the globe. These cities include the following:
- New York
- Hong Kong
The trading also occurs across all time zones. This makes Forex trading available for everyone across the globe. This way, everyone can make money from Forex trading. When Forex trading ends in one time zone, it will start immediately in another time zone. When the US closes trading, it will kick start in Hong Kong and Tokyo. Because of this, the Forex market can be very active at any time of the day. As a result of this, the price quotes will change constantly.
A brief history of Forex
You can trace the root of the stock market to centuries back. The Forex market, on the other hand, is relatively new. It involves the conversion of one currency to another. While Forex trading may be newer than stock trading, we can trace its origin back to when countries start minting currencies. Most trading activities take place in investment and commercial banks. The banks carry out the investment on behalf of their clients. Individual and professional traders or investors can also take speculative opportunities in the Forex market to make money.
Forwards & futures markets and Spot market
The individuals and institutions that trade the market do so via three ways. These are:
- Spot market
- Forwards market
- Futures market
The largest of the three is the spot market. This is because the spot market forms the bases on which the futures and forwards markets are built. The spot market took over from the futures market, which was formerly the most popular. In the past, the futures market was only available it traders and individuals for a longer period. The spot market was able to take over because of the presence of many Forex brokers and the introduction of electronic trading. These two factors led to the upsurge if activities in the spot market. The huge activities overthrew what was obtained in the futures market. Individual traders now prefer the spot market to the futures market.
Investors buy and sell currencies in the spot market. The buying and selling occur in agreement with the current price of the Forex pair. The determining factor for the particular price is supply and demand. The price reflects so many things also. Some of the things it reflects are:
- Perception of future performance of one currency when compared to another
- Sentiments due to any political condition in the country associated with those currency pairs
- Economic performances of the countries
- Current interest rates in the countries
A finalized deal is called a spot deal. We can define it as a bilateral transaction in which a party delivers a given price on a currency pair to a different party and then gets a given amount of a different currency at a given price. After the closing of a trade position, the trader can then cash the profit. Trade in the spot market can take up to two days to settle.
The forward market is somewhat different from the spot market. The futures and forwards markets do not involve trading of actual currencies. Rather, they have to do with contracts representing claims to a given type of currency. It also concerns a future date for settlement and a specific price per unit.
The forwards market has to do with the buying and selling between two parties over the counter. The two parties determine the agreement terms between the two of them. The futures market has to do with the buying and selling of futures contracts. It has its basis on public commodities markets and standard size. Examples of public commodities markets include the Chicago Mercantile Exchange. The regulation of the Futures market in Canada is the duty of the ICE Futures Canada.
Bear in mind also that futures contracts come with specific details. Some of the details are:
- Minimum price increments impossible to customize
- Settlement dates
- Delivery dates
- Number of units you are trading
The exchange plays the role of a counterpart to the futures trader. It also provides settlement and clearance. The two types of contracts are binding. The settlement occurs for cash when they expire at the exchange under consideration. You can buy or sell the contracts before they expire. The futures and forwards markets can protect the trader from risks during currency trading. Big corporations of international standings make use of the futures and forwards markets for hedging against future fluctuation in the exchange rate. Speculators also participate in both markets.
Forex for hedging
Fluctuation in the values of currencies can negatively affect companies that do their businesses in foreign countries. This effect comes up when the companies buy or sell their goods and services outside their domestic markets. The Forex market makes it possible to hedge risks in currency exchange. They do this by fixing the rate at which the completion of the transaction occurs.
To make this possible, the trader can buy or sell currencies in the swap or forward market in advance. This will help to lock in the exchange rate. If a particular company has plans to sell a blender made in the United States to another country, the difference in countries can affect the profit margin.
The cost of manufacturing is $100 and the sales price is €150. The exchange rate is $1 to €1. This means that the company records a profit if $50. This is because of the evenness in the EUR/USD rates.
The value of the USD rises against the EUR. The rate becomes 0.80. This means that you will need $0.80 to purchase €1.00. The cost price for the blender remains constant at $100 and the sales price is still €150. As a result of this, the true value of the sales price is now $120. This means the profit is only $20.
Forex for speculation
The volatility in the Forex market makes it possible for speculators to make a profit. Some of the factors responsible for the volatility are:
- Supply and demand for the currencies
- Geopolitical risk
- Economic strength
- Trade flows
- Interest rates
A change that may cause a rise or fall in the values of currencies against another brings about an opportunity to make a profit. The speculator looks to profit from the increase or decrease in the value of a currency pair. Currencies come in pairs in Forex trading. When you buy one of the currencies in the pair, it means you are selling the other currency in the pair and vice versa.
Currency as an asset
Currencies as an asset class have two different features.
- You can get interest rate differentials between two of the currency pairs you are trading
- The trader can also make a profit from the difference in the exchange rate.
A Forex investor can make a profit from the difference in the interest rates of the two currencies in the currency pair. The profit occurs when the trader buys the currency with a higher interest rate and sells it with a lower interest rate. Before the financial crises of 2008, many traders were selling the Japanese Yen (JPY) and buy the GBP (British Pounds). This is because of the large size of the interest rate differentials. The name for this trading strategy is Carry Trade.
Why currency trading is possible
Before the invention of the internet, it was very difficult for individual investors to trade Forex. Many of the Forex traders in those days were:
- Wealth investors that could afford high investment amount
- Hedge funds
- Large multinational corporations
This is because Forex trading required a huge capital in those days. Things have changed since the internet came to be. The Forex market is now available to individual traders with very little capital. The interest now makes it easy for individuals to venture into retail Forex trading. These individuals can make a profit by trading via brokers or banks. You can access very high leverage on many dealers or brokers online. The leverage will help you to control very large trade using your rather small capital.
The risks you can encounter in Forex trading
Forex trading can help you to make money, but it is also very risky. The complexity of the Forex market is one of the reasons why so many investors do not make money regularly from Forex trading. There is a huge level of regulations in the interbank market. There is also no standardization of Forex instruments. There is a regulation of the Forex market in some parts of the world but some regulations do not occur in some other parts.
The power of banks
The banks in the interbank market trade with one another across the globe. The banks are responsible for determining and accepting credit risk and sovereign risk. The banks also put in place internal processes that help to keep the banks safe. The purpose of the regulations is to protect the banks from participating in the Forex market.
The Forex market works thanks to the activities of the participating banks. The banks provide bids and offer for a given currency and the price mechanism depends on supply and demand. There is a very big trade flow in the Forex trading system. As a result of this, rogue traders find it difficult to influence the price of any currency. The system brings about transparency for investors that can access interbank dealings.
Many of the retail traders in the Forex market use unregulated Forex brokers. Some use semi-regulated brokers. Some of the brokers or dealers can re-quote the process. Some of them can even trade against customers. Some governments also regulate the activities of Forex traders in their domains. The organization responsible for Forex market regulation in Canada is the Investment Industry Regulatory Organization of Canada (IIROC).
Many of the retail investors should spend some time investigating the Forex dealer or broker. This will help to detect the reliability of the Forex broker. The Canadian authority has a very strict rule as regards the activities of Forex brokers. So, you can always trust in the report of the IIROC as regards the reliability of Forex brokers operating in Canada. The regulatory agencies will help to determine if the Forex broker has a good protection strategy. The strategy will help to protect the accounts of traders in case things go south.
Benefits of challenges of Forex trading
The Forex market is very large. It is the largest as regards the trading volume per day. It is even the largest in the world. Its liquidity is the largest in the world today. As a result, it is very easy to enter and exit a trading position in the Forex market. You can enter or exit within just a few seconds. The spread can be small and this enables the broker to make a profit easily.
Open 24 hours
The Forex market is always open all day and all night. So, you can trade Forex at any time of the day or night. It is open 5 days of the week also. This means there is a huge opportunity to make a lot of money from Forex trading. Each day in the Forex market starts in Australia and the day closes in New York. As a result of this, there is always an opportunity to trade Forex in any part of the world. The major centers where the Forex market holds sway across the globe are:
- New York
- Hong Kong
The dangers of leverage
Banks, dealers, and brokers in the Forex market make it possible for the trader to access high leverage. The leverage has the benefit of allowing the trader to control a large position. However, it can also work against the trader. Leverage can help the trader to make a lot of profit and it can also cause the trader to record huge losses. Before you pick the leverage to use in Forex trading, make sure you understand how leverage works. You need to know the risks that leverages can expose your account to. If you choose extremely high leverage, it can cause you to lose all the money in your trading account. It can even make you go bankrupt.
Need for a good trading understanding
Forex trading is complex in its way. So, you need to learn all you can to make money from Forex trading. Before you can fully understand the Forex market, you need to understand different categories of indicators. You also need to understand economic fundamentals. It is essential to understand the economies of different countries and how these can affect the currencies of the countries. You also need to understand how these economies relate from one country to another.
How to choose a good Forex broker
As a beginner in Forex trading, you need to be careful about the Forex broker you register with. There are so many of them that welcome Australian Forex traders. They all claim to be reliable. However, you should not take their words for it until you have properly analyzed these brokers. In this section, we will show you a couple of things you need to bear in mind when choosing the right Forex broker for your trading experience in Canada.
Before you register with any of the Forex brokers in Canada, you need to first find out about security. You should only register with a Forex broker that has everything in place to secure its trading platform. A high level of security is even the foremost thing to determine if a broker is good or not. Do not forget that you will be giving the broker your money. It is not wise to give your hard-earned money to a broker that does not offer reliable security. You should make sure that the broker is reliable before you register there. This is in your best interest.
It is not so difficult to detect if a Forex broker is credible or not. One of the best ways to know if a broker is credible is by checking its regulation status. The regulatory agencies will help you to know if a broker is fraudulent or trustworthy. A trustworthy Forex broker will be regulated. Many of the untrustworthy, fraudulent ones are not regulated. You should also find out if the regulation is by a tier-1 regulatory agency. When choosing a broker in Canada, look for one that is regulated by the Investment Information Regulatory Organization of Canada (IIROC). Such a broker will not be fraudulent and your money will always be safe there.
Cost of transaction
One other very important thing you must bear in mind when choosing a broker in Canada is the cost of the transaction. There is no way you can avoid paying a transaction cost when you trade Forex. However, you should look out for brokers that will not charge you too much money. A Forex trader must pay a commission or spread when he trades Forex. When choosing a Forex broker, look for one that offers the cheapest and most affordable rates.
It is important to register with a broker offering low transaction costs. At the same time, you must not overlook the reliability of the broker. Make sure the broker offers both reliability and low transaction cost. This way, you can have a better experience when you trade Forex in Canada. You should look for a way to find a balance between low transaction costs and security when choosing a broker in Canada.
Deposit and withdrawal
One of the best ways to know if a Forex broker is reliable is by checking the ease of deposit and withdrawal. There should be no problems when making a deposit and the withdrawal process must also be without hitch. A good broker will never make any of these processes to be difficult. Any broker that makes the process to be difficult is bad. You can detect such a broker by reading reviews online. The only reason why a broker holds your fund is to enable you to trade Forex. You should have complete freedom to your funds any time you want to withdraw it. The processing of the broker must also be very fast ad there should be no delay at all.
Before you register with a Forex broker in Canada, you also should find out about its trading platforms. The greater percentage of trading activities occurs via the trading platform. Since this is the case, the trading platform should always be safe and secure. It should also be user-friendly. Find out if the trading platform is stable or not before you register there to trade Forex. You should also check the various offers on the platform before you register there to trade Forex in Canada.
Check if the trading platform offers news feed. The newsfeed will provide you with helpful information for easier fundamental analysis of the Forex market. This will, therefore, help you to make a better trading decision. Check also if the Forex broker platform offers charting and technical tools of different types. Such an offer makes technical analysis a lot easier than ever. A Forex broker needs to offer everything you will need for a complete trading experience
Before you pitch your tent with a Forex broker in Canada, you also need to investigate its trade execution. Find out if the broker fills you at the best price possible for each order. The broker needs to fill you in at the best price possible each time you buy or sell.
Be that as it may, some factors can prevent this from happening. A very good example is if there is a bad internet connection. This can also become impossible if there is abnormal liquidity in the Forex market. Some surprise events can also prevent proper trade execution. Even the release of very important news can affect this. Failure of the broker to execute your trade fast can make Forex trading less profitable for you.
Quality of customer service
Find out if that broker offers a very good customer service before you register there to trade Forex. Find out if it is easy to contact the Forex broker or not. If you encounter any problem, such a broker will be able to put you through. This way, you can trade without the hassle and also make a profit easily. Check the competence of the broker also. Find out if the customer care agents handle technical support issues professionally. Check also if they assist you with the opening of your account on the platform. Do not forget to investigate their after-sales support also.
One other way to know if a Forex broker is reliable is the quality of the reviews. Before you choose any Forex broker in Canada, first read reviews about the broker. You can get reviews from the internet and it will help you a lot. The reviews can tell you if you should trust that broker or not. They will also tell you how the broker handles its customer’s needs.
There are so many outlets that give reviews about Forex brokers operating in Canada. However, you will find out that many of them are not reliable. So, you should investigate each of these brokers using the information you find on a reliable platform.
Helpful tips for trading Forex
The Forex market is the largest in the world today. The tips we give in this section will show you some of the things to always bear in mind.
Understand the market
Before you venture into Forex trading, first study the market. Forex trading can make you rich quite alright, but it is not a get-rich-quick scheme. You need to know what is responsible for the behaviors of different currency pairs before you start trading them.
Develop a strategy
You need to develop a good trading strategy for Forex trading. You should also backtest the strategy to know if it can make a profit or not. A good trading plan is also essential. After making the plan, make sure you always stick to it no matter what. Be that as it may, make sure your plan gives room for modification. A flexible plan is easy to adjust to meet new challenges.
Practice is essential
You must practice as many times as you can to make Forex trading easy for you. Practice will help you to better understand your trading strategy. It will also enlighten you further about how the market works. This is why you should only register with a broker in Canada that will give you access to a demo account free. The demo account will help you to test your strategy so that you can determine its profitability.
Risk with care
Forex trading is risky quite alright. Be that as it may, you should do everything you can to control that risk. For one, you should not risk more money than you can afford on Forex trading. You must not trade Forex with money that you cannot afford to lose. You should equally choose your leverage carefully. Know that leverage is a two-edged sword. This means that it can swing both ways.