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COVID-19 did one thing well: It underscored uncertainty all around the world and the international community is still dealing with the aftermath. Hundreds of millions have lost income and businesses closed on every continent.
What did it also do? Trading brokers saw massive boosts, more pronounced in developing countries. Africa, Eastern Europe and Southeast Asia made up 60 percent of new trading accounts.
The steep increases in trading activity and account numbers placed substantial pressure on forex brokers. Employees working remotely and liquidity demands mean that smaller forex brokers taking advantage of the renewed interest may not be a safe choice for traders.
Extensive growth that the COVID-19 shored up is extremely rare for the forex industry. In fact, the forex industry has struggled over the past few years.
If you’re facing your own financial struggles, should you jump on the bandwagon, too? Are self-isolation and layoffs a good enough reason to trade forex?
How to Trade Forex
First of all, let’s talk about how to trade forex in the first place. You need more knowledge under your belt than just hearing the quote, “With great volatility comes great opportunity!” ringing in your ears. Sure, greater market volatility makes trading easier, but there’s the practical side, too. Here are the basics of getting started in forex trading.
Step 1: Connect your computer to the internet.
So far, so simple, right? You need a reliable internet connection and zero service interruptions so you can trade through your online broker. Make sure you have a smartphone, tablet or computer to run a trading platform. If your internet connection is unstable, you could face losses when the market charges ahead — against you.
Step 2: Find the right online forex broker for you.
Look for an online forex broker that meets your requirements and accepts you as a client. Make sure the broker you choose is in a well-regulated jurisdiction under the oversight of a reputable regulator like the U.K.’s Financial Conduct Authority (FCA) or the U.S. Commodity Futures Trading Commission (CFTC).
Step 3: Open and fund a trading account.
Next, deposit funds into a trading account. Online forex brokers often offer several ways to open an account—bank wire transfers, debit cards or electronic payment providers like Skrill or PayPal.
Step 4: Choose a forex trading platform.
Next, you can’t get trade without a forex trading platform. Download or get access to an online forex trading platform supported by your broker. Most forex brokers either offer a proprietary trading platform or you could choose a third-party platform.
What’s the best way to choose the right forex trading platform for your needs?
Go for one of the most popular platforms if you can’t decide—you can’t go wrong with excellent third-party platforms like MetaTrader 4 and MetaTrader 5 (MT4/5) from MetaQuotes.com or those from NinjaTrader. Check out the top apps for forex trading for more information as well.
Step 5: Start trading.
Finally! You’re ready to trade!
Well, kind of.
You really should open a demo account using virtual money to test out the broker’s forex platforms and services. This way, you can also test your trading strategy and practice trading without risking any funds.
Once you’re comfortable doing that, then you can consider forex trading with real money.
How to Know Whether it’s Right for You During this Time
Lured by the possibility of wads of cash, is trading forex actually going to help you, or should you focus on passive investing instead? Here are some tips to make sure you’re making the right decision with your hard-earned cash.
Tip 1: Be honest with yourself.
Do you really understand forex pairs? Be honest.
To give you a small crash course, a currency pair compares the value of two currencies. This is done through a numerator/denominator relationship. The base currency is on top and the quote currency is on the bottom. For example, the EUR/USD currency pair is the world’s most popular forex trading instrument, so it’s like this:
- EUR: Base currency
- USD: Quote currency
Let’s imagine a quote is EUR/USD 1.20000. This means that the euro is trading 20 percent higher than the U.S. dollar because USD equals $1. Each ratio is quoted in two to five decimals and can also move in the opposite direction with a new currency pair — USD/EUR instead of EUR/USD. In other words:
If EUR/USD = 1.25000/1.00 =1.25000, then USD/EUR will = 1.00/1.25000 = .80000.
You usually trade the currency pair with the highest volume, which carries a narrow bid/ask spread and lowers your trading costs.
If this already overwhelms you, are you really cut out for forex trading? If you barely know the definition between a pip and a moving average, you might want to choose another way to make money — building a blog, developing an e-commerce site or something else entirely. Trading forex takes stamina, decisiveness and intimate forex knowledge.
It also involves a large amount of risk.
Tip 2: Learn everything you can.
With most things, you get better with experience, and that’s true when learning how to trade forex. That’s why most forex trading brokers recommend using a forex demo account to start trading to understand the technical mechanics of making forex trades and learning the ticks of the platform you’ve chosen.
To continue our quick lesson, the most popular forex pairs are:
- EUR/USD, the euro and U.S. dollar
- USD/JPY, the U.S. dollar and Japanese yen
- GBP/USD, the British pound sterling and U.S. dollar
- USD/CHF, the U.S. dollar and Swiss franc
Forex traders make money on long positions when the ratio goes higher and lose money when it goes lower. On the other hand, you can make money on short positions when the ratio drops and you lose money when it rallies.
Tip 3: Get consistent.
How will you make consistent decisions so you consciously execute your trades? You need to know exactly what’s working and what’s not so you can learn exactly how to enter or exit a trade. You want to learn technical analysis and fundamental analysis — either look at the underlying fundamentals of the economy and chart trades or use technical analysis. No matter what, you need to take underlying market dynamics into consideration and employ your techniques consistently.
Technical analysis forecasts future market moves and identifies trading opportunities based on chart patterns and computer indicators. Technical analysis is a great way to predict short-term market moves.
Fundamental analysis helps you value an asset determining its intrinsic value. It looks at economic and financial factors and qualitative and quantitative information. The difference between the two is pretty simple: Technical analysis involves looking carefully at charts to identify patterns or trends and fundamental analysis involves looking at economic data reports and news headlines to analyze economic, social and political forces that affect currency prices.
Decide Whether Forex is Right for You
It’s pretty unbelievable that a virus jump-started the struggling forex industry. But many people believe that with every crisis comes opportunity. You don’t have to look any further than a quick Google search for “online forex trading,” which will show you that that exact thought raged rampant.
John Maynard Keynes once said, “The market can stay irrational longer than you can stay solvent.” You can’t say the market’s now acting irrationally and that it will come around — it’s akin to gambling.
So, should you start trading forex because you’re bored — or worse, desperate? You need to evaluate whether the risk is worth it to you — and whether it’ll keep you afloat, not dash your broken ship against the rocks.