Many people desire to generate income in the world of Forex. But, few people are willing to put in the effort required to become influential investors. Although trading Forex is now easier than ever due to the ability to trade digitally, most inexperienced traders continue to lose money.
The primary reason why newbies lose money is that they began trading Forex the wrong way! Being a successful trader takes patience and effort. But first, you must understand what forex trading is all about.
What is Forex Trading?
Forex trading (FX) is the buying of one currency against another. Forex can be likened to the stock market in that it uses a type of auction system to trade currencies. The FX market is open 24 hours a day, five days a week, and offers deals on all ten currency pairs.
As for trade volume, the FX market is the largest in the world. It’s not surprising that many individuals are interested in taking advantage of this opportunity as it has proven lucrative for many traders. For these traders, Forex trading also offers an alternative path from traditional investments like stocks or bonds.
Forex trading is entirely dependent on the market, and this presents both advantages and disadvantages. However, one benefit to this approach is that traders do not need large investment capital or long-term financial backings to begin trading. Forex also provides individuals who do not have the time or resources to invest in more traditional investments.
The practice of investing in currencies by attempting to take advantage of their value has proven lucrative for many individuals. However, it is best to learn how to trade before you start trading Forex.
How to Start Trading Forex
Trading forex is similar to equity trading. Here are some steps to get yourself started on the forex trading journey.
This is the most basic and essential step. You cannot trade in a market you do not understand, so it is vital to learn. Forex is a dynamic market where trends are constantly changing. The best way to learn is by doing – getting involved in trading.
Most people think that Forex trading is easy and that they can make money with no effort. This is not true. It takes time to understand the market, and you must be patient if you are serious about success.
Open an Account
The second step you need to take when you want to begin forex trading is opening an account with a forex dealer or broker. The process of setting up an online forex trading account requires you to have an email address and a phone number on your account profile on the broker’s site. You can also open a demo account when you are just starting. A demo account is a trading account that does not involve real money. Instead, the demo account uses virtual money that has no worth. Trading on a demo account can help you develop your trading strategy, and it can also help you understand how the online broker works.
The third step you should take when getting started with forex trading is to develop a trading strategy. You can do this by using technical analysis, fundamental analysis, or a combination of both. Technical Analysis (TA) is based on historical price and volume data used to predict where the market will go next. Fundamental Analysis (FA) studies the economic factors that affect supply and demand in the market. Combining TA and FA helps you to make more informed decisions when entering into trades.
The fourth step you need to take when getting started with forex trading is keeping track of your money. You can do this by setting up a charting system in your account. By using a charting system, you can see how the market has performed historically over time. You can also monitor the trend of the market by watching candlestick patterns. Technical analysis and candlestick patterns can help you make informed strategic decisions and identify entry and exit points.
Maintain Your Emotions
The fifth step you need to take when getting started with forex trading is cultivating emotional equilibrium. You need this emotional discipline in trading if you are serious about making money in the market. Forex trading is not an easy job, especially when the signals given by market indicators are not clear. Having emotional stability is an essential temperament that you need to have if you want to succeed in trading.
Major Terms in Forex Trading
If you’re interested in investing in the Forex market, you need to know some key terminologies. Forex traders use a lot of words and phrases that may be unknown to someone just starting. If you want to avoid any confusion when reading blog posts or watching Youtube tutorials, then it’s best to start learning these terms right now.
A currency pair: There are two significant classes of currency pairs: majors and minors. A major currency pair has two sets of major currencies: USD/EUR (USD is US dollars and EUR is Euros). A minor currency pair only has one set of minor currencies—for example, USD/JPY (US dollar and Japanese yen).
A forex broker. A forex broker is an intermediary in the Forex market. Its function is to bring buyers and sellers together and facilitate transactions. Dealers who are trading for themselves can usually be referred to as forex traders, not brokers.
A forex trading account. A forex trading account is similar to a bank account, and it can be opened at any of the major Forex brokers online.
A foreign exchange market. This is the global market where traders buy and sell currencies.
A forex trader. A forex trader trades currencies as their profession and specializes in the study of technical indicators that might help them predict price movements. A trader can be referred to as a dealer; however, this term is often used as a synonym for a broker instead.
A pip. A pip is a unit of price change. In the Forex currency market, a pip is the smallest possible unit of price change. It signifies one-tenth of 1 percent (.0001) per tick. For example, if the price moves from $1 to $1.01, the pip is exactly one tick.
A trend. A trend is a long-term upward or downward movement in price that appears to continue for an extended time. Traders try to capitalize on these trends by buying when prices are low and selling when they’re high.
A technical indicator. A technical analyst uses several tools to interpret price fluctuations in the market. These tools include chart patterns, moving averages, Fibonacci retracement levels and volatility indicators that help them predict trends.
Ask price. With this price, an investor can buy a forex pair. This price is usually higher than the bid price.
Bid price. This is the buy price at which an investor may sell a forex pair. This price is usually lower than the ask price.
Contract for Difference. A CFD is an agreement between a trader and a broker. CFDs help a trader to speculate on the price movements of foreign exchange pairs such as EUR/USD. The trader places an open position with the broker and pays the brokerage fee based on the value of this position.
Spreads. These are the differences between bid and ask prices. Traders looking to buy or sell forex pairs will be interested in only a few of these spreads. The wider the distance, the less likely it is that you’ll be able to hedge your position.
A leverage ratio. This is the amount of money borrowed for every dollar you have in your account. For instance, say your leverage is 2:1, which means you can lend and borrow $100 for every $20 you have.
Brokerage fees. The fee in a commission that an investor pays to open and maintain a forex account with a broker is called brokerage fees or commissions.
Bid-ask spread and pip value. The pip value of a FX pair is the difference between its bid and ask prices, otherwise known as its spread.
Bearish market. A bearish market is a market in which investors expect prices to fall.
Bullish market. A bullish market is a market in which investors expect prices to rise.
Lot size. A lot is the standard Forex trading unit used in currency trading. It refers to 100,000 units of the base currency.
Call option. A call option, sometimes shortened to simply a call, is a contract between two parties. The buyer of the call has the right, but not the obligation, to buy an agreed-upon amount of underlying stock or other financial instruments at a designated price (the strike price) on or before a specific date.
Put option. A put option helps the buyer to sell an asset at a specified price during a set period. If the specified price does not occur, the buyer ends up with money less than his original investment (minus commission).
Basic Strategies in Forex
You have to develop a plan of action before taking any meaningful steps in your trading account. This includes analyzing the current market and deciding on which direction you might like to go with your investments, as well as planning an exit strategy.
Generally, there are four basic strategies in Forex trading. These include:
For example, a scalper will buy when there’s a market dip and sell when the market has risen. This trade will usually be in a concise period, taking advantage of a single price movement within a minute or two. Scalping is the riskiest trading approach because you’re looking at the market with a very short-term view and relatively shallow stops. Scalping is buying and selling on the same day. It aims at earning pips and not so much on the actual movement of the market. Traders best use it with a large quantity of money to trade — i.e., high leverage.
This is a daily trading strategy. It aims at earning on the movement of the whole day’s price rather than taking advantage of small price movements in a short amount of time.
Day Trading is usually done within a day or within a concise time frame of several hours or several minutes. The aim here is to profit by trading frequently throughout that day rather than on any market movement over an extended period.
Swing trading is catching the trend at a predetermined point. It is a valuable trading approach for more prominent traders with more extensive capital. It can even be used for long-term trading since it doesn’t usually involve many trades. A swing trader will usually take advantage of price movements within a day or multiple days or weeks. This can be done by buying when the market dips and selling when it rises.
This strategy involves buying or selling one or more contracts while you already have the position in place. It thus consists of a combination of buying and selling.
Position trading can be used for any Forex trader, beginners, or advanced. This is because you are not dependent on the market’s movement for profit but rather on your skill and knowledge of the market. Position trading can allow you to take advantage of price movement and time-sensitive opportunities in the market.
Each of these four strategies has its own set of strengths and weaknesses and its risks and rewards. You should carefully consider your own goals, resources, timeframe, and personality before deciding which strategy would work best for you.
Reasons Why You Should Trade Forex
Some of the benefits of trading forex include:
- High profitability: A form of investment in which traders buy and sell currencies on a short or long-term basis. A trader invests in one currency and hopes that the exchange rate for that particular trading pair will increase over time.
- Understanding the Markets: The benefit of understanding what is happening with international currencies, central banks, and interest rates. It can be broken down to specific regions with commodities available in smaller increments than investing in stocks. The spreads on executed trades are usually narrower than other markets, which is another factor to consider when deciding to invest in a new market.
- 24/7 Trading: Traders can open positions anytime during the day, depending on their preferred trading times. Competing currencies can also be traded in several ways, including the bid-ask spread, transaction fee, and currency pair.
- Volatility: Forex gives you the ability to make decisions without having to rely on any outside information. When it opens, the volatile nature of the forex market can give you an idea of what is happening around the world.
There are many disadvantages to trading forex. You are likely to lose a lot of money with trading forex. Forex trading can be very addicting, making it difficult for people to stop even when they lose money and get involved in the riskiest trades they wouldn’t do if they weren’t addicted.
Forex trading presents opportunities for existing and prospective investors around the world. Nevertheless, it is not a get-rich-quick scheme as many dubious marketers present it. The best way to enter the market is by learning how to trade Forex. Learning Forex may take a long time, but it is the appropriate way to get started.
How much does it take to start forex trading?
Some Forex brokers offer you the opportunity of trading for as low as $1. But experts often advise against trading with such an amount. Generally, it is believed that the lower the capital, the higher the risk involved in trading forex.
How do I start a forex trade?
Learning how to start Forex is the best way that guarantees success in Forex.
Can I teach myself to trade Forex?
One of the proper methods to learn Forex is to open a demo account. Such accounts provide you with virtual money that is used for trading currency pairs.
Is it illegal to trade Forex?
Yes. Forex trading is legal in most countries. However, it is best to be mindful of some fraudulent brokers or self-acclaimed successful traders. Major approved bodies do not regulate dubious forex brokers. Self-acclaimed traders often offer get-rich-quick schemes to lure individuals into buying fake signals and tips.