What is Forex Trading?
Forex simply means “Foreign Exchange”. It can be defined as the over-the-counter market in which all foreign currencies all over the world are traded. It is the largest and most liquid market in the world. It is this market that determines foreign exchange rates for every currency. It involves all aspects of buying, selling, and exchanging currencies at current or determined prices. individuals who are new to Forex usually assume that there is a centralized location where Forex transactions take place but that is not the case as the Forex market is an electronic network of banks, financial institutions, brokers, and individual traders.
The Forex market is usually opened 24/5 that is 24hours in a day and 5 days of a week with exemptions to holidays. The Forex market is the largest financial market in the world, and this is the reason currencies may still trade on a holiday if the global market is open for trading.
Retails traders can open a Forex account and then buy and sell currencies and a profit or loss usually results from the difference in the price of the currency pair that was bought and sold at
How does Forex trading work?
Forex trading involves buying and selling currencies with the sole aim of making a profit. It usually involves two currencies at a time, “the base currency” and “the quote currency”. The difference in price is where you either make your profit or loss.
The Forex market is open to just anyone with an internet-connected device and a small deposit to use as a margin.
Forex traders trade with one another through a group of Forex dealers and computer networks that act as market makers for their own customers. The key to running a long-term Forex trading business lies inconsistent profitability as no individual wants to waste their precious time and money on an investment that brings no money in return.
Understanding how currencies are quoted and what exchange rates represent is the basic foundation of trading in Forex trading.
History of Forex
The Forex market is a relatively new market, but then if we examine the fact that people have been converting one currency to another for financial advantage this shows that Forex has been around since countries started minting currencies. The 1971 accord at Bretton Woods brought about more major currencies being allowed to float freely against one another. The variations in the values of individual currencies gave rise to the need for foreign exchange trading.
Types of Forex Currency Pairs
In the Forex market, all currencies are quoted in pairs which is why the act of Forex trading involves buying one currency against the other simultaneously. Currency can be split into three major categories:
Major currency pairs:
These are the currencies that are traded against the US Dollar which is the World’s reserve currency i.e. GBP/USD and EUR/USD. The major pair usually offers the biggest liquidity and the EUR/USD remains the most liquid currency pair.
Minor currency pairs:
These are usually called the cross pairs and these are currency pairs that don’t trade against the US Dollar i.e. EUR/GBP or EUR/CHF. They offer less liquidity for trading.
Exotic currency pairs:
These are usually called minor pairs, they are currencies linked to the emerging economies around the world i.e. Turkish Lira or South African Rand.
How to Start Forex Trading
There are quite a number of steps to follow to begin Forex trading and we have helped to analyze these steps to make it easier for beginners who would like to venture into the Forex trading world to find it as an easy one. Below are the steps you need to begin Forex trading:
- Find an Online broker
- Download a Forex trading platform
- Study the charts
- Analyze and Research
- Open a demo account
- Open a live account
- Fund the account
- Enter your first trade
Find an Online Forex broker
This is an important step in starting your journey through the Forex world. Brokers are very important to you as a trader in the Forex market. It is important to note that it is not just about selecting an online broker but making the right choice by selecting a licensed broker as that helps to ensure you do not lose your hard earned money.
Your broker must be reliable and also suit your trading style. It is also important that you do your research properly so as to ensure that your broker is regulated as this guarantees the safety of your investment.
For veterans of war, they do understand the importance of strategy in winning battles, this rule also applies to Forex trading. You need to develop your own strategy, that is reach a conclusion on what you are interested in trading and your expected outcome.
Download a Forex trading platform
There are different platforms that exist to facilitate online Forex trading. Online brokers have their own preferred choice of trading platform and while some have limited platforms others have numerous platforms so it is left to you as a trader to select your particular choice of trading platform.
Most online brokers make use of the MetaTrader 4 or MetaTrader 5 platforms developed by MetaQuotes which you can either use online or download for free on their website and install on your preferred device either your computer or phone. Most brokers also provide guidelines and instructions to use these platforms which help you to conveniently use the platform without any difficulties.
Study the Charts
There are different charts for every Forex market. If you are planning to trade on many different markets, it is important to understand the information you will be researching for each trade. Take your time to study the charts provided on the trading platforms as this is quite important as a beginner.
Analyze and Research
As a trader, you cannot afford to be lazy, because your hard work is tantamount to your success. In order to achieve success in Forex, you need to research information about foreign markets including the exchange rates and trends. Putting efforts into analyzing and doing proper research might take so much of your time but in the long run it will pay off.
Open a Demo account
This is important as a beginner because you are not aware of what you are about to plunge into and it is highly advisable for beginners to run a demo account before opening a live account so as not to watch their money go down the drain.
Most Forex brokers have provided Demo accounts for you to test run your strategy and to also grasp an idea of what Forex trading is all about and how it works. To that beginner, my candid advice to you is to open a demo account first before plunging your money into the live platform.
Open a Live account
The majority of the brokers have made opening an account as easy as ABC. They have fewer requirements for opening an account this is so as not to discourage potential clients to be discouraged to trade with them if their account opening process is complex. Visit the website of your Broker choice, you will need to confirm that you are a real person and not a bot and that you are not with the intent to engage in fraudulent practices i.e. Money laundering.
Fund the Account
Trading Forex with real money requires you to fund your Forex account with a broker to use as a margin. The amount you deposit can then be leveraged by a ratio which is dependent on your location and that of your Broker and this is due to regional regulations.
There are different ways to fund your account as provided by different brokers. It is important to note that most brokers have provisioned you to use the same deposit method for your withdrawal. Convenience should also be considered when choosing your preferred method of depositing funds.
ENTER YOUR FIRST TRADE
Once again, take your time to learn how to enter and exit trades properly using your trading platform with a demo account before you try out a real transaction. Once you feel confident enough in your ability then you can enter your first trade. I do always advise beginners that after entering their first trade they should be careful not to overtrade as it is not a good idea.
If you do overtrade, you are likely to get caught up in thoughtless trade in which you do not have a prior strategy for and you end up losing your money. The best way to prevent overtrading is to set a trading goal and outline the maximum amount of trades per period of time. Also, learn to carefully examine your past trades to learn better from your mistakes or your profits to be able to select a perfect strategy for yourself.
Forex Trading Terminologies You Should Know
Below we would discuss some trading terminologies that you might have come across previously or be new to as well. They include:
What this term stands for is “Contract for Difference”. This is a contract used to represent the movement in the prices of financial instruments. CFDs allow you to trade in the price movements of these prices without having to buy them. Apart from Forex, CFDs are also available in bonds, stocks, indices cryptocurrencies, and commodities.
A pip is the base unit in the price of the currency pair. It is the smallest price change that a given exchange rate can make. It is important to note that most currency pairs are priced to four decimal places, the smallest change is that of the last decimal point the only exception to this is the Japanese Yen (JPY) pairs which are quoted to the second decimal point. Let’s say, for example, the bid price for the EUR/USD pair goes from 1.1000 to 1.1001 that represents a difference of 1 pip.
The currency pair shows how much of the quote currency is actually needed to purchase one unit of the base currency. The first currency of a currency pair is what is referred to as the “base currency” and the second currency is called the “quote currency”.
Base Currency Pair
This is the first currency quoted in a currency pair on Forex. It is usually considered as the domestic currency.
This is the second currency quoted in a currency pair. It is often referred to as the secondary currency. In a direct quote, the quote currency is the foreign currency. In an indirect quote, the quote currency is the domestic currency.
This is usually how the broker makes their money. The spread is the difference between the purchase price and the sale price of a currency pair. Spreads for the popular currency pairs are usually low but in the case of pairs that don’t trade often they are usually high.
Not all spreads are created equal because spreads differ between brokers. The value of the currency pair must exceed the spread for a Forex trade to be considered as profitable.
Money that is retained in the trading account when opening a trade is what is referred to as Margin. The Retail Forex Trader do not have the necessary margin to trade at a volume high enough to make a good profit, many Forex brokers offer their access to leverage.
As a beginner, Leverage is a concept that is important for you to understand. The leverage is the capital provided by the Forex broker to increase the volume of trades its customers can make.
It is a trade between two parties where they will exchange the principal amount of a loan and the interest in one currency, for the same amount in another currency. Currency swaps can be negotiated to mature
Leverage, Volume, and Margin Requirements:
Margin as previously explained above shows that you need to understand how margin trading works. It is a certain amount of your balance that you put down as collateral whenever you open a trade. That deposit is what is referred to as the margin requirement. The margin requirement depends on three things:
The instrument you trade: GBP/USD, EUR/USD,
Position size: This is the amount you buy or sell which is usually measured in lots.
Leverage: This is a way of controlling bigger trades by borrowing from your broker so you can boost the profits of a trade. 1:50 is the standard leverage offered by most brokers especially in the US and it could go as high as 1:500 for non-US and offshore brokers.
Your Forex margin can be calculated using this formula:
Margin requirement = (Contract size * Lot size * Price) \ Leverage.
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Currency Pairs Explained
In the Forex market, trading is usually done with currency pairs, you sell a currency to purchase another currency. You can exchange USD for Euros, Canadian dollars for Indian rupees, etc. The exchange rate specifies the value of one currency relative to one another i.e. The EUR/USD currency pair shows you how many US dollars you can purchase with one Euro. All Forex pairs have an associated market price. This price refers to how much of the second currency is needed to purchase one unit of the first currency.
Furthermore, the price of the currency is not stable and as such it constantly fluctuates as transactions are carried out across the globe 24 hours. In the Forex market, all currencies are denoted by specific symbols. Here is a list of the major currencies and their denotations listed below:
Forex Currency pair Lists
|NEW ZEALAND DOLLARS||NZD|
|HONG KONG DOLLARS||HKD|
The major currency pairs usually move about 50 to 100 pips a day. Depending on the overall market condition, the number of pips can be more or less. In Forex, Pip means Point in Percentage and it is the fourth decimal value in a currency pair but not in the case of the Japanese Yen (JPY) it refers to the second decimal value. The value of each pip is called the pip value. The first currency in the pair is what we refer to as the directional currency. For instance, in a currency pair pf EUR/USD, if the value of the pair increases, it means the value of the EURO is higher than the dollar also if the pair value decreases, then it shows that the value of the EURO is declining respect to the USD.
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Common Trading Strategies for Beginners
There are different trading strategies that exist and traders usually select the best trading strategy that suits their personality. There are four common strategies that can be used in different market environments and they include:
- Forex scalping strategies
- Forex day trading strategies
- Forex swing trading strategies
- Forex position trading strategies
Forex scalping strategies:
Scalping is a type of trading that consists of buying and selling currency pairs in a very short period of time, usually between a few seconds and a few hours. This is commonly referred to as the best trading strategy and it involves making a large number of small profits hoping that those profits will accumulate.
This is a more conservative approach that can suit beginners with a conservative mindset. It is focused on four-hour or one-hour price trends. Trades can be open between one and four hours. They focus on the main sessions of each Forex market.
This is a medium-term trading approach that focuses on larger price movements than scalping or intraday trading. This type of trading is good for those who trade as an alternative source of income to their daily work.
It is a risk management technique in which a trader can offset potential losses by taking opposite positions in the market.
Forex grid strategy:
This is a strategy in which a trader uses buy and stop orders and sell stop orders to profit on natural market movements.
Forex Trading Risks You Should Know As a Beginner
Every investment or business has its own risk and most people engage in business or investment only when the profit outweighs the risk. Trading currencies can be quite risky and complex. You make a profit when trading Forex by taking a position that increases in value and you make a loss when you take a position that decreases in value.
Traders consider entering a trade if the risk is minimal against the reward ratio they have decided upon as a trading criteria i.e. a trader might be willing to risk 50 pips on a trade under consideration to gain 100 pips. This means the risk against the reward ratio would be 50:100 or 1:2.There is also the risk of investing with an unregulated or less reputable Forex broker and the best way to prevent this risk is spending time investigating a Forex broker to find out whether it is regulated in the country where it is domicile. It is also a great idea to find out what account protections are available to the trader in a situation where a dealer becomes insolvent. There are other risks you should know as a beginner and they include:
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The higher your leverage, the larger the profit or loss. This depicts that leverage can have both positive and negative impact on your trading. But remember to always look to the positive side always while trading.
Interest Rate Risk:
When a country’s interest rate increases the currency is likely to strengthen and vice-versa. When currency rates fall, investors are likely to withdraw their investments.
Transaction risk is a type of exchange rate risk that can be attributed to the time differences between the different countries. Transaction risk increases the greater the time difference between entering and settling a contract.
Factors That Drive the Forex Market
Here are lists of factors that drive the currency pair and they include:
- Central bank’s monetary policy
- Interest rates
- Country’s economy
- Geopolitical factor i.e. stability of the government.
- Supply and Demand
- News reports and Economic data
Key Points to Consider About Forex Trading
Decide on how you will finance your trading in advance
- Money management skill
- Calculate your own risks
- Estimate your profits
- Start as little as you can with smaller trades
- Use leverage wisely
- Focus on long term
- Ensure you do a lot of research to help guide you
Cost of Forex Trading
An activity which generates great income for you should be treated as an extremely important business activity. Beginners should also consider how to minimize their costs/risk and maximize their income that is consider the cost of trading with Forex brokers before deciding on the right choice of broker for you. Investigate and compare the costs and services rendered by different brokers since there are no general rules on how Forex brokers charge once you do this you can go ahead to have an account with a Forex broker of your choice to begin trading.
There are costs which you should compare before selecting your broker and they include:
- Minimum deposits
- Fee on the spread between the bid and ask price quoted
- Commission per trade
- Inactivity fees or withdrawal fees
What Regulatory Bodies Govern Forex Trading?
There is no central regulator of the Forex market which is why you would find some reputable but unregulated Forex brokers. Most beginners tend to look for Brokers within their location to trade with but this doesn’t mean you can’t trade with offshore brokers as you would later discover that some of them have a lot to offer you than even the Forex brokers domicile in your country of residence.
In the UK, the FCA (Financial Conduct Authority) actually regulates brokers within that region. In Cyprus, CySEC (Cyprus Securities and Exchange Commission) regulates Forex brokers in Cyprus. ASIC (Australian Securities and Investments Commission) is the regulatory body. While in the US there are two regulatory bodies namely: The NFA (National Futures Association) and the CFTC (Commodity Futures Trading Commission).
The the essence of regulations is to keep Brokers at bay so as to prevent them from engaging in fraudulent practices. Regulatory bodies aim at protecting individual traders and ensuring fair operations to safeguard trader’s interest.
It is important to note that regulations vary from country to country and US is well known for its stringent regulations which not only restricts Brokers but also traders which is why most US traders lookout to trade with offshore brokers.
As a beginner while considering making profit it is important to consider regulated brokers instead of the unregulated one this is to secure your investment this is not to say that there are no unregulated brokers who are not trustworthy of course there are and their reputation speaks for them and they do give you unrestricted access to trading.
Common Mistakes Beginners Make in Forex Trading
As humans we are bound to make mistakes and this means that we are not perfect. No matter the trading strategy you employ in trading Forex you are bound to make mistakes which would make you lose money. Learning from your mistakes is what makes an expert trader. Even people with decades of experience in Forex sometimes make mistakes so it is nothing to be worried about.
It is due to this mistakes that are bound to happen that we are going to discuss a few of the common mistakes to help prepare your mind as a beginner to avoid them. These include:
This tool could cause either a negative or positive impact in your Forex trading. Lay man definition of Leverage is a Loan from your broker.
It works in a way that when your broker increases the amount you can trade by 10 for example and then takes a percentage from your payout if it is successful.
If it’s not then there is a chance that the traders’ entire account will be wiped out in just a trade. This is a tool that could either make you successful in Forex or show you the exit door as a Forex trader.
A trend in Forex usually occurs when a large part of the market starts agreeing on something. As a beginner it is important for you to know that no matter how wrong a trend is.
It usually influences the demand and supply as long as a large number of people follow it and when traders don’t follow it they are most likely to have a terrible trading experience.
Forex market is not a constant market it is highly subject to change and there are a lot of factors that influence it mostly events around the world. You need to watch out for world events that might likely influence the Forex market and conduct a proper research to know whether to trade or not due to that event. There are other factors too that are likely to affect the Forex market and they have been discussed above.
Trading unknown currencies
This is a common mistake beginners often make just because they observed that a specific currency pair has a good history and those that traded it in the past recorded making huge profits. Due to this reason, the trader tries this out as well only to discover that there was a reason those who did in the past made profit and those reasons are non-existent now. Trading currencies you know nothing about is a bad idea.
Advantage and Disadvantages of Forex Trading
Every investment has its advantages and disadvantages and most individuals engage in investment or business when the advantages outweigh the disadvantages this is because no one wants to lose money they worked so hard to get
Types of Forex Scam
As you might have thought, are there scams in the Forex industry? Of course, there are scams in the Forex industry and we would talk about the three major scams you might likely come across. Knowing about these scams helps you not to fall victim as a beginner. Understanding these scams is the first step not to fall victim and we would also talk about how to avoid scams.
1. Signal seller scam:
These are individuals who give out trade ideas, which usually include an entry price, stop loss, target levels and currency pairs. So as not to fall victims to this individual there are things to look out for such as:
This individuals request you to pay high subscription fees in other to get access to the trades or sometimes they start out low and they could use your banking details for other numerous scams.
Sometimes the signal sellers are often tied to a particular broker which means they are getting some form of payment or reward from a broker which is why they offer you trade signals only if you trade with a particular broker.
The signal sellers usually do not have a verified track record, if their trading signals have recorded a high percentage profit why are they not trading the signals themselves.
2. Robot Scam:
Contrary to popular opinion, not all Forex robots are scams. Forex robot is a trading program that involves using algorithm, or lines of computer code as technical signals to open and close trade. There are a few things to watch out for to avoid Forex robot scams you may likely come across:
There are some Forex robots that show good results using unregulated brokers that are uncommon. The results might be good in their interbank spreads but once you open an account with this brokers your spreads and commission will be wider, thereby eating too much of your profit.
They send out marketing messages that are unrealistic.
You should also watch out for high percentage growth returns.
3) Phony Trading Investment Scams:
This investment scam usually involves sending a catchy message or a salesperson might show you unverified results of their forex fund and they ask you to send them your investment and relax and wait on your returns.
Many traders lose their money this way as the company denies ever receiving funds from you.
How Do You Avoid Forex Scams?
Never rush into taking decisions during Forex trading as this also determines whether you make profit or loss. The best way to avoid Forex is trading with a reliable broker who has a long reputation in the Forex industry.
You could google the business name of any Forex broker as the results will display their reviews which will enable you have an idea if they are reliable and can be trusted to do business with. If they have no reviews it is most likely because they are fakeand you should stay away from doing business with them.
It is also imperative for you to stay away from opportunities that seem too good to be true. When you come across 200% gain per month you should know it might not be feasible due to the fact that Forex trading requires a lot of education, patience and good strategy to make profit.
FREQUENTLY ASKED QUESTIONS
How do I select my preferred Forex Broker?
Forex brokers should be selected based on a trader’s preference. It is a common trend for people to pay attention to a broker’s regulation license which means if they don’t have it they are likely not regulated.
As much as it is important to seek out regulated brokers to ensure the safety of your investment there are also brokers who are reputable in the business but are not regulated so it is left for a trader to select the best for him based on his preference.
How do I conduct my research?
Research is the process of gathering sufficient information about a thing to know more about it. Making profit relies so much on watching out for recent fresh news as this affects the market mostly. The news can be economic, political or about finance and sometimes might not be in anyway related to the Forex market.
It is imperative to decide on whether this particular event could have influence over your currency pairs. Research in Forex has to do with analyzing what has happened in the past with an event and what is being planned for the future.
What trading software is the best for me?
In Forex trading, there are three types of software. There is the WebTrader that can be used in your web browser, we have the MobileTrader that can be used on either your smartphone or tablet and there is the desktop version which you will have to download and install on your PC or MAC. You can select which trading software is more convenient for you to access among this three software.
Which currency pairs are best to trade?
Trading currency pairs usually depend on your knowledge of various currencies including the currency of the country you reside in. In situations where beginners have little or no knowledge about their native currency, the common pair they trade on is EUR/USD or at times they select the currency pair a broker has for them. The EUR/USD is usually the most stable currency pair and they both guarantee that there will be no huge changes in a day due to their stability.
Why should beginners stay off Leverage?
As much as Leverage is a highly useful tool, it can be extremely dangerous when your broker who provides this doesn’t provide a margin call.
A margin call occurs when the broker abruptly closes your trade if it’s too unsuccessful and when there is no margin call there is a high risk of owing the broker the funds it gave to you. This shows why you need to avoid leverage as a beginner until you become an expert trader with high chance strategies.