How to trade forex for beginners

forex blog

How to trade forex for beginners

Trading forex online involves selling a number of units of one currency in order to buy some of another. If you ever travelled to a country with a different national currency, you have already taken part in a forex trade, and you may have even benefitted from a favourable exchange rate. 

However, physically exchanging your cash on the spot and waiting for exchange rates to rise or fall before you change them back to your own currency is largely unproductive and most of the time any gains you would make would likely go to exchange fees. 

Therefore, a much more efficient way to benefit from the rise and fall between currency exchange rates was born, and online forex trading rapidly grew in popularity as the forex market became the largest and most profitable financial market in the world.

If you want to learn how to trade forex i.e., currency pairs, keep reading.

How to trade fore

Trading forex with CFDs 

As mentioned above, forex transactions can be made on the spot at a bank or even between two individuals. However, traders can now speculate on the fluctuation of currency exchange rates, much easier and faster, by trading CFDs (Contracts for Difference) online through a trading platform such as the MetaTrader 4. 

CFDs are financial derivatives that mirror the price of an underlying asset and can be traded online. CFDs are highly advantageous for retail traders since they don’t require ownership of the asset and can be traded on margin, which will be explained below.

Simply put, if you have register for a trading account with a CFD broker, you will be able to speculate on the fluctuation of any financial asset such as currency pairs, stocks, commodities or cryptocurrencies and generate profits as you would by actually buying and selling the asset itself. 

So, for example, if you believe that the value of the euro would rise against the US dollar, you could open a buy position on the EUR/USD currency pair, which effectively means that you are selling US dollars in order to buy euros. If the exchange rate does move in your favour, then you would make a profit according to the exchange rate difference. Higher movements translate to higher potential profits, but the market rarely moves in the same direction for too long. 

A CFD trade also offers you the opportunity to open your position for a fraction of the total value and this is possible thanks to the use of margin or leverage.

When you open a CFD position, only a percentage of your invested capital is reserved to sustain the trade. This is referred to as the margin requirement and it can vary depending on your broker and the underlying asset that you have chosen to trade. 

In short, this can be considered as borrowing capital from your broker in order to increase the number of currency units you can trade and therefore increase your potential returns. 

This is one of the main advantages of trading forex online with CFDs, however, using margin or leverage can backfire since it also magnifies potential losses if the exchange rate starts moving against you.

Trading currency pairs

Trading currency pairs is what forex trading is all about. In our example above, where we examined the outcome of a trade between the euro and the US dollar, we mentioned opening a position in the EUR/USD pair. This is because currencies are traded in pairs.

In this case, the euro (EUR) is referred to as the base currency, and the US dollar (USD), which is referred to as the quote or counter currency. What we are interested in is how many units of the counter currency we can buy with one unit of the base currency – and this forms the exchange rate between the two currencies. 

Using EUR/USD again, if this pair is currently trading at 1.18234, then one euro is worth 1.18234 US dollars. 

If you did enter into a buy trade in this pair at 1.18234 and the rate went up by a few points to 1.18500, then that means one euro would be worth more dollars and this trade would end up being profitable.

On the other hand, if the exchange rate started dropping, you would start losing money until you closed the position. However, CFD trading also allows for opening sell positions, which enable traders to profit even when the exchange rates of currency pairs start dropping.

There are hundreds of currency pairs available for trading and while the actual number may vary depending on your broker, currency pairs are generally divided into three main categories: majors, minors and exotics.

The major pairs include the currencies of the largest and most developed economies such as the US dollar, the British pound, the Canadian dollar and the Australian dollar. Each major pair always have the US dollar as the base or counter currency, and they make up the lion’s share of the global forex trading volume. The high liquidity makes them the most affordable to trade as well. Some examples are the EUR/USD, GBP/USD, USD/CAD etc.

In contrast, the minor pairs stage major currencies between each other. Examples are the EUR/GBP, GBP/JPY and the EUR/CHF. 

Lastly, the exotics are currency pairs that include the currencies of emerging economies such as the South African rand, the Polish zloty and the Mexican peso. Examples are the USD/ZAR, GBP/MXN and the USD/PLN.

Discover more opportunities with CMTrading

CMTrading offers more than 150 tradable assets including the top-performing currency pairs available in the markets. CMTrading clients get access to global brands, exceptional trading conditions and robust safety and security under the auspices of the Financial Sector Conduct Authority (FSCA) in South Africa.

Being a retail brokerage that specializes in CFDs (Contracts for Difference), CMTrading provides clients with unique advantages such as powerful leverage, which allows traders with smaller accounts to gain exposure to much larger positions. This translates to substantially higher profit potential, however, it should be noted that leverage also increases your exposure to downside risk.

While leverage typically adds a certain degree of risk to any investment, CMTrading also offers negative balance protection, thereby guaranteeing that potential losses will never exceed your invested capital.

If you are interested in learning more about how you can take advantage of price movements in currency exchange rates, commodities or cryptocurrencies, you will find that CMTrading’s unique offering of innovative services and diverse account types are suitable for both beginner and experienced traders.

Start trading the financial markets today with an award-winning broker. Join CMTrading, the largest and best-performing broker in South Africa.

Register here to get started!

 

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