By Jin Dao Tai
Forex – short for foreign exchange – is a term that has been circulating among Malaysians in recent times. However, understanding on the topic is limited, and many are unsure on what forex is, and what trading it entails. To keep things simple and easy to understand, forex is ultimately centered on currency conversion, and forex trading is the practice of trading currency for profit.
The aim of forex trading is simple. Traders will aim to buy a currency at one price and sell it at a higher price – or sell a currency at one price and buy it at a lower price – in order to make a profit.
That being said, there can be confusion as the price of one currency is determined and measured against another currency. To put it simply, trading always occurs in pairs, known as the base and quote currency. They are separated by a slash between them, such as USD/MYR. A currency pair represents the amount of the second currency (the quote) that is needed to buy the first currency (the base). In the case of USD/MYR, the exchange rate would be 4.28, which means it takes 4.28MYR to buy 1USD. Typically, traders would seek to buy when the exchange rate is low, and sell when the exchange rate is higher.
Popularity of Forex Trading vs Stock Trading
One of the main differences between forex and other assets is its popularity among traders and regular users. With forex, when a trader buys a currency pair – both base and quote currency, they always sell one currency and buy a new one – they always have one currency on their account. With stock, a trader has to first buy the stock then exchange it back to the currency, meaning the trading process involves two different assets.
The convenience and ease of access of forex trading makes it more popular when compared against other assets, and because of this, the forex market is active 24 hours a day for five days a week. This is the reason why forex trading sees the largest traded volume per day: almost USD5.1 trillion.
Forex Trading: Is it the right time?
The biggest advantage of investing in forex is that it is easy to start. All one needs is a laptop and a brokerage account – and this can be started with less than US$500 – and they can begin their trading journey. However, as easy as it is to get started, beginners diving headfirst into the market and making trades without learning the craft can see them empty their accounts very quickly.
Nonetheless, the current climate is a great time to begin trading, as the COVID-19 pandemic has affected markets across the globe, seeing prices reach multi-year lows during the February/March period before recovering almost entirely in the following months. For the beginner trader, this recent market volatility gives them the opportunity to experience many different market conditions in a relatively short space of time. After all, learning to trade effectively and make a profit through forex is like a lot of things we do: easy to get started with but takes time and effort to master – and there is no better time than the current season to get started.
How to succeed as an amateur trader
When it comes to forex trading, there is no quick and easy method to making a profit. Beginners need to know that while making money in trading forex is possible, it is a high-income skill that needs time and effort to be developed before reaching its full potential.
Beginner traders looking to start should consider their risk profile to manage their aggressiveness or tolerance, and the amount of capital and time they are able to commit. These will filter into selecting a strategy for the trader that will suit their style and preference as they learn the ins and outs of the forex trading craft. Next, it is important for traders to have realistic and repeatable goals as they work on the path towards success, while also consulting a coach as coaches will be able to accelerate learning, while also holding the trader accountable to their commitment, process, and results.
Finally, the common characteristics of a successful trader regardless of experience lies in their ability to wait for good trades, aim for small-but-consistent wins, and be okay with losing trades. They need to be focused on the mindset of accumulating wins rather than expecting a windfall, especially given the volatility in the forex market, it can be easier and faster to achieve repeated smaller wins instead of banking it all on one big win.
What to know as a beginner about to invest in forex
There are many methods to pursuing forex trading. However, beginners need to consider the following points at the forefront on how to approach and tackle the market:
- Strategies are not everything. There is a wide range of trading strategies available. Beginners will have to find a strategy that is not only profitable, but something that you are comfortable to deploy consistently over an extended period of time.
- Psychology could be more crucial than strategies. Since no strategy is going to be profitable 100% of the time, managing psychology in periods of both profit or loss is important.
- Having reasonable goals that you expect to achieve from investing in forex is going to help you enjoy the process and also increase your likelihood of success.
Ultimately, forex trading can be an effective, attractive investment proposal, especially given the current economic situation in Malaysia. However, to fully capitalise on it and make a profit, traders will need to consistently approach the market and hone their knowledge.
Jin Dao Tai is an entrepreneur, award-winning forex coach and trainer, international speaker and multi-million dollar trader. Starting out his career as an economic and financial consultant in Australia