Your ultimate guide to the basics of forex trading
Your ultimate guide to the basics of forex trading
If you are looking for information regarding the world of forex trading, you’ve come to the right place. While the forex market is quite a volatile ever-changing environment with a fickle nature, there are multiple forex trading strategies that are proven to increase your chances towards making accurate predictions and thus your profit potential. Complete this forex trading tutorial to get the confidence you need to succeed in the exciting world of forex.
Forex trading for beginners
Forex stands for the foreign exchange market which is not unlike a network where all currencies are traded. Financial institutions like banks also make transactions on this network as well as millions of retail traders around the world. As you can imagine, with all these participators trading forex, the trading volume in the forex market is massive and this is incredibly favorable for traders because the market is always moving – thus providing more opportunities to profit from the constant price fluctuations.
Forex in general is a lot more advantageous than the stock market because of this extremely high liquidity and trading volume as well as the more accessible minimum deposit limits. You can open an account at a brokerage and start trading forex with just a couple of hundred dollars whereas investing in stocks – you would need several thousand and a lot of patience instead.
Forex trading basics
Trading forex is admittedly challenging for beginners but as soon as you become acquainted with the basics of how the market works and the inner workings of the trading platform – you will quickly realize the potential forex trading provides as well as its risks and pitfalls.
- What do you trade when you trade forex?
To put it simply, trading forex revolves around trading currency pairs since you can only gauge the strength of a currency compared to another. For example, at the current exchange rate, one Euro equals 1.14 US dollars. This means that you can sell one Euro and buy 1.14 US dollars. Now if the value of the dollar increases against the euro, you could sell your US dollars to buy back a higher amount of the Euro currency and realize a profit.
When trading forex on the platform, however, you don’t need to own any of these currencies in order to trade them. This is an amazing benefit of the platform since you can essentially buy or sell a currency (without owning it in the first place) and profit regardless if its price rises or drops.
- Forex quotes
The first currency in the pair is referred to as the base currency while the other is called the quote currency. So, in our example, you can sell 1.1400 US dollars to buy 1 unit of the base currency which is the Euro.
Since you are trading two currencies with a single trade and the exchange rate between currency pairs fluctuates with every passing second; you need to watch the live price feed provided by the trading platform in order to see the current bid and ask price for each pair (explained below).
Revisiting the previous example where one Euro can buy you 1.14 US dollars, the forex quote would be EUR/USD 1.1400 – 1.1410. The reason why you are quoted two different prices is because of the bid and ask. The bid which is always the price quoted on the left; is the price that buyers in the market are willing to pay in order to buy this currency. On the other hand, the ask price – the one on the right – is the price the sellers are requesting in order to sell this currency.
So, in our case, if you were convinced that the price of the Euro would go up against the US Dollar, you would be buying the EUR currency by selling 1.1410 (ask price) US dollars for each Euro. Likewise, if you believed that the Euro would devaluate, you could receive 1.1400 (bid price) US dollars for each Euro you sell.
- Trading fees
You may have noticed that there is a small difference between the bid and ask price. The spread is the difference between these two prices and represents the commission you pay to your broker for facilitating the trade. These fees add up, especially when you are opening multiple positions daily, therefore, if you want to avoid paying too much in fees when forex trading, you need to find a broker with low/tight spreads.
The spread isn’t the only cost that you may incur in forex trading, however, as you may be liable to pay additional fees according to how many days you hold your positions open. Always consult with your account manager about any additional costs to get more information.
- Risk management
Perhaps the most important part of forex trading is risk and money management. If you approach trading as battle of attrition you can surely expect a somewhat modest return on your investment which can grow as you get more experienced. However, if you try to gamble everything in a get rich quick trade, you are destined to fail. This is why it’s highly recommended that you incorporate stop losses in your trading strategy. A stop loss is an instruction you can set through the trading platform that automatically closes your positions in case the price moves against you, saving your money for another trade.
Forex trading strategies
You have to understand that the forex market is unpredictable and it may change direction at a moment’s notice. This is because prices are affected by external factors such as high impact geopolitical news and events and of course other announcements from financial institutions such as the central bank of their respective countries.
However, most successful traders have been using a couple of different forex trading strategies with great success. Mainly, there are two different schools of thought when it comes to how you should approach forex trading. On one side you have the technical traders who only focus on the price action on the chart itself and look for patterns in the historical data to conduct their analysis – and on the other we have the fundamental traders who believe it’s best to keep up with financial news, announcements and central bank policy updates and trade according to the information they gain from this macroeconomic point of view of the market.
That doesn’t mean, however, that you can’t use both methods in order to have a better understanding of the market’s movements. If you want to try out technical analysis, you can use a couple of trading indicators on the chart like Bollinger bands and Support and Resistance levels. There are hundreds of technical indicators available in the platform but in order to keep things simple, you should stick to the basics.
Trading with the fundamentals is quite challenging as well but they provide incredible profits for those who have an understanding how the market reacts to different news and events. This is because the price of a currency is extremely volatile during these announcements due to the uncertainty of the buyers and the sellers. As such, when a positive or negative announcement is released, the price could move rapidly to inflated levels that could decimate accounts in mere seconds or provide extreme gains.
Education is key when it comes to forex trading and thankfully the industry is mature enough to be able to provide valuable resources for beginner traders to succeed. Reputable forex brokers offer free education through online webinars and workshops and you can always request assistance from the personal account manager assign to you the moment you sign up.