When it comes to Forex trading in Ghana, whether you are an experienced trader or a complete novice, a critical factor to help you achieve financial success is: educating yourself and finding the best possible Forex broker.
Part 1: Understanding the Basics of Forex Trading
Forex is short for “foreign exchange.” It is also known by the even shorter term “FX.” If you are a frequent traveler, you should be familiar with the term. After all, it is simply the currency of the host country you are travelling to, and you need to spend in the local currency once you get to your destination. For this, you exchange dollars for the foreign currency.
The Forex market is, undoubtedly, the most volatile and exciting market in the world. No other market comes close to Forex in terms of the amount that changes hands and the volume of transactions every single day – US $5 trillion! The online Forex market is mostly speculative in nature. This means you don’t take physical possession of the actual currency you are dealing with. With your online trading account, you buy or sell currencies based on what you think will rise or fall in value.
Unlike commodities or stocks, Forex is an off-exchange market. This simply means transactions are done over-the-counter (OTC) directly between the parties involved. No supervision by an exchange is necessary. Thus, you can easily access the online market wherever you may be, and anytime you want.
Unique Forex Market Features
There are certain features unique to the forex market that make it more attractive to investors compared to traditional investment vehicles. These include:
- Liquidity – The large transaction volumes that happen on a daily basis make the market highly liquid. Thus, there is always a significant amount of currencies to trade, whether you are looking to buy or sell. The market is never wanting in buyers and sellers.
- Leverage – This is simply borrowed money that you can use to trade a large sum of money with only a minimal deposit in your investment account. While most markets, including the stock market, offer a leverage ratio of only 1:2, it is not uncommon to see Forex brokers offering a leverage ratio of 1:100 or higher. Leverage allows you to earn a bigger profit within a short period of time.
- Bigger Opportunities – Market conditions can quickly change and trigger currency price movements. While a highly volatile market poses great investment risks, it can also potentially bring in a lot of profits, if trades are timed well.
- Easy to Access – With a minimal deposit in your trading account, you can immediately start trading. Within 5 minutes, you can complete opening an account that you can fund with your debit card or other common payment options like Skrill, Neteller, and Webmoney, among others.
- No Commissions – Forex brokers earn through spreads and not commissions. They can also earn from rolling fees for trading positions left open overnight. Spread is the difference between the buying and selling price.
- Controlled Risk – When trading, you can fix a stop loss. This means that you automatically exit the trade once the amount of loss you are willing to risk is reached. It is important to use a reliable platform that can guarantee implementation of your stop loss, when necessary.
The Trading Instrument
In Forex, various currencies are traded in pairs, and four of these pairs are called “majors,” namely the EUR/USD, GBP/USD, JPY/USD, and CHF/USD pairs. These pairs comprise the majority of transactions in the Forex market. These are also the most liquid currencies. Note that in the major currency pairs, trading is done against the dollar. The EUR/USD pair is the most widely-traded currency pair.
Outside of the majors, many other currencies can be traded. These currencies are called cross currencies as the rates of exchange are computed through the US dollar.
Understanding Currency Pairs
Currency pairs are written in a specific format. The first currency is the base currency while the other is referred to as the counter currency. You “buy” the base currency and “sell” the counter currency. On the other hand, when you are selling, you are selling the base and buying the counter.
To illustrate, if the prevailing EUR/USD rate is 1.4200, you need to pay US $1.42 for every Euro you intend to buy. However, if you are selling Euro, you will receive US $1.4200 for every Euro you sell. If you are buying €10,000 and paying with US dollars, based on the exchange rate mentioned previously, you will receive $14,200 based on the exchange rate of $1.42. If the Euro’s value rises against the dollar the following day and it goes up to 1.4300, you will earn 1 cent for each Euro or a total of $100 for €10,000.
If you are trading in the opposite direction, meaning you are selling the pair, you would have used dollars to buy the Euro. Using the example given above, and the dollar falls against the Euro, you would have lost money from the transaction.
Parties Involved in a Trade
In an online Forex trade, two parties are primarily involved: the trader and the market maker. You are the trader and the market maker is the entity that facilitates the trade, typically your broker, by quoting ask and bid prices on a particular currency. In essence, market makers create the market where traders can engage in trading.
Currently, individual Forex traders comprise the fastest sector of the online Forex market. Other sectors include securities dealers and large commercial banks (collectively known as the interbank market), smaller banks, hedge funds, and multi-national corporations.
When to Engage in Trading
Due to the global nature of the Forex market, trading is open 24 hours daily, 5 days in a week. As the market closes in one part of the globe, trading day begins in another region. Thus, you can trade in a certain market, taking into consideration the events that are currently taking place in the particular region.
More about the Forex Markets
As mentioned, the market is open 24 hours daily starting from the opening in Sydney on Monday mornings, until the closing in New York on Friday evenings. Three sessions make up a trading day. These are the Asian, European, and US sessions, otherwise known as the Tokyo, London, and NY sessions, respectively. The session opens in Asia at around 21:00 hours GMT, overlapping with the EU session that opens at 06:00 GMT and stops at around 16:00 GMT. Towards the end of the trading day in Europe, the US session begins as it opens at 13:30 hours GMT and closes at 21:00, just about the time that the Asian session opens.
Because everything is done online, in theory, you can engage in trading without stopping, beginning at 21:00 hours on Sunday until Friday at 21:00 GMT.
The most exciting times to trade are the times when two different sessions overlap. These are considered as the most volatile periods as high trading volumes are happening. And, as expected, high volatility comes with big opportunities.
As it is sandwiched between the two other sessions, the European market has the highest trade volume. Around half of all the transactions daily involve the European session.
Where to Trade Forex
You can trade online anytime of the day, anywhere you may be, using your preferred device. You can choose the time most convenient to you, a time when you can closely check on the status of your trading positions, close deals, amend terms of your trading positions, or withdraw funds. The easy access that online Forex trading offers is what makes it very lucrative to traders, whether full-time or part-time.
How to Profit from Forex Trading
Forex trading is speculative, but you can profit whether the market is on an upward or downward trend since currencies are always traded in pairs. This means you can profit by correctly guessing the direction that the currencies in a pair will go. You will gain profit if you guess correctly which currency will strengthen (go up) or weaken (go down) relative to the other. A good idea is to purchase while a currency is low, then sell it one it begins to strengthen. Later, we will walk you through the steps in Forex trading.
As traders gain trading experience they develop their own trading strategies that they find effective, based on fundamental and technical analysis. Fundamental analysis considers news announcements, macro-economic data, as well as other reports that can trigger price fluctuations.
Factors that Affect Currency Prices
The biggest factor that affects fluctuations in currency rates is the law of supply and demand. This is actually true, not only in the Forex market, but in other markets as well. In Forex, other factors may come into the picture and trigger the rise or fall of a particular currency. These include events of political, geographical, or economic nature. With fundamental analysis, you will understand how these factors can affect currency prices and subsequently come up with sound opinions on how movements in currency rates will go.
Economic factors can be as varied as the country’s GDP, unemployment rate and retail sales data. Prevailing interest rates is among the most influential indicators as any changes to the interest rate policies of a country can affect different currencies simultaneously. An announcement by the US Federal Reserve Bank on changes in the interest rate on loans it extends to banks, for example, has a great influence on the US dollar value. The dollar is involved in the majority of Forex transactions.
Politics and economics, on the other hand, are closely related. Thus, changes in administration or government policy can trigger fluctuations in currency prices.
Geography can likewise affect currency rates. The value of the Japanese yen was adversely affected by the earthquake that hit Japan in 2011.
Forex Trading Risk
While there are inherent risks associated with Forex trading, these can be controlled and mitigated by putting various safety measures in place. For one, you can set a stop loss to make sure that even if you are on a losing trade, your losses would not exceed the amount you are willing to risk. As a beginner, it is recommended that you start with investments that you feel comfortable about, while you continue growing as a trader.
In this section, the basic topics of Forex trading were discussed including what, when, and where to trade, as well as the entities involved in trading. In the next section, we will provide a step by step guide on how to trade in the Forex markets.
Part 2: Getting Started in Forex Trading in Ghana
How to Start Trading
It is easy to begin as a trader. The first step is to register with one of our recommended Forex brokers, open a trading account, and fund it with the amount you intend to invest. Various payment methods are available. In general, deposits made via bank wire transfers, eWallets, credit cards, or debit cards are accepted.
You can begin trading once receipt of your deposit is confirmed. You will be provided with training and support by a personal account service manager.
If you have no prior experience in trading or you feel that you are not yet ready to trade, you can first use a demo account where you can get a feel of real market conditions but without the risk of losing real money. While this can simulate the trading environment, in general, it cannot make you completely understand the psychology of trading that trading with real funds using a live account can provide. Thus, it is recommended that you get your feet wet by starting a mini account that has a low initial deposit requirement, then try making small trades.
Understanding the PIP
The smallest unit of currency price movement is called a PIP. It is short for “percentage in point.” If you notice, currency pairs are always quoted with 4 decimal places. A pip is equal to 0.0001, although some currency pairs where a pipe is equal to 0.01, such as in the case of the USD/JPY pair.
Understanding the Spread
A currency pair is always quoted in two prices on the currency table. The price on the right side is the buy or ask price. This is the price you will pay when buying. The price on the left side is the sell or bid price. This is the rate you can sell for.
As previously discussed, when you buy a currency pair, you actually buy the base currency as you sell the counter currency. On the other hand, when you sell a pair, the reverse is true. The difference between the ask and bid prices is known as the spread. To put it simply, the spread is the difference between the amount you need when buying a specific currency, and the amount you will receive when selling it.
Basically, the spread is the cost to trade. Some brokers advertise low spreads. However, you need to check if there are other fees and commissions that they may charge their clients. Ideally, your broker should only earn from the spreads.
Here is a simple example to help you understand better. Let us use the most traded currency pair: EUR/USD. If the rate moves from 1.2842 to 1.2862, the price increased by 20 pips. If the price goes down to 1.2783, it decreased by 59 pips. By using pips, you can easily compute for your trade’s profitability. To relate pip movements to your P&L, you only have to determine the size of the deal.
If you take a 100,000 EUR/USD trade, an upward or downward movement of 20 pips translates to a $200 gain or loss, depending on the direction the price went.
Understanding What Going “Long” and “Short” Mean
Because the Forex market has a bi-directional nature, you can place a trade in either direction. Depending on your trading strategy, you can opt to either buy or sell. To go “long” means you are buying because you are hoping that the price will go up. On the other hand, going “short” means you are intending to sell because you are expecting the price to drop.
However, if you are “flat” or “square,” it simply means that you have taken no position in the market, or that your buy and sell positions exactly offset each other.
Understanding Leverage and Margin
To explain, leverage allows traders to trade a large sum of money with only a minimal amount deposited in their trading accounts. To gain a significant profit, you will need to trade large sums of money since currency rate movements are small and slow. By trading in big sizes, you potentially earn a bigger profit for every pip. However, it also comes with risks of losing big. Depending on your leverage ratio, you can trade with as big an amount as the free balance in your account will allow you to “leverage.”
Leverage is always expressed as a ratio like 1:100 or 1:200. This means for every dollar in your account you can trade as much as $100 or $200. It magnifies both potential gains and losses.
You have decided to buy €100,000 at $1.4200. If your account has a 1:100 leverage. You do not need to have the $142,000 dollars to buy euros. With a 1:100 leverage you need to pay only 1/100 of the total purchase price, which is $1000. This is called the “margin.”
To compute the margin, simply divide the deal size by the leverage ratio (100,000/100). The margin will cover your potential losses. In case the deal goes the opposite direction, and you lose, your potential losses will not exceed the $1000 deposited in your trading account. Your account will be closed automatically, and you exit the trading position once your losses equal the amount of your deposit.
Understanding Stop Loss and Take Profit Rates
You set up a stop loss to define the risk you are willing to take. This means you set the maximum loss that you can tolerate. If the price movement in the market reaches that point, the deal will be closed automatically. This way, you are able to control your investments.
On the other hand, a take profit rate means the amount of profit you want to achieve. Similar to a stop loss rate, your deal will be closed automatically once the price movement equals the rate you set up. By having a take profit rate in place, you are able to control your positions without having to monitor your investments continuously.
There are 3 types of orders you can open: day trade, pending, or limit or forward order.
- Day Trade – Also called market order, day trade is an order placed to buy or sell currency at the most favorable rate possible. Typically, the order is immediately executed.
- Pending Order – In this type of order, you have a pre-defined rate at which the order for a day trade will be placed once the market price reaches the rate. Your order will remain on pending status until the pre-defined rate is reached or the given time-frame expires. A pending order bears the same features of day trades, and these include the margin requirement.
- Forward Order – A forward order is a type of open trade that has a value date beyond the date of the spot value. Like a pending order, it bears similar features as day trades that include the margin requirement.
In each of the order types, you can set up a stop loss or take profit measure to help you control and manage your investment risk.
The Right Timeframe to Hold Your Position Open
If you are engaged in day trading, you typically hold an open position in less than one day. This can be as short as a few minutes or as long as a several hours. This is why it is called day trading.
If you are a medium-term trader, you would want to get a feel of the general direction to enable you to gain a more significant profit from bigger currency rate movements. As a medium-term trader, you would need to have similar skills as a day trader, specifically in terms of entering and exiting trading positions.
Medium-term trading, however, requires a lot more patience, a wider market view, and tons of analytical work. Technical and fundamental analyses offer the basic knowledge and tools that will help you take your trading activities a notch higher.
In this section, we discussed some basic terms as well as the steps on how to trade. You are now ready to try your hand at Forex trading. To better equip you with the necessary skills, it is recommended that you learn the techniques on technical and fundamental analyses. This way, you can start developing your own trading strategies as you embark on your trading activities.
Final Word: A Warning on Risk Management
Options, CFDs and Forward Rate agreements are products that use leverage and bear a significant amount of risk. These products may not be suitable for all traders because the entire invested capital may be wiped out in case of extreme loss. It is therefore to your advantage that you take time to fully understand the involved risks and refrain from investing money that you can’t afford to lose.
It is worth mentioning that all information provided here should not be misconstrued as a recommendation to dabble in any trading activity. Our company and affiliates are duly licensed by CySEC.