What is Forex Trading, and How does it Work?
The currency market operating for more than 40 years is known to be one of the largest financial markets entailing over $5trillion transactions in a day; made to buy, sell, exchange currencies. The figure mentioned is more than what the entire equity market can combine. This virtual trading market is not a single integrated exchange industry but a massive network of computers and brokers communicating worldwide. It is operating 24/7. Forex trading is known as an easy money-making process, but it can become quite challenging to handle. The forex market comprises of the following:
- Banks
- Commercial companies
- Central bans
- Investment management firms
- Hedge funds
- Retail forex brokers
- Investors
The market is divided into two sections:
- A) Interbank market
- B) Over-the-counter market
The first level is where the bank either operates on behalf of customers or trades massive bank trade currencies for hedging and balance sheet adjustments.
The latter is where people are trading individually via online platforms or their brokers. Forex brokers here are also playing the role of market makers.
Speaking of forex trading in Pakistan, there are no restrictions, although selling and buying cryptocurrencies is currently against the law. Many people do not register their accounts with the Securities and Exchange Commission of Pakistan; therefore, we would advise you to open your account with an international forex broker to avoid fraud and money laundering. Offering an account to a Pakistani trader is legal for an international broker.
Forex Trading for Beginners
To get started, we have made a simple three steps checklist for a forex trader in Pakistan.
- Find a broker:
Since the brokers in Australia, UK and the US are strictly regulated, many people in Pakistan choose their broker from either of these three countries.
- Choose a platform:
The second step is to either choose a trading platform offered by your broker or have your own like MetaTrader 4/5.
- Account Funding:
Once your broker has verified your personal information, go ahead, and fund your account by linking your bank account and converting rupees to USD, GBP, etc., to make your first official trade.
With just a laptop, mobile, tablet in hand, anyone can get into forex trading with minimum money since it does not require a huge sum of capital to start with. However, having good sound knowledge of forex trading is a must!
Forex Trading Apps
Some of the best forex trading apps in Pakistan are:
- com
The minimum amount required: $100.
- AvaTrade
The minimum amount required: 100 Euro.
- eToro
The minimum amount needed: $50 USD.
Forex Trading Strategies
To minimize the risks of liquidity issues, it is advised to start trading with a major currency pair such as the USD/EUR.
Keep in mind these two technical forex trading strategies to stay informed and make educated decisions.
1. Momentum Indicators
The momentum indicator measures the sudden changes in price movement. This technical indicator can also notify you to buy or sell by keeping track of trends or any changes in the momentum of a currency. Since these indicators lag trends, you will not misread the signal even if you are entering late.
2. Reversal Candlesticks
A reversal candlestick will indicate if a trend or pattern of currency is changing, it can also indicate if a currency is falling or rising in value. If you intend to capitalize on smaller volatile shifts, then you should rely on a reversal candlestick.
Advantages of Forex Trading Online
Flexibility
You can opt for forex trading as either a part-time hobby or a full-time job because of its flexibility and time-free facility. The market is huge and operates across various time zones; any information regarding this market is easily accessible.
Trading Options
Traders are given various options to carry out online forex trading, for example, spot trade and future agreement – providing massive trading volume with options available for every trader’s needs. Forex trading is the largest volume of trading than anywhere in the world, offering unmatched liquidity.
Transaction Costs
Compared to other markets on a percentage point basis, online forex trading has much lower transaction costs because it is primarily operated by dealers who reserve a spread for themselves to mitigate risk and offer a two-way quote to make a profit.
Once you are in the game, you will not have to worry about including separate brokerage charges.
Disadvantages of Forex Trading Online
Counterparty Risks
The forex market remains largely unregulated. Hence, there is no centralized exchange that can guarantee you a risk-free trade. The counterparty risk will always be there, and for this reason alone, forex trading requires careful assessment and creating plans to mitigate these issues.
Leverage Risks
In the financial industry, forex markets provide the maximum leverage, which means the risk of losing or gaining is implied by the ratio of 20/30. Fact that there are no limits on the amount of movement, a person can lose all their funds in a day or a minute. Novice investors need to always stay on guard to avoid such risks.
Operational Risks
Because the market is functional 24/7, forex trading operations can become gruesome to manage and operate. Therefore, traders must implement algorithms to secure and protect the value of their investments for times when they are away. Similarly, for large scale trading, multinational firms own trading desks operating on their behalf day and night around the world.
Forex Terminology
Pip: Minimum unit of a currency calculated to the 4th percentage point. For example, $0.0001 is one pip in USD.
Lot size: The total number of units of a currency you are trading. If you order to sell 50,000 PKR, your lot size is equal to 50,000. Most traders consider 100,000 units of any currency as standard.
Order: A set of instructions to guide your broker on which currency to buy or sell, the price of the purchase or sale, the number of shares to move, etc. Multiple types of orders can be used to limit the loss and maximize profit.
Call: If your equity falls below a certain percentage while leveraging, this is when you can margin a call from your lender. If you would like to stay in your position, you will have to deposit a set amount of money into your account in addition to the initial deposit.
Essential Steps to Forex Trading in Pakistan
- Research thoroughly on the forex market
- Choose a reliable broker site or application
- Practice on a demo account
- Create an original account
- Choose and buy reliable stocks
- Monitor the market trends consistently and regularly
Conclusion
The forex market caters to people of all budgets and risk factors. The only significant benefit of foreign exchange is the massive profit that can be made even from a small amount of investment. If you think a currency pair will increase in value, you can buy it, but if you think it’s going to decrease, you can sell it anytime. For people with a solid financial background and knowledge, forex trading has become a popular career for its high liquidity, 24/7 schedule, and easy accessibility feature. Be your own boss and start making money from the comfort of your home.
