Forex Trading for Beginners
Forex trading for beginners can be difficult. The first question that comes to everyone’s mind is: how to learn Forex from scratch. This article will serve as a guide for new Forex traders.
The foreign exchange (also known as FX or Forex) market is a global marketplace for exchanging national currencies against one another.
Currency trading is conducted electronically over-the-counter (OTC), which means that all transactions occur via computer networks between traders around the world, rather than on one centralized exchange. On the Forex market, trades in currencies are often worth millions, so small bid-ask price differences (i.e. several pips) can soon add up to a significant profit. Forex is our largest and most liquid market, over $4 trillion in daily turnover, a market that can resist even the vainest attempt to manipulate it. For this reason alone, currencies are deemed to be our purest form of trading, but winning in this arena is not nearly as easy as marketing claims would have you believe
Price is determined by demand and supply, current interest rates , economic performance , political situations as well as currency performance of one against the other.
How To Start Forex Trading...A Beginner's Guide
Today, technology has made it appear easy, and markets are open for nearly six days, non-stop, a week. You can trade from anywhere in the world. Knowledge, experience, and emotional control are the same factors for success in this genre but getting expert advice is better. But it helps to get guidance from mentoring professionals, if you have any desire of jumping into the fray after a short period of time. You need to be aware, unfortunately, that nearly 70% of beginners become impatient early on and leap into the market before completing anything close to preparation. They become quick casualties, as a result.
Understand Forex Technical Jargon
An understanding of the most commonly-used Forex jargon will make your entry into the market much simpler. Some words and phrases you’ll hear over and over again include:
Base currency: The currency you are holding.
Quote currency: The currency you are going to purchase.
Bid price: The price that your broker would be willing to “bid” or “buy” the base currency you are holding.
CFDs : The term CFD stands for “Contract for Difference”. It is a contract used to represent the movement in the prices of financial instruments. In Forex terms, this means that instead of buying and selling large amounts of currency, you can take advantage of price movements without having to own the asset itself. Along with Forex, CFDs are also available in stocks, indices, bonds, commodities, and cryptocurrencies. In all cases, they allow you to trade in the price movements of these instruments without having to buy them.
Margin : Margin is the money that is retained in the trading account when opening a trade. However, because the average “Retail Forex Trader” lacks the necessary margin to trade at a volume high enough to make a good profit, many Forex brokers offer their clients access to leverage.
Ask price: The price that your broker will “ask” you for in exchange for buying your quote currency of choice. The ask price is always higher than the bid price.
Spread: The difference between the bid price and the ask price. This is just the broker’s commission.
Pip: The smallest measurable value of currency movement. The word “pip” is an acronym standing for “percentage in point,” and a single pip is equal to 1/100th of 1% of your currency. For example, if the value of the USD rises by a single pip, that means it increased in value by $0.0001.
Leverage: This concept is a must for beginner Forex traders. Leverage is the capital provided by a Forex broker to increase the volume of trades its customers can make.
Choose the Right Broker
Before you begin Forex trading, you’ll need to choose a brokerage firm. Your brokerage firm will help you make trades, and many brokers also offer additional financial services.
Working with a reputable broker can mean the difference between profiting from your trades and losing money between the bid and the ask price. Don’t be afraid to thoroughly research and read the reviews of a variety of brokerage firms.
Not all brokerage firms offer Forex trading, so make sure it’s available before you open an account. Working with a broker that offers multiple outlets for customer service is highly recommended for beginning traders.
Understand the World Economy
To be a profitable trader, you must convert your base currency into a quote currency set to rise in value, then convert your quote currency back to your base currency when the value peaks.When you research the trading positions, GDPs and political climates of countries you are interested in purchasing currency from, and you’ll get a forecast on which quote currency is worth your investment and which countries have economies projected for growth.
The Currency Pair
Currencies come in pairs, like the Euro versus the U.S. Dollar, or “EUR/USD”. It may surprise you, but currencies have no “intrinsic value”, as with stocks. Their value is “relative” to each other and the economies of the respective countries that stand behind them. The first currency listed is always known as the “Base” currency, and the second one, as the “Counter” currency.
Also, Forex markets are of two types – trending or ranging. A Trending Market is one where prices are moving in a single direction while a Ranging Market is a market where the price is moving back and forth between a higher price and a lower price.
Make Your First Trade
To be a Forex trader, you have to actually trade.
Once you’ve decided which quote currency you’re going to buy, simply place an order for your first trade. Your brokerage firm will probably train you on how to to place an order to buy or sell a currency.
In Forex Timing Is Everything
As a Forex Trader, you have to learn to wait patiently for your optimum times for entry, and then strike while the iron is hot. If you are impatient, you will fail. Opportunities are always forming and changing, just like the weather. The best times to trade are when the ATR and volumes reach higher than average levels, indicating more activity and liquidity.
Currency trading is all about improving the “50/50” odds in your favor by finding trends and anticipating when they might repeat a familiar pattern of behavior. When you find one of these high-percentage opportunities, you want to execute your plan quickly. There is no time for studying the situation and developing a new plan on the fly.
10 Reasons to Focus on Fundamental Analysis and 10 Reasons to Focus on Technical Analysis in Forex Trading
How to Choose A Broker
There are thousands of retail trading brokerage firms operating around the world. As a Forex Trading beginner, these are some questions you should be asking your prospective broker:
- How efficient are the trading executions? Are their trade executions fast and reliable? Are you consistently able to trade at the price you’re trying for? If you’re trying to sell, and your trade request fails, and you’re offered a lower price, you’re probably being re quoted. Does your broker offer price improvement on limit orders? For stop-loss orders, the brokerage’s execution quality comes down to the amount of slippage experienced when prices gap following data or news announcements.
- How are orders filled?A reputable broker will have clearly defined order execution policies on their website. This will let you access how its stop-loss or take-profit orders are filled. It will answer questions like are stops guaranteed? If so, are there any exceptions to such guarantees? Are there policies that limit orders?
- Again, look on a broker’s website to see if they publish their execution statistics. This way, you are able to get more insight into their execution quality — including speed, the percent of trade requests that are successfully executed, and the opportunity for price improvement.
- No matter what kind of currency trader you are, like it or not, you will always be subject to transaction costs. Every single time you enter a trade, you will have to pay for either the spread or a commission so it is only natural to look for the most affordable and reliable broker. Whatever you do , do not trade reliability for affordability.
- Customer Service- You deserve excellent customer service from your Broker. Chose Broker that will kindly attend to your concerns and questions always. The competence of brokers when dealing with account or technical support issues is just as important as their performance on executing trades. How will you know this? Snoop around, go online and offline to ask real people real questions.
Pros and Challenges of Trading Forex
Pro: The Forex markets are the largest in terms of daily trading volume in the world and therefore offer the most liquidity. This makes it easy to enter and exit a position in any of the major currencies within a fraction of a second for a small spread in most market conditions.
Challenge: Banks, brokers, and dealers in the forex markets allow a high amount of leverage, which means that traders can control large positions with relatively little money of their own. Leverage in the range of 100:1 is a high ratio but not uncommon in forex. As a trader, you must understand the use of leverage and the risks that leverage introduces in an account.
Pro: The forex market is traded 24 hours a day, five days a week—starting each day in Australia and ending in New York. The major centers are Sydney, Hong Kong, Singapore, Tokyo, Frankfurt, Paris, London, and New York.
Challenge: You need to understand the economies of the various countries and how they inter-connect to grasp the fundamentals that drive currency values.
Forex Trading Risks Every Beginner Should Know
Like every other endeavor, Forex trading has it risks. Some are:
Leverage Risk: In Forex trading, leverage requires a small initial investment, called a margin, to help you gain access to substantial trades in foreign currencies. Small price fluctuations can result in margin calls where the investor is required to pay an additional margin. During volatile market conditions, aggressive use of leverage will result in substantial losses in excess of initial investments.
Interest Rate Risk: The moment that a country’s interest rate rises, the currency could strengthen. The boost in strength can be attributed to an influx of investments in that country’s money markets since with a stronger currency,higher returns could be likely. But if the interest rate falls, the currency may weaken, which may result in more investors withdrawing their investments.
Transaction Risk: This risk is an exchange rate risk that can be associated with the time differences between the different countries. It can take place sometime between the beginning and end of a contract. There is a chance that during the 24-hours, exchange rates will change even before settling a trade. The transaction risk increases the greater the time difference between entering and settling a contract.
Counter party Risk : Counter party risk refers to the risk of default from the dealer in a particular transaction. In Forex trades, spot and forward contracts on currencies are not guaranteed by an exchange or clearing house. In spot currency trading, the counter party risk comes from the solvency of the market maker. During volatile market conditions, the counter party may be unable or refuse to adhere to contracts.
Country Risk : Before investing in currencies, you must consider the stability of the issuing country. The currencies of many third world countries are unstable and tied to a world leader like the US Dollar. If a currency crisis occurs which may result in devaluation of the currency which can then result in negative effects to Forex trading.
In order to become a successful Forex trader you need a lot of practice. Always be open to learn more and learn to listen to the markets in order to anticipate changes. Know your limits! Never trade for more than you can afford to lose.
There’s no magic formula or algorithm. Don’t slander other people’s trading methods or strategies. If you cannot make it work it doesn’t mean it’s worthless.
No one can predict the market constantly. Anyone can make a lucky guess from time to time, but it means nothing.
Always remember that no matter what you think, the market might be at the beginning of a long trend, or at the beginning of a ranging market.
What works on one stock or pair might totally be a loser on another chart. Make sure you test every trading approach on every instrument well before trading live.
Don’t let your EGO come between you and the market. It’s not about “being right”. It’s only about not risking too much and making money.
You cannot control the market movement or its direction. But you can control the risk, entry and exit time, your knowledge, the tools you choose, and always know worst case scenario.
Stay away from extreme risky trading methods like grid trading, martingale, holding open positions for too long until they “come back”.
Never rely on one trading strategy and one market. Use multiple strategies over a number of markets and instruments. Build a diversified Portfolio.
Forex offers leverage, so you may lose more than what you put in. More importantly, it’s about following a set of key principles that allows you to be profitable in the long run. If you can’t follow it, you can’t make money no matter what you trade. Some of these principles are, cut your losses, risk a fraction of your trading capital on each trade etc.If you trade stocks and don’t cut your losses, risk a lot on each trade, then your results is still disastrous.