Hello Traders,
No matter how intense and fast-paced films paint the trade market to be, nothing fully captures the reality of forex trading. As a beginner, Forex trading is a particularly tough skill to master, which is largely due to the misconceptions that run among newcomers.
One of the things you need to realise is that, in spite of it being a potentially lucrative field, it is in no way a quick way to get rich. However, if you learn the ropes well, follow a good guide, you may be finding yourself more than satisfied with your results.
If you’ve been eyeing a career change into the field of forex trading or looking to capture a new revenue stream, we’ve created this handy beginners guide to forex trading with everything you need to know. In this article, we’ll give you an introduction into the Forex market, how the wheels turn, phrases you need to be familiar with, and the insane benefits it could provide.
The question that people ask the most is how to start as a beginner trader in forex. Buckle up because, by the end of this handy guide we’ve prepared, you’ll know the ins and outs of this challenging world.
What is Forex Trading?
Forex is short for foreign currency exchange. It can also be shortened to FX but, in essence, it is the marketplace in which currencies are traded. This, of course, is a very broad description of it. These encompass something as simple as exchanging your local currency to a foreign one for a holiday trip, or something even more complex!
Forex trading basics for beginners
As a guide, Foreign currency exchange is essentially when one currency is changed to another currency for various intentions. It is most commonly used for commerce, tourism, trading, among many other reasons. It’s become such a booming business that the Bank for International Settlements released a 2016 triennial report, in which the average was over $5.1 trillion in daily forex trading volume.
If that’s not enough to show you just how big the Forex trading market is, consider this: the total amount of money traded in the Forex market is way more than the GDP of the biggest economic countries in the world. Apart from its size and prowess, Forex is the most liquid market in the world. It doesn’t need to shut down on regular workdays, which leads to the trading world being the market that never sleeps, without any restrictions.
The Forex market, then, is the hub in which trading of currencies occurs. In the forex trading market, currencies are traded in pairs and the movement of currency pairs is the measurement of the value of one currency in comparison to another.
In spite of the forex trading market being the place of currency trade, there’s actually no central place in which these trades physically occur. Rather, these currency trades are done electronically over-the-counter. This means that all of the transactions and trades are done via networks scattered all over the world.
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Forex trading markets never sleep
As a beginner, one thing about this market you need to understand is that it hardly ever sleeps. The market is open 24 hours a day, five and a half days a week, and across every time zone in the world. Since it covers every time zone across the seas, it means that as the forex market in the US ends, it begins anew in Hong Kong and Tokyo.
There’s also no set time as to when it’s best to tune in to the market as it is volatile, and price quotes change constantly and without warning. However, while there is no set time, there are certain hot spot hours per market. For example, currency pairs that have US dollars tend to move in massive volumes during US business hours.
One quick tip is for you to research the business hours of the currencies you’re trading and observe the movements of the trade then! As a beginner.
Forex trading strategies for beginners
With how ever-changing and fluctuating the forex market is, there are various foundation strategies that traders employ every day. Some may work for one, and some may not. As a beginner, It’s important that you research well and test out what fits best for you!
However, to give you a taste of what the strategies are like, here are some of the most common forex trading strategies:
Day Trading Strategy: The Day Trading Strategy features trades that are exited before the day comes to an end. This is a safe strategy especially if you’re just testing out the waters since it prevents you from taking any damage that may occur through the night.
Trend Trading Strategy: The Trend Trading Strategy is straight to the point, and is also one of high-risk, high-reward. If you opt for the Trend Trading Strategy, you’ll need to study the current trend so that you can predict the direction the prices are taking on.
Swing Trading Strategy: The Swing Trading Strategy is usually employed in trades that only last from a day to a week.
These three strategies take the forefront as the easiest to digest and master, ideal for someone starting out. However more advanced trading styles can even depend on the holding period and time frame of every trade.
Advanced trading styles include the following:
-Position Trading
-Technical Trading
-Fundamental Trading
-Intra day Trading
The trading strategies we mentioned are just the most common and you may find yourself mixing and matching these to your own preference. It’s all about finding the perfect balance, and taking on well-researched and calculated risks whenever you choose one to use.
Best currency pairs to trade for beginners?
We gave you a brief overview as to what currency pairs are, and how they fit into the whole forex trading situation, but it’s important to have an in-depth understanding of it as well. After all, it is the heart of Forex trading, and it’s one of the things that you need to get acquainted with before you kickstart your Forex trading venture.
Essentially, a currency pair is what you will call the pricing structure and quotation of the currencies being traded in the forex market. The currency value is a rate that can be determined once it is juxtaposed with another currency.
Forex trading usually involves the purchase of one currency while simultaneously enacting the sale of another. When you look at it this way, it can be easy to view a currency pair as one single unit that you can buy or sell.
One of the most common examples of trading a currency pair is the U.S. dollar or USD against the euro or EUR. It is famously known as the EUR/USD, widely regarded as one of the most commonly traded currency pairs.
With this example in mind, the first listed currency is referred to as the base currency whilst the second listed currency is the quote currency. The currency pair will be what indicates the amount of the quote currency you need in order to purchase a unit of the base currency.
Once you decide to purchase a currency pair, you’ll be purchasing the base currency while selling the quoted currency. This works inversely, as well!
Now, the buy price of a currency is called the bid while the sell price of a certain currency is called the ask.
Through the bid, you’ll know the amount of the quote currency you need in order to obtain the base currency.
On the other hand, the ask of the currency pair will let you know the amount you’ll receive in the quote currency just for selling one unit of the base currency. Now that we’ve mentioned bid and ask, it’s time that we go in-depth on these two factors in Forex trading.
The Inner Workings of Forex Trading - Bid and Ask
It’s not enough that you know what a bid and ask are, it’s vital to your success to know how they work too. This is so that you can fully maximise your profits through making the right moves with these two. A quick visit to any Forex trading site that features the buying and selling of currency pairs will most likely showcase the Bid and Ask prices as well.
We’ve brushed over how the Bid Price refers to the price that you will most likely be able to buy a currency. On the other hand, the Ask Price is how much you will most likely be able to sell a currency pair.
For these two aspects of Forex trading, nothing is ever set in stone. The Bid and Ask prices fluctuate multiple times throughout the day, all dependent on the forces of demand and supply. This is why it’s important that you keep a hawk’s eye on your trading platform as much as you can.
If you decide to purchase a currency pair, it’s safe to say that you will be in it for the long haul. You do this in hopes that your initial investment when you bought it will pay off. This will happen if the currency pair consistently goes up in value. You’ll be able to know how much your profit is just by taking away your initial Bid Price from the current price!
On the other side of the Forex trading coin, is the selling side of currency pairs. It is commonly said to be short on a trade if you’re selling a currency pair. Unlike purchasing the currency pair, the hope when you sell is that the price will continue to drop and never increase in value again. In this case, you’ll be able to see how much you made by getting the difference between the value that entered the trade, and the current value it has.
Forex Terms every beginner must learn
Spread
When you hear the term spread in the Forex trading world, you will know that they refer to the difference between the bid and ask price in Forex. To help you understand this better, imagine that the Bid price of EURUSD is at 2.18845, while the Ask price is 2.18847. With these variables, you only need to get the difference to find out that the spread is 0.002.
In terms of trading, it is vital that the price of a certain currency pair crosses the spread in order to make a profitable trade. Thus, the spread needs to be as small as it can be in order to create profit from the trade while giving ease for small price movements. It is exactly due to this that people in Forex are fond of trading major currency pairs, as those come with thin spreads.
On the flip side, minor currency pairs are prone to having much higher spreads.
Pip
One of the things you’ll hear a lot when it comes to Forex trading is “pip”. This is a short, three letter word that carries so much meaning and weight in the trading industry. Pip simply refers to the change in value of two currencies.
The Pip of trade basically connotes the last decimal place of the currency pair’s quotation. The usual situation is that Pips are said to be in the standard two and four decimal places. However, this doesn’t mean that those are the only ones as it can also be quoted at the five and three decimal places.
Leverage
You probably already have an overview of what leverage is in daily life, but it’s a little bit different in terms of Forex trading. In the Forex context, leverage is the amount provided by a broker, and it’s aptly named leverage since it can do wonders for bolstering your trading volume.
Let’s talk about this in terms of a 1:10 leverage. The 1:10 leverage, if you put it on initial capital of a thousand dollars, it would allow for one-trade currency pairs that can be valued at ten thousand dollars.
Just think of it as being able to multiply your profits by multiples of 10 if we’re talking about a 1:10 leverage. However, the negative side of this is that if you lose, your losses would also multiply by 10. It is for this exact reason that the trading leverage is considered a high risk, high reward facet of forex trading. It’s all about assessing the cards you are dealt and making rational choices in which you are also fully aware of its risks.
Margin
The margin of a Forex trade refers to the amount of money in an account used for trade, which allows a person to open trades of given sizes. This is where good faith becomes centric to the trade; It is connoted as the good faith deposit in a trading account that will be used as collateral.
How to Start Forex Trading
Now, you may have got overwhelmed with the sheer number of market-specific terms and strategies, but starting Forex trading is actually quite simple! A lot of brokers are incredibly easy to sign up for to get a head start on Forex trading. The great thing about these brokers is that most, if not all, offer comprehensive material that will help you ease into the role of a Forex trader. They even have demo accounts available so that you’ll get to try your hand at different strategies before you put in your own money.
If you’re ready to learn how to actually kickstart your Forex trading adventure, read on!
Step 1: Open a Forex Brokerage account.
If you’re planning to foray into the trading world, one small step you can make is to first open a Forex Brokerage account. A quick Google search will pull up tens upon hundreds of Forex brokers, which is why it’s important that you meticulously research which one is the most reliable and responsive. After all, you will be investing your own money so it’s best to make sure that you’re putting it in a place you can trust.
Some of the things you should consider when making your choice is the leverage being offered by the broker. This is due to the fact that it will be extremely difficult to begin trades with meagre amount of capital.
Apart from leverage, it’s best that you take into account the spread on offer to trade currency pairs. You should know that Forex brokers shouldn’t charge you commissions for trades, since most of their profit comes from spreads. With this in mind, be on the lookout for a broker that offers small spreads as this will give you the confidence that you’ll be able to maximise returns on your trades.
Of course, we recommend that you tabulate each of your choices and weigh out the pros and cons of each. Finding a good broker will lead you in the right direction of trading.
Step 2: Source a Trading Platform Software
After you’ve hand-picked the best brokerage account for you, the next step you should take is to deposit your initial capital in order to actually be able to bid and ask on currency pairs.
If you’ve chosen a good and trustworthy broker account, they should immediately give you a trading platform resource in which you will be able to actually execute trades. These platforms vary per broker, and you should ask the broker you choose which trading platform they use before paying for their services.
Forex trading order types to learn
There are small nuances in each trading platform, with some having more or fewer features. However, its core is essentially the same across all versions. Here are the most basic types of trading orders that are available:Take Profit Order - The Take Profit order is an order that will enable you to set the price in a short or long trade. When you set the Take Profit order, the trade would instantaneously ensure the profits once the price is able to reach a certain level that is fixed.
Take Profit Order - The Take Profit order is an order that will enable you to set the price in a short or long trade. When you set the Take Profit order, the trade would instantaneously ensure the profits once the price is able to reach a certain level that is fixed.
Market Order - The Market Order is one that will enable a trader to get a currency at a price that is apparent in the market. These respective traders enact a Limit Order to bid or ask a currency pair at their own preferred price. For this, a trader is able to specify in advance a specific entry price for either a long or short trade
Stop Loss Order - This is something that is enacted in order to stop the bleeding caused by losses. Through this, traders will be able to set beforehand how far a trade should continue before closing it down in order to prevent further losses.
Dos and Don’ts of Forex Trading
DO: Learn as much as you can. Before investing your own money, learn and research as much as you can about foreign exchange markets. Reading this article is a good start, but it’s best to digest as much as you can.
DON’T: Don’t get too risky. One of the things you should keep in mind especially with leverage risks is that the higher your leverage gets, the higher your losses can possibly be. It’s great to be optimistic, but don’t forget to assess the risks realistically.
DO: Start small. As you go along your journey as a forex trader, you’ll gain valuable knowledge and insight. We recommend that you start small, and learn from every trade.
DON’T: Don’t forget to find a reputable broker. Finding a reputable and respectable broker can either make or break your trading journey.
The forex trade market may be wide and vast, but it doesn’t mean that it’s impossible to navigate. All you have to do is equip yourself with as much research and knowledge as you can to find your footing in this exciting marketplace.
While we did mention that Forex trading is definitely not a “get-rich-quick” venture, it’s definitely something that provides a promise of great returns if you are able to reap a reward if done right. However, it is a double-edged sword that can also accumulate losses just as fast if you make a string of wrong moves.
Being careful and detail-oriented will be your greatest weapons in your Forex trading arsenal. You need to be mentally strong and alert for any price movements that will happen on the market.
We offer a range of Forex trading courses perfect for beginners…
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Hopefully, you have enjoyed today’s article. Thanks for reading!
Have a fantastic day!
Nisha Patel
Live from the Platinum Trading Floor.