How to start forex trading
How to start forex trading
If you are looking for exciting new ways to generate additional income, trading forex provides the best opportunities to accomplish that goal. Below we will explain how forex traders take advantage of fluctuations in the currency markets to grow their capital by trading forex wherever they are in the world.
Millions of investors want to learn how to start forex trading and forex market has been growing in popularity the past few years due to the incredible benefits it provides. It’s not only the largest financial market, but it’s also open throughout the week – from Sunday to Friday – and thousands of financial instruments are available to trade 24 hours a day.
In fact, trading forex is also quite accessible to new investors because of the low capital requirements which make it possible to start trading with an initial deposit of as low as $250. Trading also offers low transaction costs, the ability to trade from your home or on your mobile whether you are at work or on the go and the only requirement is an internet connection and the patience to learn how it all works.
Trading currency pairs
The forex market or foreign exchange market is where currencies are actively traded around the clock. So, when trading forex, you are actually investing in the exchange rate between two currencies.
Currencies in the forex market come in pairs and this is how they are traded. EUR/USD for example, is one of the most popular currency pairs in forex and it’s important to note that the first currency in the pair is called the base currency and the second currency is the counter currency or the quote currency. In this case, the EUR or euro which is the base currency is considered the basis of the transaction and the exchange rate will represent the value of the euro against the U.S dollar. If the exchange rate of EUR/USD is currently at 1.0844 then this means that 1 euro is worth 1.0844 U.S dollars.
As one currency gains strength against another, the exchange rate between them will rise or fall and this is how forex traders hope to make money – by predicting which currency pair will gain strength and finding the right time to enter the market before the exchange rate movement happens.
Thankfully, the exchange rates between currencies are inherently volatile and therefore they fluctuate all the time. These constant movements are what create so many profitable opportunities for traders but are also the reason why forex trading is considered a risky and unpredictable investment class.
How currency pairs are traded
Put simply, when trading currency pairs, you have two options. You can either buy or sell a currency pair depending if you think the value of the base currency will rise or fall against the quote currency. Therefore, if you believe the EUR will gain value against that of the U.S dollar, you need to buy the EUR/USD pair. On the other hand, if your analysis shows that the USD will start gaining ground instead or that the EUR will start losing value, then you need to sell the EUR/USD pair.
If your predictions are correct and the exchange rate moves according to your assessment, then you will start making profit and you can close the trade at any time of your choosing. This is both a good and a bad thing, however, because if you don’t close this trade in time and the exchange rate starts moving towards the other direction then your profit will start dropping as well. Your actual profit will only be transferred to your trading account when you close the trade and this is why you need to be careful how long you keep your trades open.
It’s important to let a winning trade run for as long as possible, but you need to remain vigilant in order to close it as soon as the market starts to turn against you. Of course, exchange rates sometimes can move too rapidly and if you can’t react fast enough or don’t want to monitor your trades all the time, it’s better to set an automatic limit regarding your profit target and how much you are willing to risk.
These risk management tools are called Take Profit and Stop Loss respectively and they are available within the trading platform as soon as you try to open a new trade and as such it’s highly recommended that you always use them in order to limit your risk exposure.
Leverage and margin
Leverage is one of the many attractions of forex trading since it allows you to control large amounts of capital even with a small initial deposit.
For example, with a 50:1 leverage ratio you would be able to trade $50.000 by just opening an account with $1.000.
Leverage is how forex traders can generate incredible returns even if the exchange rate of a currency pair doesn’t move too much throughout the day. Since leverage increases the amount of capital you can control, even a small market movement can translate to high profits. However, it’s also important to note that using leverage is risky and if the market doesn’t move in the direction you think it will, you may sustain substantial losses.
Therefore, while leverage may be crucial to making forex trading an effective and worthwhile investment class, you should always be mindful of the risk that comes with it and adjust your trades accordingly. Managing risk through proper position size and tight stop loss and profit targets is key to succeeding as a forex trader.
What may affect a currency pair’s exchange rate
The financial strength of an economy is the foremost indicator of a currency’s performance on the world stage and consequently how it fares against other currencies. When an economy is faring well i.e. unemployment rates are low, inflation is kept in check and the political climate is stable – then we can expect its currency to be in demand by foreign investors which will boost its value.
It’s all about supply and demand. If a country’s economy is considered strong, then its currency will appreciate in value. Forex traders usually need to watch out for economic indicators such as central bank interest rates, geopolitical risks and developments, imports/exports because all these are key factors that can affect the performance of a currency and therefore its strength when compared to that of others.
The benefits of forex trading
If you are interested in learning how to start forex trading, you are in luck because CM Trading provides award-winning services under the best trading conditions the industry has to offer.
- Open an account with a deposit of $250
- Increase your buying power and profits with leverage
- Access free educational resources and coaching from trading specialists
- Discover how to trade passively by copying the trades of professional traders
- Enjoy safety and security of your funds with a regulated broker licensed by the FSCA in South Africa
Start trading today with the largest and best-performing forex broker in South Africa. Open an account now!