Forex Trading: Definition, Advantages and Disadvantages - Forex trading today can truly be seen as a promising area of income. As not, Forex trading does not require a large enough capital. Plus, it's not overly difficult to use. For information: it often happens that forex players are those who have been working in the world of stock trading for a long time. Then what exactly is the point of Forex trading? How does Forex trading work? Here's a crazy bro will give a comprehensive explanation.
Understanding what Forex trading is
Today, perhaps many people will say that they can get rich quick if they play forex. However, this is not necessarily accompanied by a deep understanding of the significance of Forex trading itself, in terms of characteristics, benefits and risks. In the following explanation, we will discuss the basic understanding of forex trading that everyone should know. Then what is Forex trading?
Forex trading or also known as Forex trading is trading currencies from different countries with the aim of making a profit. In this case, Forex itself is an abbreviation for Foreign Exchange or can be called a currency exchange. An example of forex trading would be buying the euro (the main European currency) while simultaneously selling the US dollar (American currency), which can be reduced to either the euro or the US dollar. In the minds of ordinary people, the meaning of forex trading is more connected with the exchange of money in an exchange office, namely, with the purchase and sale of foreign currency manually, which is carried out through the exchange office. In fact, Forex trading is different from manual operations like in Money Changer.
Another term you need to know is trader. What is a trader? Trader or forex trader is a term for people who are in Forex trading and trade currencies from different countries.
Please note that the purpose of someone buying and selling money in Money Changer is to need to exchange currencies for transactions in different countries, so there is a physical exchange of money. As for Forex trading, it is carried out online with the sole purpose of making a profit. It should also be understood that Forex trading is a business, an investment, it can even be considered a profession.
Internationally, foreign exchange or foreign exchange trading is often carried out by a variety of parties ranging from governments, central banks, multinational companies to individuals who have large amounts of assets or are major players. Currency buying and selling transactions that take place between different parties do not take place in a market with physical buildings, but in an invisible network called the “foreign exchange market”.
Along with technological developments, forex trading has been able to reach a broader scope. Now anyone can trade on Forex via the Internet, anytime and anywhere. Nowadays everyone can trade in Forex. You can also easily trade Forex online and with as little as $ 10 capital.
Forex trading history
Throughout its history of foreign exchange trading in the late 90s, only wealthy, large financial institutions such as central banks, private and public banks, and large commercial companies such as Apple or Toyota were involved in this business. They usually trade Forex for trading purposes, to pay off debt, hedge (hedge) or invest. The capital required is also quite large and not everyone can do forex business.
With the development of the Internet around the world in the late 90s, the forex market could finally be followed by almost everyone, from entrepreneurs to housewives, parents and young people. Brokers have also begun to structure forex so that anyone can trade on a retail basis. So now, everything from exchangers, banks to motorcycle taxi drivers who hang out can also enter the Forex market.
1. The end of the barter period and the beginning of the exchange of money.
In the history of human civilization, it is necessary to know that the exchange of goods between people began with a barter system. For example, someone needs a goat, then he meets another person who sells two baskets of apples, then they agree to exchange their goods, after which a transaction can take place. Over time, however, barter was deemed insufficient to meet day-to-day needs. The main problem with the barter system is that if you cannot find a person who needs goods and supplies them for exchange?
To overcome the disadvantages of barter, means of payment or media of exchange have been created in various forms. During this period, mankind used shells, beads, rare stones and precious metals as intermediaries. However, it should be noted that each region can apply its own "currency" based on what they consider to be the most valuable, community-recognized and portable (easy to carry anywhere).
Because each region of the world uses its own "currency", traders who transact between regions or between islands and transcontinental shipments often need a currency exchange certificate, which is generally accepted. In many countries it is accepted that the use of precious metals such as silver or gold is an intermediary.
The kingdoms that existed at that time began to print their "money", determining the content of certain precious metals in them. In turn, the exchange is based on this rate. This was the beginning of currency exchange in ancient times.
Since when did currency exchange take place? Byzantine records (circa 4th century BC) indicate that the kingdom monopolized the exchange of money. The Papyrus records then also show that currency exchange took place during the ancient Egyptian era. Other regions, from Australia, Indonesia, China, India to Europe, have their own records. So this is not something that has suddenly appeared in our time.
2. The history of modern Forex trading.
Money has been exchanged since time immemorial, but the history of modern forex trading in the form in which it is conducted today actually began only after the Second World War. For your information: at the end of World War II, there was a lot of chaos and economic crisis, so the governments of the allied countries felt that they needed a system that could later unite the world economy. Then the Bretton Woods System was formed to realize this dream.
In the Bretton Woods system, which originated in the city of Bretton Woods, New Hampshire, USA, in 1944, for the first time, there were official rules governing currency relations between countries. The United States, which at the time owned two-thirds of the world's gold reserves, insisted that the system be based on gold and the US dollar. Finally, this system requires all participating countries to relate the value of their currency to gold and the US dollar. However, this did not last long.
On August 15, 1971, the United States unilaterally severed monetary relations with gold, thereby automatically ending the Bretton Woods system. The value of the dollar is no longer determined by its gold reserves, but only by the promises of the US government. This action certainly makes the US dollar a reserve currency for many countries around the world. At that time, exchange rates between currencies were no longer determined by a standard, but were determined by a simple economic system, namely supply and demand. A new stage has emerged in the history of forex trading, namely the floating exchange rate system.
Thereafter, the buying and selling of currency is mostly done by banks, while other parties, such as government and companies, have to contact banks as intermediaries. Companies that need this can contact the bank by phone, after which the bank records at what price the currency was bought or sold. This creates the interbank market as an OTC network where currencies are exchanged and exchange rates change dynamically.
3. The era of online Forex trading
The development of the global economy between the 80s and 90s brought the world to a new stage in the history of foreign exchange trading, in which people could participate in a world previously dominated by large banks and international companies. Transactions through bank intermediaries no longer need to be initiated by telephone, but simply with instructions via the Internet. In fact, a trading platform has been created that allows anyone to see the "price" (exchange rate) and trade currencies in real time.
The development of this technology is a defining moment in the history of forex trading because it has led to the volume of trading in the foreign exchange market still becoming the largest financial market in the world with daily liquidity reaching $ 5.3 trillion in 2013. In addition, you can find out which currency is only among those who are actively traded and seek to profit from the strengthening or weakening of currency exchange rates.
Then how if you, as “ordinary people”, can benefit from currency exchange? There are now many “forex brokers” that service currency trading for the community on a small scale. Unlike the interbank market, which has a standard trading size (100,000 US dollars per unit), such forex brokers provide the public with opportunities to trade in the foreign exchange market, even with as little capital as a few tens or hundreds of dollars. In today's mobile age, it is even more sophisticated to trade Forex using your laptop, tablet, Android or iPhone. As long as there is electricity and an internet connection, you can jump into the forex market and profit from it if you know how to play the forex market.
How Forex Trading Works
Forex trading is essentially buying one currency and selling another at the same time. Then the currency pairs are traded at the same time. For example, EUR / USD = 1.23700.
The currency on the left (in this case the euro) is the base currency, and the currency on the other side is called the quote currency. The above notation shows that 1 unit of the base currency is equal to 1.23700 of the quote currency (1 Euro = 1.23700 USD).
So you have to pay $ 1,23700 if you want to buy 1 Euro. On the other hand, if you want to sell € 1, you will receive $ 1.23700.
Forex trading is a foreign exchange transaction that is increasingly being chosen as a way of investing. This Forex trading includes selectable currency pairs and can be traded under specific conditions for maximum results.
Forex trading laws according to Islam
For those of you looking to learn how to trade forex, there will of course be questions about halalism. In fact, is Forex trading haraam? Then is Forex trading a type of gambling?
According to Islam itself, currency trading or forex trading occurs due to the need for a global market to meet the needs of different countries.
This is in line with Masail Fiqhiyah's book written by fiqh expert Prof. Masjfuk Zuhdi stated that trading in forex or foreign exchange is permitted by Islamic law.
Forex trading is considered legal because the products traded have a clear shape and value, namely in foreign currency. Forex trading is also different from usury and is purely a buy and sell trade because currencies are traded in Forex instead of lending money in anticipation of more profit.
MUI has also authorized SPOT Forex trading, whereby buying and selling SPOT financial instruments, commodities and other assets is carried out in cash and direct payments. This market is often referred to as the cash market because transactions are directly exchanged for assets.
Benefits of Forex Trading
Please note that each business or investment certainly has its own benefits and risks, depending on what type of investment is being made. Forex trading is an investment that has been quite active in recent years. Because these investments can make investors rich or even bankrupt. And, of course, you should know that Forex trading is a highly profitable investment with a high risk. The following will explain the benefits of investing in Forex trading.
1. Forex trading tends to be flexible
Indeed, you can trade Forex anywhere because it is very flexible. Forex trading transactions can be made through applications provided by online forex brokers.
Having internet access almost everywhere will of course also make it easier for traders to transact. For the rest, you only need to prepare the following things, for example:
Hardware such as a computer, laptop, tablet, or even a smartphone.
Download and install the app provided by the trading broker
Adequate internet network
Forex trading is not only flexible in terms of location, but also in time. Access to the forex market is open 24 hours a day. In addition, the market is only closed on Saturdays and Sundays.
On the other hand, you can set up a schedule for your trading. You can trade in the morning if you can concentrate more at this time. Or you can also trade at night if you have your main job in the morning.
2. Benefit from the difference in exchange rates.
The name of the investment, I definitely want to make a profit. Well, the "salary" or income of a forex trader for those of you planning to trade forex is the profit in the form of the difference between the exchange rate you buy and the current exchange rate. The trick is that you buy dollars when their value is still low and resell them at a higher price, or buy at a higher price and resell them at a higher price.
In general, there are three possibilities for the dollar to move: upward or upward, fixed or sideways, and downward or downward. If it grows, then there will be big profits. But if it falls, then the value of the currency will tend to decline.
Before making dollar investments, you must first know the purpose of those investments. Also make sure that before you start trading Forex, you also provide an emergency fund that you can use for what happens suddenly and unexpectedly.
3. Forex trading is liquid
Note that not all stocks are liquid. This means that many stock investors find it difficult to buy and sell stocks quickly.
This phenomenon is indicative of illiquid stocks commonly found in fried and non-LQ45 stocks. Stocks that are on hold even delay investors' money, who knows how long the suspension will be open.
When trading forex, you have nothing to worry about because the forex market has very high liquidity. The large number of transactions proves that there are almost always people buying and selling every second.
Traders can also quickly make profits according to their chosen forex trading strategy without worrying about whether their money is stuck or not worrying about being unable to spend money due to the calm market.
Due to the high liquidity, the forex market does not recognize such a concept as a "stock trader" or a person with big money who can manipulate stocks with low liquidity. These "bookmakers" definitely have appropriate prerequisites and goals for buying and selling that can influence the emotions of retail investors.
4. The results of Forex trading can be felt immediately
Another advantage that traders can get is that they can take advantage of the price increases that occur due to the difference between the buy and sell prices in a buy order. Meanwhile, when a sell is made, the profit will be derived from the difference between the sell price and the buy or close price.
5. No additional fees.
It should be noted that there are no transaction fees in the online forex market, only there are a few fees that vary in quantity. An example would be the cost of withdrawing funds from a forex account.
6. Forex trading has a margin system.
The last advantage is that there is a margin trading system that can make the purchasing power of investors higher than their capital.
If this is the case, of course, profits are made in both directions when the market goes up and the price falls. Of course, this may not apply to other types of investments, such as stocks.
Disadvantages of Forex Trading
After understanding the benefits of Forex trading, you also need to understand the risks. Of course, you must also be prepared to accept all the consequences. Thus, the decisions made were carefully thought out. The following will explain the losses or risks that arise from Forex trading itself.
1. Government intervention by currency
It should be noted that each investment has its own drawbacks, including foreign exchange. One of them is the intervention of the government of the country of origin, the currency of which is traded on the foreign exchange market.
The intervention in question is the intervention of that country's central bank by raising interest rates, issuing government bonds, and buying large-scale foreign exchange.
2. Forex up and down very quickly
Another risk is the impact of fluctuations in exchange rates. As is well known, if the rupee currency can get very weak, buying dollars can be risky because of course the price is high.
Waiting for the Indonesian currency to strengthen may take some time, so it could put foreign exchange trading in Indonesia at risk of losing money.
Thus, knowing the advantages and disadvantages of investing in Forex trading, you should wisely select the type of investment that suits your abilities as well as your funding needs, for both short-term and long-term investments.
Forex Risk Management
Risk management is the most important thing in Forex trading. As you know, Forex trading is associated with a fairly high risk. But when you can control that risk (potential loss), then this online business is very profitable compared to other online businesses.
Unfortunately, very few traders realize the importance of risk management, especially for novice traders. Usually, after creating an account and making a deposit, these novice traders get impatient and immediately hit the BUY or SELL button without any prior analysis, let alone risk management. Here are some of the risk management techniques that beginner traders need to understand, including:
1. Use "cold money" when trading Forex.
If you are a novice trader, the use of cold money is a must. Because the use of cold money is due to the fact that you will not always be able to withdraw money or withdraw money that you use for trading. Therefore, if you force the trade at the wrong time, you will actually lose. Simply put, if you sell a product when the price falls and you buy it when the price rises, you are bound to lose. Therefore, it is highly recommended to use cold money.
For information, cold money is money that is not used for sudden or urgent needs. This means that it is not money that is needed for day-to-day needs, insurance, emergency funds, child education funds, installment funds, and so on. It is also highly recommended to use borrowed money for trading, because this is also not cold money. Thus, all money used for trading is for trading and not for other purposes.
2. Set a stop loss to avoid losing too much
A stop loss or stop loss is an order placed to close an open transaction in order to limit the risk of loss. For example, you open a Forex trade "BUY 1 lot AUD / USD at 0.81400".
To limit the risk in your trading, you will of course need a strategy in which you place a stop loss at 0.81000. That is, if the price drops to 0.81000, your transaction will close at 0.81000 with a loss of $ 400.
When trading Forex, you are legally obligated to limit your risk. The main thing is to minimize the likelihood that the stop loss will be "caught" by the price movement. This is the very technique of setting a stop loss.
Place your stop loss a few pips above the key resistance (if your position is short) or below the key support level (if your position is long).
Technically, there are methods that teach you to place about 100-200 points (for 5 decimal quotes). There are many methods for identifying key resistance and support, you just need to learn them.
3. Create a good trading plan.
For the forex trader, a trading plan is essential to obtain consistent trading results. One of the success factors in Forex trading is discipline. With a well-crafted and objective trading plan, a trader can certainly practice discipline in accordance with the rules laid down in the plan.
4. Take Profit to Take Profit.
Traders need to know how to correctly determine Take Profit so that in the future they do not just follow their emotions. There are several techniques you need to learn to determine how to close a position for optimal profit, including:
Determine Take Profit Under Trending Market Conditions
Determine take profit when ranking market conditions (sideways)
Using the ratio of risk and reward