Forex Trading for Beginners
Are you interested in Forex Trading? If you answered yes, then this article is for you. The Forex Market can be a very daunting, and sometimes scary place for newbies.
But don’t worry. In this article we will take you through some of the basics of Forex trading. The content below will by no means make you a better trader.
This article is simply aimed at helping beginner traders gain a better understanding of what forex trading is.
We will also explain some of the steps beginner traders can take to start their trading journey.
Now, without any further ado, let’s jump in.
Understanding Foreign Exchange
The word Forex is derived from the words namely; Foreign and Exchange. Forex simply refers to the exchange of currencies.
People actually participate in the forex market on a daily basis without even realising it. Millions of forex transactions occur daily between individuals, companies, banks and governments etc.
Transactions you make with buyers or sellers in another country will require currencies to be exchanged. Let’s look at a practical example. Let’s assume that you stay in Australia and want to buy a book from a seller in Europe.
However, you have a problem. The book is sold in Euros and your bank account is denominated in Australian dollars. This means, you need to exchange your Australian dollars for Euros in order to buy the book.
Now, we don’t ever have to do those type of exchanges ourselves. Luckily, the banks does all of the exchanges automatically. So we don’t have to worry about it.
But this should give you a basic idea of how people actually take part in Foreign Exchange on a daily basis.
The Forex Market
What is the Forex Market? The Forex market is the biggest financial market in the world. It has an estimated trading volume of $5.3 trillion per day.
The sheer size of the Forex market is amazing when compared to stock exchanges. The Forex market is also decentralized.
Decentralised means that it is an over-the-counter market.
It also means that it is not bound by a physical location with normal trading hours.
This is how it’s possible for the Forex Market to stay open 24 hours a day for 5 days a week. All transactions are made electronically without the need of a physical exchange.
This allows traders from all over the world to participate in the Forex market without going through a stock exchange.
Why does the Forex Market move?
The Forex Market has many different players. Some of these are banks, hedge funds, prop firms, companies, brokers and retail traders to name a few.
All of these players are the ones moving the forex market.
Trading forex is not like the exchange you make when you make an online purchase.
In the forex market the players mentioned above buy and sell various currencies. They speculate whether one currency will lose value against another.
The Forex Market is based on the fundamental economic principle of supply and demand. If something is considered as valuable or scarce the demand should increase causing the price to increase.
Conversely, if something is considered as less valuable and readily available the supply should increase causing the price to decrease.
Currencies are traded much the same way in the Forex Market. If the market thinks a currency is gaining in strength of value, the demand for that currency should increase.
When demand increases, the price should go up.
Similarly, if the market things a currency is losing strength or value, the supply for that currency should increase.
When supply increases, the price should go down.
Thus, the Forex market moves based on the supply and demand of currencies.
How does traders trade Forex?
In the Forex Market, we never trade one single currency at a time. We always look to pair two currencies together and trade them against each other.
Now let us look into how the players in the Forex market actually trade Forex. We will explain this using a practical example.
Let us suppose the market thinks the US dollar will increase in value. This should cause demand for the US dollar to increase.
Consequently, that should lead to the price of the US dollar going up.
Similarly, let us suppose the market thinks the Euro will decrease in value. This should cases the supply for the Euro to increase.
Consequently, that should lead to the price of the Euro going down.
In this example, the price of the Dollar is expected to go up. Contrastingly, the price of the Euro is expected to go down.
Thus, traders would pair these two currencies together as both of these are expected to move in opposite directions.
Finding currencies that are diverging in value often provides the highest probability trading opportunities.
As mentioned above, we never trade single currencies. Different currencies are paired together to form what we call a currency pair.
For example, the most commonly traded currency pair in the world is the EURUSD (Euro paired with the US Dollar).
Traders trade Currency Pairs in both rising and falling markets. This means you can buy and sell a currency pair.
It is important for beginner forex traders to understand that not all currency pairs are created equal.
We strongly advise beginners to only trade pairs formed with the major currencies of the world.
These currency pairs are known as the Majors. You will notice from the examples below that Major currency pairs are pairs that contain the US Dollar.
However, not all currency pairs that contain the US Dollar and Major pairs. Only the currencies from the major currencies of the world that are grouped with the US Dollar are known as the Major pair.
Examples of the major currency pairs are below…
Then there is also other currency pairs called the Minors. Minor currency pairs, also known as cross pairs, are also great to trade. However, their costs and volatility are often a lot higher which can make them a bit more risky.
You will notice from the below examples that the Minor currency pairs are pairs that does not contain the dollar. However, not all pairs without the US Dollar are considered as Minor pairs.
We will look at this in more detail when we discuss the Exotic Currency pairs below.
Examples of the Minor currency pairs are below…
Then there is also the Exotic currency pairs. These pairs contains currencies from emerging markets such as the South African Rand (ZAR) or the Turkish Lira (TRY).
However, these pairs are not limited to emerging market economies as some Exotic pairs also contain currencies from developed currencies such as the Swedish Krona (SEK) and Singapore Dollar (SGD).
These developed economy currencies are grouped with the Exotic pairs as they are very volatile and has very low liquidity. Most Exotic pairs has very high volatility and very low liquidity.
Examples of the Exotic currency pairs are below…
Personally, we do not trade the Exotic currency pairs. The reason for this is because they can move very erratic and the costs of the pairs can be quite large.
It is best to stick to the Major and Minor currency pairs until you are very comfortable in your trading.
How does the Forex market move?
In short, the way the Forex market moves is by traders buying and selling different currencies based on their value.
There are tremendous amounts of variables which causes individual currencies to gain value or lose value. Some of these variables can be see below…
Any single of these above mentioned variable can cause currencies to appreciate or depreciate. Things get tricky for traders when there are more than one of these variables at play for a given currency.
When there are more than one of these variables at Currencies move in cycles, and can move from strength to weakness and from weakness to strength.
These changes can happen instantly and good traders keep track of these cyclical changes.
When one currency in a currency pair strengthens or weakens it will affect the direction of that currency pair.
It can cause the direction of the Currency pair to go upwards, downwards or sideways. Traders employ various methods in order to speculate which direction a currency pairs might move.
If they speculate that a currency pair will go up they can buy that currency pair. Similarly, if they speculate the currency pair will go down they can sell that currency pair.
We use the word ‘speculate’ as there is absolutely no certainty or guarantee to which way a currency pair will go.
However, with fundamental and technical analysis traders can pinpoint the highest probability direction.
There is no trading method that will give you a guaranteed direction. However, by combining both Fundamental and Technical analysis can increase your effectiveness.
Understanding market direction can be very intimidating for a beginner. Luckily, there are many user-friendly trading methods that simplifies Forex Trading for Beginners.
Tips for getting started
Choose a broker
Technology has made it very easy for individuals to participate in the Forex market. Most brokers allow traders to download trading platform software such as MetaTrader 4 for free.
Through the broker and a trading platform an individual can trade in the Forex market with the click of a button. Apart from technology, brokers also offer leveraged accounts.
But wait! Not all Forex Brokers are created equal. There are some very bad brokers out there. As a beginner you need to make sure that you use a reputable broker.
Below is a short checklist we have made that will assist you in choosing a broker…
Make sure to ask the broker concerning all of the above points before you deposit real money with them.
As a note of caution, don’t allow your Forex broker to trade for you or to give you trade calls. This type of actions can open up all sorts of conflict of interest problems.
Use proper Leverage
This means that traders with very small capital amounts can trade and participate in the Forex market. For example, with a leverage of 500:1 a trader can trade quite large volumes with as little as $200.
However, leverage is a very dangerous thing in the wrong hands.
We do not encourage traders using leverage in their trading in the beginning. We advise that beginner traders learn to trade without leverage until they are consistently profitable.
We cannot stress this point enough. Leverage is a great tool in the hands of a professional. However, in the hands of a beginner it is dangerous.
As a beginner, don’t open trades worth more than 1:1 leverage. Also, don’t over-leverage your account by opening too many trades at the same time.
Invest in Forex Education
Also, beginners need to enroll in Forex education and Training before they even think about trading with real money.
The market is an unforgiven place and without education a trader will eventually lose all their trading capital.
Learning to trade is like learning any new career. You will need help from trading professionals to show you the way.
Don’t be one of those people who think you can watch a few short videos on Youtube and you will trade like a pro.
Make sure to do your homework though. There are lost of bad training courses out there. Choose well.
Use effective trading methods
Don’t fall into the trap of solely relying on Technical trading systems or strategies. In our opinion, trading without the Fundamentals is like riding a car blindfolded.
No matter how good of a driver you are or how fancy your car is, driving blindfolded is a bad idea.
This doesn’t mean that Technical Analysis is bad. We use Technical Analysis on a daily basis in our trading.
We just want you to understand that there is a lot more to trading than looking at price charts all day long.
Making use of both Technical and Fundamental Analysis will give the trader the best edge in the market.
The above information is a very short introduction to Forex Trading for beginners. It provides a very broad idea of what the Forex market is and how people can participating in it.
The Forex market is a very unforgiving place, especially to a beginner. Thus, we strongly advise any beginner trader to invest in Forex training before risking real money in trading.
Also, be very careful when you make your selection on where to get your Forex training. There are many scammers out there. If it sounds too good to be true then it probably is!
Make sure to check out some of our other articles as well for more information.
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