How to trade Forex
Are you new to Forex trading?
Do you want to find out how to trade Forex and participate in the Forex Market?
Then this article if for you!
Trading in the Forex Market can be exciting and intimidating at the same time.
For this reason, it’s important for beginners to learn the basics before they decide to jump into the markets.
However, knowing how to trade Forex and knowing how to trade successfully is two vastly different things.
Forex Trading is not an easy skill to master. The financial markets can be an unforgiving place for newbies.
BUT, don’t worry you’re in good hands. In this article we’ll provide a short introduction on how traders can start to trade Forex.
Below is a list of things we’ll discuss in this article:
- What equipment do I need to trade Forex?
- How can I choose a good Broker?
- Different types of Trading Strategies
- Choose your trading Methodology wisely
- Which trading platform should I use?
- Which currency pairs should I trade?
- It’s all about the exchange rate
- What is a Pip and why you should care?
- What is Lot Size?
- Different order types
- How can you limit your risk
- Don’t forget your risk management
- Remember to follow the leader
What Equipment do I need to trade Forex?
The first thing you’ll need before you start trading Forex is the right equipment.
You will need a laptop or desktop computer. We cannot tell you how many people ask us whether they can trade on their phones.
The short answer is Yes, but trust me If I say you don’t want to do that.
Phones are great if you are at work or on the road and simply want to check on trades. But, doing Technical Analysis on a phone is a recipe for frustration!
So, when you buy your trading PC don’t go for the biggest thing out there. But, don’t waste time by using a PC that takes an hour to start…
Below is a short list of some basic computer system requirements for trading.
Keep in mind, we trade on the MetaTrader4 platform. Thus, these settings might not be sufficient if you’re using other platforms.
A stable internet connection is an absolute must.
The last thing you want is a lag in your connection when you need to get in and out of trades fast.
Furthermore, you don’t really require eight laptop monitors like in the movies. Obviously, having 3 or 4 screens are beneficial if you want to keep an eye on various things.
But, you don’t have to have multiple monitors for your trading.
If you’re going to consider using more than one monitor, make sure your PC’s video card will allow more than one.
How can I choose a good Broker?
The next thing you’ll need to start trading Forex is a broker.
You need to be very careful here. If you’re new to Forex, you need to know that not all brokers are good brokers.
Unfortunately, there are a lot of scammers out there trying to con people out of their money. And that includes brokers as well.
Make sure to do proper research about a broker before you decide to trade with them.
Below is a broker checklist that you can follow as a guideline for choosing a broker…
You need to make sure that your broker is regulated. Also, make sure it’s a reputable regulatory body.
Some brokers charge clients very high trading costs. If they don’t offer competitive costs go somewhere else.
You’ll want to find out about a broker’s transaction policies as well. Some dodgy brokers make it impossible for you to withdraw your funds.
Do not be fooled by marketing tricks by brokers that offers free sign up funds. It’s clever marketing guys that’s all.
There are a lots of terms and conditions to those free bonus funds. Those funds will never reach your bank account in a million years.
There are very few brokers that can check all of the above boxes.
However, with research you can find brokers that tick most of the above requirements.
Doing your own research when it comes to your broker is very important.
We encourage you to do the research yourself and make your own calculated decision on this.
Different types of Trading Strategies
Have you thought about a trading strategy?
What type of trading strategy are you going to follow? Are you going to day trade, swing trade or do a bit of both?
For the most part, your trading strategy will be based on your personality and availability.
Below is a short description of some of the difference between day trading and swing trading.
Every trader will have a different personality. Some people are able to handle the stress of Day-Trading and some can’t.
Lots of retail traders still have normal 9-5 jobs so they can’t spend hours in front of the screens.
Day Traders need to spend a lot of time in front of the markets every day. They trade to take advantage of much shorter-term trading opportunities.
However, swing-traders don’t require as much time. They trade to take advantage of medium-term trades.
Thus, your strategy has a lot to do with your availability. If you can’t spend hours in front of the PC then don’t try Day-Trading.
Your personality will also be an important consideration. If you get bored very quickly then Swing-Trading might not be right for you.
Similarly, if you can’t deal with stress then you’ll struggle with Day-Trading.
Some of the best traders are those that are able to combine day trading and swing trading with each other.
Choose your Trading Methodology wisely
There are two main types of trading methodologies used by traders.
They are known as Fundamental Analysis and Technical Analysis.
The differences between these two styles of trading are based on the way they approach the market.
Technical Analysis use historical price charts to analyze the markets. Fundamental Analysis uses qualitative and quantitative macroeconomics to analyze the markets.
Technical Analysis uses price action to establish the next possible direction the price will move.
The strategies employed by Technical Analysts can differ vastly from each other. Some are highly dependent on Indicators and Trading Robots.
Other technical strategies use candlesticks and support and resistance levels.
Additionally, some Technical systems combine different elements together. The fewer and less complicated the better in our opinion.
Fundamental Analysis does not use the charts to find potential trades.
The Fundamentals use economics to determine which currencies are likely to strengthen or weaken.
Fundamental Analysts use lots of different information to help them in their analysis.
Some of these are economic data releases, market-moving news, central bank policy and geopolitics.
Many beginners try to find the perfect trading system. BUT, there is not such thing as a perfect trading system!
Some traders trade only with Technicals and others only with Fundamentals.
The best approach that works for us is a combination of both methodologies. However, in our trading the Fundamentals are always more important.
Our trading approach is simple and flexible as we don’t believe in rigid trading systems.
The market is dynamic! Thus it requires a dynamic and flexible approach.
We use the Fundamentals to determine the best possible direction for a currency pair. Then, we use the Technicals to find high probability entry and exit locations for our trades.
Which Trading Platform should I choose?
The next thing you’ll need in your trading journey is a trading platform.
There are quite a number of trading platforms available on the market.
You will be limited to the platforms offered by your broker.
The trading platform that we use is MetaTrader 4.
There are some very high-tech proprietary platforms but they are only compatible with specific brokers.
We prefer MT4 to other platforms for a couple of reasons.
Firstly, the platform is free.
The broker is the one that picks up the tab with MT4. Why pay for a platform when you can use one for free?
Secondly, due to its popularity there is always plenty of support available online.
Thirdly, the platform offers great functionality.
The extra features available on some other platform will not necessarily make you a better trader.
It might be helpful, but it won’t turn you into a profitable trader. Lastly, some of the other platforms are really expensive.
Which Currency Pairs should I trade?
Now we can dive into some of the more technical aspects of trading.
In Forex, we do not trade single currencies at a time, we trade currencies in pairs.
Thus, the term currency pair refers to the pairing of two different currencies.
A good example of a currency pair is called the EUR/USD. It is the most popular, highly traded and most liquid currency pair in the world.
The first currency in a currency pair is known as the Base currency. The second currency is known as the Quote currency.
For example, in the EURUSD pair the Euro will be the Base currency and the USD the quote currency.
In FX currency pairs can be either bought or sold.
This is great because it means we can profit in both rising and falling markets.
For example, traders can choose to either BUY or SELL the EURUSD pair. It’s important to realize that you don’t physically own any of the currencies you trade with.
When we place a BUY trade, we are buying one currency and simultaneously selling the other.
Thus, Forex traders don’t physically buy or sell the currencies. They are in fact speculating whether the exchange rate between them will go or down.
Forex Traders speculate whether one currency’s value will go up or down against the other.
It’s all about the Exchange Rates
Every currency pair on your trading platform will have a specific price.
This price is the current exchange rate between the two currencies in that specific currency pair.
Thus, when a trader places a buy trade on EURUSD they are speculating that the exchange rate or price will go up.
Correspondingly, when a sell trade is placed we are speculating that the exchange rate or price will go down.
The exchange rate between the two currencies is always quoted in the Quote currency.
For example, let’s assume the price for the EUR/USD is 1.40. That means, it will cost exactly $1.40 for every 1 Euro.
The reason why exchange rates fluctuate is because currencies will always move in cycles.
Different currencies will have different strengths and weaknesses depending on the fundamental outlook and sentiment.
For example, let’s suppose that a trader expects the Euro to lose strength against the US Dollar.
The trader can then open a sell trade on EURUSD in expectation that the exchange rate will fall.
What is a PIP and why should you care?
This is a very important thing to understand as a beginner trader.
The terms “pip” or “point” is something that every trader will come across when they start trading.
Above we learnt that the exchange rate between two currencies are constantly changing.
Now, it’s important for us to know how the value of that changes is measured.
These changes in the price or in the exchange rate is measured in Pips.
A pip usually refers to a 4th decimal change in the exchange rate on your trading platform.
Similarly, a point or pipette, refers to a change of the 5th decimal value of the exchange rate.
Below is a great visual example to better illustrate this.
In this example the exchange rate for the GBPUSD currency pairs was 1.38488.
You’ll remember that the exchange rate is always quoted in the quote currency.
Thus, in this example it will cost $1.38 for every £1.
If the rate moved from 1.38488 to 1.38498, it moved exactly 1 Pip.
Similarly, if it moves from 1.38488 to 1.38489, it has moved up by exactly 1 point.
Thus, if you got the math right you would have noticed that 10 points is equal to 1 pip.
For all pairs that contain the Japanese Yen a Pip would be a movement on the 2nd decimal and a Point a movement on the 3rd decimal.
What is Lot Size?
Oh boy this is an important one!
You can wipe out an entire trading account if you use the wrong lot size. So pay attention.
Currency pairs are traded in specific amounts called ‘lots’. There are three main lot sizes in Forex Trading.
They are know as Standard Lots, Mini Lots and Micro Lots.
So, why is the amount of units important? Every Lot size will have a different value for every pip the price moves.
The USD is the most traded currency in the world. Whenever the USD is the quote currency in a pair the pip value is fixed.
Every 1 pip movement in price on a Standard lot trade size is roughly worth $10 per pip.
On a Mini lot size each Pip will be roughly worth $1 per Pip. For Micro lots it’s about $0.10 per pip.
This will be true if your trading account is a USD account. For all other pairs where the USD is not the quote currency the value per pip will be different.
The value per pip will be different depending on the quote currency and your account’s currency.
The different lot sizes have different inputs in the MetaTrader4 platform.
Below is the volume you can use in your MT4 platform for each of the various lot sizes.
So, what lot size should you use? Well, depends on the size of your trading account and the leverage you want to use.
A good Forex trading course should teach you how to calculate the perfect lot size for every individual trade.
Knowing which volume you can afford to trade with is very important!
Different Order Types
We already learnt that it’s possible to trade a currency pair in both rising and falling markets.
This means that you can either buy or sell a currency pair. There are a number of ways to do that on the MetaTrader4 platform.
The easiest way of placing a buy or sell trade is by opening a market execution order.
A market execution order is an instant order opened at the current market price.
Then there are also pending orders. Pending orders can be a little trickier as they are not executed immediately by the trader.
Rather, they are set up to automatically open a trade only when price reaches a specific level.
Pending orders are helpful as you don’t need to be in front of your screen to open traders manually. The platform will automatically open up a trade when it reached a certain price point.
How you can limit your risk
Learning how to manage your risk is a critical step in Forex Trading
What if I told you there’s a way to limit your risk in trading…sounds interest right?
You can limit your risk in trading is by using a ‘Stop Loss’ and a ‘Take Profit’.
So, what exactly is a Stop Loss and Take Profit?
A Stop Loss and Take Profit are automatic order that close trades automatically to limit risk.
Every good trade will have a good exit plan.
Your Stop Loss and Take Profit is your exit plan for your trades.
What will you do if a trade goes against you and you’re not in front of your screen?
This is where a Stop Loss comes in.
With a Stop Loss a broker will automatically close a trade if a predefined price level is reached.
Thus, it helps traders to close a losing trade to protect an account from big losses.
Did you know you can also limit your risk when the market moves in your favor?
This is where a Take Profit comes in.
With a Take Profit a broker will automatically close a trade if a predefined price level is reached.
Thus, it helps traders to close a winning trade by locking in profits in case of deeper pullbacks.
Knowing where to place Stop Losses and Take Profits takes a lot of practice.
Don’t forget your Risk Management
Above we saw that traders can limit their risk.
Now, we’ll learn some insight into how traders can manage their risk.
Knowing how to manage your risk is probably one of the most important aspects in trading.
When a trader learns how to trade Forex, risk management should be on the very top of their list.
There is vast amounts of info available regarding this subject. And for a very good reason.
Many people shy away from Forex trading because they fear the risk involved.
However, without the risk there would not be reward.
With proper risk management you can withstand multiple subsequent losses without damaging your account.
You cannot be successful as a trader if you do not learn to manage the risk.
With good risk management even a series of losing trades will ever be able to make or break you.
Those who practice good risk management accept that trading is a long term business.
They also fully acknowledge that Forex is not a get rich quick scheme. First learn to manage the risk, then profits will come by themselves.
Remember to Follow the Leader
Don’t to trade against trending markets. This is where Fundamental Analysis will aid a trader immensely.
Fundamental Analysis will help you understand the sentiment in the market.
It will help you to pick better trade directions for your trades. It helps us trade in the same direction as the institutional traders.
Majority of institutional traders use the Fundamentals when choosing their trade direction.
You’ll have much higher probability if you stick to prevailing trends.
Knowing how to trade Forex is not as easy as placing trades whenever you feel like it.
You need to establish in which direction the market is trading and follow the leader.
In this article we gave a basic guide for beginners on how to trade Forex.
We looked at everything from equipment, to brokers, strategies, training and risk control.
But, there’s a lot more to learn before beginners should start trading.
If you guys need further help be sure to reach out to our team who will be glad to assist you.
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