Forex Trading Definition Advantages and Disadvantages – Forex trading today can indeed be regarded as a promising income field. How not, forex trading does not require large enough capital. In addition, it is not too complicated to use. For information, it is often found that forex trading players are those who have been in the world of stock trading for a long time. Then, what exactly is the meaning of forex trading? And how does forex trading work itself? Here will givea complete explanation.
Understanding What is Forex Trading
Today, maybe many people will say they can get rich quick if they play forex trading. However, this is not necessarily accompanied by an in-depth understanding of the meaning of forex trading itself, both in terms of characteristics, advantages, and risks. In the following explanation, we will discuss the basic understanding of forex trading that everyone must 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 short for Foreign Exchange or can be called a foreign exchange exchange. An example of forex trading would include buying Euros (the main European currency), while simultaneously selling USD (the American currency), which can be shortened to EUR or USD. In the minds of ordinary people, the meaning of forex trading is more on the activity of exchanging money at Money Changer, namely buying and selling foreign currencies manually which is done through a money changer. In fact, forex trading is actually different from manual transactions 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 do forex trading who trade currencies from various countries.
Please note, the purpose of someone to buy and sell money in Money Changer is because of the need to exchange currencies to transact in different countries, so there is a physical exchange of money. As for forex trading, it is done online with the sole purpose of making a profit. It should also be understood, forex trading is a business activity, investment, it can even be considered a profession.
On an international scale, foreign exchange or foreign exchange trading is often carried out by various parties, ranging from the government, central banks, multinational companies, to certain individuals who have large amounts of assets or are big players. Currency buying and selling transactions that occur between various parties do not occur in a market with physical buildings, but in an invisible network called the “forex market”.
Along with technological developments, forex trading has been able to reach a wider scope. Through the internet, forex trading can now be done by anyone, anytime, and anywhere. Nowadays, everyone can trade forex. You can also trade forex online easily and with a capital as small as 10 dollars.
History of Forex Trading
In its history, forex trading in the late 90’s, only the rich, large financial institutions such as central banks, private and government banks, and large commercial companies such as Apple or Toyota did this business. They do forex trading usually for trading purposes, paying debts, hedging (hedging), or investing. The capital required is also quite large, and not just anyone can do forex business.
After the development of the internet around the world in the late 90’s, the forex market can finally be followed by almost all individuals, from entrepreneurs to housewives, parents and young people. Brokers also began to structure forex so that it could be traded on a retail basis by each individual. So now, starting from money changers, banks, to motorcycle taxi drivers who hang out can also enter the Forex market.
1. The End of the Bartering 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 individuals 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 merchandise, then a transaction can occur. However, over time, bartering was considered insufficient to meet daily needs. The main problem with the barter system is what if you can’t find the person who needs and supplies the goods to exchange?
To overcome the shortcomings of barter, then made a means of payment or means of exchange in various forms. In 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 the most valuable, recognized by the community, and portable (easy to carry anywhere).
Because each region of the world uses a different “currency”, traders who transact between regions or cross-island and transcontinental shipping often need a currency exchange reference that is universally accepted. In many locations, it is agreed that the use of a precious metal such as Silver or Gold is an intermediary.
The kingdoms that stood at that time began to print “money” respectively by determining the content of certain precious metals in it. In turn, the exchange is based on that rate. This is the beginning of currency exchange in ancient times.
Since when did this currency exchange take place? According to Byzantine records (circa 4th century BC) show that the kingdom monopolized the exchange of money. Then Papyrus records also show that currency exchange was carried out in the ancient Egyptian era. Other regions ranging from Australia, Indonesia, China, India, to Europe have their own records. So, this is not something that suddenly appeared in modern times.
2. History of Modern Forex Trading
Exchanging money has been going on since time immemorial, but the history of modern forex trading as it is today actually only started after World War II. For information, there was a lot of chaos and economic crisis at the end of World War II, so that the governments of the Allied countries felt they needed a system that would later be able to unite the global economy. Then the “Bretton Woods System” was formed to realize this dream.
In the Bretton Woods System, which was born in the city of Bretton Woods, the state of New Hampshire, United States in 1944, for the first time there are official rules to regulate monetary relations between countries. The United States, which at that time held 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 countries involved to relate the value of their currency to gold and the US Dollar. However, it did not last long.
On August 15, 1971, the United States unilaterally severed its currency from gold, thereby automatically ending the Bretton Woods system. The value of the dollar is no longer obtained from its gold reserves, but only from the promises of the US government. This action certainly makes the US Dollar a reserve currency for many countries in the World. At that time, the exchange rate between currencies was no longer determined by standard, but by following a simple economic system, namely demand and supply. A new phase was born in the history of forex trading, namely the floating exchange rate system.
After that, currency buying and selling transactions are mainly carried out by banks, while other parties such as the government and companies need to contact banks as intermediaries. Companies that need it can contact the bank via telephone, then the bank records at what price a currency is bought or sold. This creates the interbank market as an over-the-counter network where currencies are exchanged and exchange rates change dynamically.
3. Era Trading Forex Online
The development of the global economy between the 80s and 90s then led the world to a new development in the history of forex trading in which people could participate in the world, which was previously dominated by large banks and international companies. Transactions through banking intermediaries no longer have to be initiated by telephone contact, but simply with instructions via the internet. In fact, a trading platform was created that allows anyone to see the “price” (currency exchange rate) and trade currencies in real-time.
The development of this technology is a crucial point in the history of forex trading, because it has pushed trading volume in the forex market so far to become the largest financial market in the world with daily liquidity reaching USD 5.3 trillion in 2013. At this time too, you can find out which currency only those who are heavily traded and seek to profit from the strengthening or weakening of currency exchange rates.
Then how when you as “ordinary people” can benefit from this currency exchange? Now there are many “forex brokers” who serve currency trading for the community on a small scale. In contrast to the interbank market which has a standard trading size (100,000 US Dollars per unit), such forex brokers provide the public with facilities for forex trading even with a capital as small as a few tens or hundreds of dollars. Even more sophisticated in today’s mobile era, forex trading can be done via laptop, tablet, android, or iPhone. As long as there is an electricity and internet connection, you can “jump into the forex market” and profit from it, as long as you know how to play forex trading.
How Forex Trading Works
Forex trading is basically the simultaneous buying of one currency and selling of another. The currency pairs are then traded simultaneously. 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 notation above shows that 1 unit of the base currency is equal to 1.23700 of the quote currency (1 euro = 1.23700 USD).
That way, you have to pay 1.23700 USD if you want to buy 1 Euro. On the other hand, if you want to sell 1 euro you have, you will get 1.23700 USD.
Forex trading is a foreign currency transaction that is increasingly being chosen as a way to invest. This forex trading involves certain currency pairs as chosen and can be traded according to certain conditions to achieve maximum results.
Forex Trading Laws According to Islam
For those of you who want to learn to start trading forex, of course there will be questions that arise regarding the halalness. Actually, is forex trading haram? Then, is forex trading a form of gambling?
According to Islam itself, currency trading or forex trading occurs because of the need from the global market to meet the needs of various countries.
This is in accordance with a book Masail Fiqhiyah written by a fiqh expert named Prof. Drs. Masjfuk Zuhdi stated that if trading forex or foreign exchange is allowed in Islamic law.
Forex trading is considered lawful because the products being traded have a clear form and value, namely foreign currencies. Forex trading is also different from usury and is purely a buying and selling transaction because forex trades currencies instead of lending money expecting more return.
MUI has also permitted SPOT-type forex trading, in which SPOT purchases and sales of financial instruments, commodities, and other assets are made with cash and direct payments. This market is often called the cash market because trades are directly exchanged for assets.
Advantages of Forex Trading
Please note that every business or investment certainly has its own advantages and risks, depending on what type of investment will be made. Forex trading is an investment that is quite busy in recent years. Because this investment can make investors rich or even bankrupt. And of course, you need to know that forex trading is an investment that is high-return, high-risk. The following will explain the advantages of investing in forex trading.
1. Forex Trading Transactions Tend to be Flexible
Indeed, forex trading can be done anywhere because it is very flexible. Transactions in forex trading can be done through applications provided by online forex brokers .
With the availability of internet access almost everywhere, of course, it will also make it easier for traders to make transactions. The rest, you only need to prepare the following things, such as:
- Hardware such as your computer, laptop, tablet, or even your smartphone.
- Download and install the application provided by the trading broker
- Availability of adequate internet network
Not only flexible about the place, forex trading is also flexible in terms of time. The forex market can be accessed 24 hours a day. In addition, the market is closed only on Saturdays and Sundays.
In another sense, you can adjust the schedule for your own trading. You can trade in the morning, if at that time is when you can concentrate more. Or you can also trade at night, if in the morning you have a main job.
2. Benefit from Exchange Rate Differences
The name of investing, definitely want profit. Well, the “salary” or income of a forex trader for those of you who plan to trade forex is profit in the form of the difference between the exchange rate when you buy and the exchange rate that is currently happening. The trick is you buy dollars when the value is still low and resell it at a higher price or buy at a high price and resell it at a higher price.
In general, there are three possibilities for dollar movement, namely up or uptrend, fixed or sideways and down or downtrend. If it is going up, then big profits will be obtained. But if it goes down, then the value of the currency will tend to decrease as well.
Before making a dollar investment, you should first know the purpose of this investment. Also make sure that before starting forex trading, you also have provided an emergency fund that can be used for something that happens suddenly and suddenly.
3. Forex Trading is Liquid
For information that not all shares are liquid. This means that not a few stock investors find it difficult to buy and sell shares quickly.
This phenomenon is a testament to illiquid stocks, usually occurring in fried stocks and stocks that are not included in the LQ45 index. Stocks that are suspended even make investors’ money hold up, who knows how long the suspension will be opened.
When trading forex, you don’t need to worry because the forex market has very high liquidity. The high number of transactions proves that there are almost always people buying and selling every second.
Traders can also get profits quickly according to the chosen forex trading strategy without worrying if their money is stuck or worrying if they can’t spend money due to a quiet market.
Due to high liquidity, the forex market does not recognize such a thing as a “stock dealer” or a person with big money who may manipulate stocks with low liquidity. These “bookie” figures certainly have their respective backgrounds and goals in carrying out buying and selling actions that might affect the emotions of retail investors.
4. Results of Forex Trading Profits Can Be Felt Immediately
Another advantage that can be obtained by traders is that they can take advantage of price increases that come from the difference between the purchase price and the selling price on the buy order. Meanwhile, when making a sale, the profit will be obtained from the difference between the selling price and the purchase or closing price.
5. No Additional Fee
It should be noted that there are no transaction fees in the online forex market, only that there are several fees that vary in number. An example is the cost of withdrawing funds from a forex account.
6. Forex Trading Has a Margin System
The last advantage is that there is trading using a margin system, which can make the purchasing power of investors higher than the capital they have.
If it’s like this, of course, the profits obtained are both ways when the market goes up and the price goes down. Of course, this may not apply to other types of investments such as stocks.
Forex Trading Losses
After understanding the advantages of Forex Trading, you also need to understand the risks. Of course, you also have to be ready to accept all the consequences. That way, the decisions taken have been through careful thought. The following will explain the losses or risks that occur from forex trading itself.
1. There is Government Intervention from the Currency
It should be noted that every investment has its drawbacks, including foreign exchange. One of them is the intervention of the government of origin whose currency is being traded in the forex market.
The intervention in question is an intervention from the central bank of that country by increasing interest rates, releasing bonds from the government as well as buying foreign currency on a large scale.
2. Up and Down Forex Very Fast
Another risk is the influence of fluctuations in foreign exchange rates. As is well known if the rupiah currency can become very weak so it can be risky to buy dollars because of course the price is expensive.
Waiting for the Indonesian currency to strengthen can take time, so it can put forex trading in Indonesia at risk of experiencing losses.
Thus, after knowing the advantages and disadvantages of investing in forex trading, you must wisely choose the type of investment that suits your abilities as well as your funding needs, both for short-term and long-term investments.
Forex Trading Risk Management
Risk management is the most important thing in forex trading. As is well known that forex trading has 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 are aware of the importance of risk management, especially for novice traders. Usually, after creating an account and depositing, these novice traders tend to be impatient and immediately press the BUY or SELL button without doing any analysis first, let alone doing risk management. Here are some risk management that need to be understood for novice traders, including:
1. Use “Cold Money” when Trading Forex
If you are a novice trader then it is mandatory to use cold money. Because the use of cold money is because you will not always be able to withdraw money or withdraw the money you are using for trading. Therefore, if you force a trade at the wrong time, you will actually lose. Simply put, if you sell goods when the price is down, while you buy it when the price goes up, you will definitely lose. So, 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 needed for daily needs, insurance, emergency funds, children’s education funds, installment funds and so on. It is also highly recommended that you use borrowed money for trading because the money is not cold money either. So all the money used for trading is intended for trading, not for other purposes.
2. Set Stop Loss So You Don’t Lose Too Much
A stop loss order or stop loss is an order placed to close an open transaction with the aim of limiting the risk of loss. For example, you open a forex transaction BUY 1 lot of AUD/USD at a price of 0.81400.
To limit the risk in your trading, of course you need a strategy in which you will place a stop loss at 0.81000. That is, if the price then drops to 0.81000, your transaction will close at 0.81000 with a loss of $400.
In forex trading, you are legally obligated to limit risk. The key is to minimize the possibility of the stop loss being “snagged” by price movements. This is a stop loss placement technique itself.
Place your stop loss a few pips above key resistance (if your position is short) or below key support (if your position is long).
Technically, there are methods that teach placing around 100-200 pips (for 5 decimal quotes). There are many methods of determining key resistance and support, you just need to learn them.
3. Create a Good Trading Plan
For a forex trader, a Trading Plan is necessary to obtain consistent trading results. One of the success factors in forex trading is discipline. Through a Trading Plan that is made correctly and objectively, a trader can certainly practice discipline according to the rules that have been set in the plan.
In addition, a trader has taken responsibility for himself by making a Trading Plan. If the trading results are not as expected or the direction of the market price movement is against the prediction, the trader can immediately take the best steps on the trading account without hesitation and panic.
4. Take Profit to Take Profit
Traders need to know how to determine Take Profit correctly, so that later they don’t just follow emotions. Here are some methods that need to be studied in determining how to close a position in order to achieve optimal profit, including:
- Determine take profit on trending market conditions
- Determine take profit on market conditions ranging (sideways)
- Using the risk/reward ratio
Forex Trading Learning Tips for Beginners
The purpose of forex trading itself is none other than estimating the direction of price changes, so you can profit from the difference between buying and selling values. However, learning forex trading is not as easy as imagined. This is evident from most people who are just learning forex. They will quickly go bankrupt. Therefore, how to start forex trading for beginners? There are several tips to learn forex trading that can be mastered in a short time.
1. Understand Common Terms Used for Forex Trading
Before making any investment, you need to understand the various terms used in the trading process. Some general terms to know are:
- A pip is the change in value between two currencies, referring to 4 decimal places behind the comma in the exchange rate. If EUR/USD is at 1.1205 and then moves to 1.1206, the difference of 0.0001 is 1 pip.
- The base currency is the value of the base currency or the first currency in a currency pair. It is written to the left of the sign, for example Eur/(the opposite).
- Pair currency is the exchange rate of a currency pair in forex, for example Euro/USD.
- A lot is the number of units of currency bought or sold, divided into mini, micro and nano sizes.
- Buy is a position to buy. Usually buy is done if the price is expected to rise.
- Sell is done if the price is expected to fall. You sell at a high price, then buy back when the price is low. The difference will be to your advantage.
- Leverage is a loan given by a broker to help a trader to trade in high volumes. Spread: the difference between the buy and sell prices, usually for a broker.
2. Understand How Forex Trading Works
The currency being traded is in the form of a pair (pair), for example EUR/USD. For example EUR/USD = 1.1215.
The currency on the left (Euro) is the base currency, while the currency on the other side is called the quote currency. The notation above shows 1 euro = 1.1215 USD.
The following is an example of its application in trading. It is known, the position of the buy price and the selling price of the EUR/USD are:
- Buy: 1.1215
- Sell: 1.1212
The ‘buy’ price shows the price to buy 1 Euro is 1.1215 USD, while the ‘Sell’ price shows the price to sell 1 Euro is 1.1212 USD.
When trading, your benchmark is the base currency or the first position of the pair against the opposing currency. So when buying EUR/USD, we expect the base currency Euro to increase in value, and vice versa. If your prediction is that the USD will strengthen against the Euro, then the best position to take is to sell.
3. Choose the Right Forex Trading Broker
Forex trading occurs between two parties, namely you as a trader and a broker, without a central exchange authority. The role of the broker is very important. Brokers are liaisons between market participants and the international forex market. Brokers also provide facilities so that people can transact online.
Make sure that the broker has clear permits and regulations. For local Forex brokers in Indonesia, their existence is regulated by CoFTRA. As for International Forex brokers, their existence is regulated by several countries. The most famous example is FCA UK of England.
4. Use Leverage If Trading with Small Capital
With leverage, you can make large amounts of transactions with minimal capital. Leverage is a loan from a forex broker that is given to traders.
In addition to leverage, there is also the term margin, which is a security deposit temporarily held by the broker when you trade. To be able to carry out this transaction, of course, the funds owned must exceed the guarantee fund. The types of leverage are:
- 1:1 = The guarantee is the same as the contract value or 100%
- 1:50 = Guarantee of 2% of the contract value
- 1:100 = Guarantee of 1% of the contract value
- 1:200 = The guarantee is 0.5% of the contract value
- 1:400 = The guarantee is 0.25% of the contract value
- 1:500 = The guarantee is 0.20% of the contract value
5. Understand Forex Trading Risk Management
In order to survive long in the world of Forex trading, you also need to learn risk management. First, use cold money or money that is ready to be ‘lost’. Furthermore, never use money for daily needs. Because Forex trading is quite risky so you must be prepared if you experience losses. In addition you also have to set a Stop Loss. Because your position will be automatically closed if the loss has reached a certain predetermined amount. In contrast to Stop Loss, there is Take Profit.
With Take Profit, if the position is profitable, the platform will automatically close the position. Without Take Profit, you can be lured into not realizing the profit even though the target has been achieved because you expect more profits. And you can secure the profit that has been achieved so as not to be ‘eaten’ by the risk of loss or loss from price declines that could occur.
6. Beware of Forex under the guise of a Trading Robot
For forex traders, one way to find profit in buying and selling foreign exchange transactions (foreign exchange/forex) is automatically using a robot (forex trading robot). This autopilot forex trading provides automation, such as looking for trading opportunities (open trade), buying opportunities (open buy), to selling opportunities (open sell). Thus, traders only need to instruct the robot so that they no longer need to observe and analyze the forex market continuously on their own in making buying and selling transactions.
However, you need to be aware of this type of fraudulent investment mode behind all the conveniences offered. The reason is, the existence of an unlicensed website domain tends to be dangerous. Moreover, in 2021, the Ministry of Trade through the Commodity Futures Trading Supervisory Agency (Bappebti) and the Ministry of Communication and Information (Kominfo) have blocked 249 website domains in the field of commodity futures trading (PBK) that do not have permits.
Online Forex Trading Application
As is known, besides being able to start with small capital, forex trading also has high liquidity so that investors can make purchases anytime and anywhere, including through applications. Moreover, now there are many best forex trading platforms, applications or services that can make it easier for you.
Well, how to trade forex for beginners with the application? Then, what are the applications that are suitable for forex trading and guaranteed security? Here’s a summary.
1. Agrodana Future News
The first application you can use is a trusted forex trading application called Agrodana Future News for trading activities. This application is also under the auspices of PT Agrodana Futures. Through Agrodana Future News, you can monitor trading data every day.
On the other hand, this forex trading application also presents a simple display so that it is easily accessible by traders. Currently, there are more than 5,000 people who use Agrodana Future News on the Play Store.
2. Meta Trader 4
Besides Agrodana Future News, you can use Meta Trader 4. This application was developed by MetaQuotes Software Corp, this application is quite popular among traders. How not, in addition to trading, this forex application also makes it easy for you to connect with hundreds of forex brokers.
Launching the official website, Meta Trader 4 makes it easy for traders to carry out technical analysis along with a flexible trading system. Apart from that, this app even helps you to get real-time quotes.
3. HSB Trader
This application is also very suitable for beginners to play forex trading. HSB Trader makes it easy for users to monitor market movements from time to time.
The most important thing is that HSB has high integrity and full legality from the Commodity Futures Trading Supervisory Agency (CoFTRA) of the Ministry of Trade of the Republic of Indonesia. That way, you don’t have to worry about using this application.
4. MIFX Mobile
Another application that you need to try for forex trading activities is MIFX Mobile. This application offers various advantages. One of them is a user-friendly interface that helps traders to make profits easily.
Not only that, MIFX Mobile also makes it easy for users to withdraw and deposit trading funds. The most important thing is that this application is registered with CoFTRA under the auspices of PT Monex Investindo Futures.
So, you don’t have to worry about fraudulent investments. If you are interested in using it, you can download this application on the Play Store and join over 50,000 other people.
5. Trade Optimizer
If you are interested in using a paid application, you can try Trade Optimizer. With this paid application, you can get a variety of luxurious features, such as the 14 calculators feature which will later help you in analyzing risks to post-trading.
6. NetDania Stock & Forex Trader
This application is considered suitable for beginners. Because, NetDania will help you to monitor currency movements in real-time. In fact, this application is quite popular among forex traders. Not only that, this application also presents actual news about forex so that traders can follow it.
MotionTrade is an online stock trading application owned by PT MNC Sekuritas and is one of the best reputable securities companies in Indonesia. In this application there is also a TradingView Chart feature that can be accessed to view charts and trends from various issuers. How to use the TradingView Chart feature is that you only need to type in the stock code of your favorite issuer, then you will be able to see the chart and trend of the stock code directly.
You certainly already understand the losses and risks experienced when playing forex trading. Of course, there are important things that need to be underlined, namely, is there insurance that can be guaranteed when playing forex trading? Because, forex trading has a fairly high loss. Unfortunately, until now it is still rare to find insurance engaged in this field. However, you don’t need to worry. You can control your finances by buying and using other best insurance products , so that when playing forex trading, you can set aside cold money to trade forex.
In addition, you also need to consider the amount of premium each month that you have to spend when you are active in the world of forex trading. Because as is known, forex trading has the possibility that a trader will experience losses. Of course, when the loss occurs, there must be an emergency fund for other needs, such as funds for treatment and so on. So, it would be nice if you also participate in insurance that suits your needs.