Forex trading is a contemporary field which is very lucrative due to the profit potential. Unfortunately, not many traders make their living off Forex trading. The main reason is the lack of correct information and too wild expectations while executing the info. Here’s a detailed guide on how to trade Forex. Do not skip, read all to grasp the real crux fo Forex trading.
An Introduction to Forex Trading – A Guide for Beginners
For starters, foreign exchange trading seems somewhat impenetrable.
Despite all the crises, the euro is significantly better against the US dollar than when it was introduced, and even economics professors and fund managers sometimes find it challenging to explain why one currency is stronger than the other.
But there are simple tools that can be used to achieve good results. Learning to trade forex is not as difficult as it seems.
One such tool is chart analysis, i.e. the interpretation of the graphical representation of a course of the price. The most straightforward description is the line chart, in which the sequences are shown as a line.
This is also quite sufficient for foreign exchange trading for beginners, more complex forms of presentation such as candlestick charts (also called candle charts) are not needed at the beginning.
The trend-following strategy sometimes only referred to as the trend strategy, is particularly simple. It is based on the experience that the likelihood of a trend continuation is far higher than that of a trend reversal.
Sometimes the trend can even be seen by looking at a chart. Where this is not the case, some simple tools will help.
What is Forex Trading and How Does it Work?
The forex market is also referred to as the currency or foreign exchange market because forex stands for “Foreign Exchange”. Forex trading, therefore, describes trading in foreign exchange.
The foreign exchange market has two peculiarities: First, it is not a floor market, because market participants trade with each other via banks and brokers. On the other hand, profits can be made on the forex market even when other markets are at a low and prices tend to fall.
How does Forex trading work?
Currencies are traded on the Forex market, the values of which are subject to fluctuations. Investors speculate that the value of a particular currency will rise or fall compared to that of another currency.
The difference between the two currencies depending on the exchange rates, fewer payments to the broker and tax deductions, ultimately makes up the investor’s (net) return. The entry into forex trading is already possible with relatively small amounts of money.
Currency rates are usually subject to minimal fluctuations, which often only become noticeable in the fourth decimal place. For this reason, professional Forex traders trade leveraged derivatives.
For example, after depositing a security deposit (margin), the trader is provided with additional capital for opening a position. The extra (borrowed) capital creates a leverage effect through which even the most marginal fluctuations in the value of exchange rates can be exploited. Below is an example for illustration.
Forex trading example
They speculate that the dollar will lose value and the euro will grow by buying € 100,000 for $ 115,000 at an exchange rate of € 1.00 to $ 1.15. You do not have to give the broker the full dollar amount; you only deposit the security deposit of, for example, 1% ($ 1,150).
|Profit Scenario||Loss Scenario|
|You sell the $ 100,000 for $ 117,000, which means a profit of $ 2,000 (the difference between buying and selling). ||They sell the $ 100,000 for $ 113,000. That means you make a loss of $ 2,000.|
|They get their margin back ($ 1,150) and get an additional $ 2,000.||Since your loss is greater than the margin deposited, there is an obligation to make additional contributions.|
|You have more than doubled your original bet of $ 1,150 and made a profit of +173.91%.||You won’t get your $ 1,150 security deposit back, and you’ll have to pay $ 850 to make up for your loss.|
In order to determine the net profit, you also have to deduct individual broker costs and taxes. You will also have to pay the brokerage fees, which will further increase the loss.
How are exchange rates created?
The exchange rate (also exchange rate or FX rate) determines the difference between profit and loss in Forex trading. But how does it come about?
The actual exchange rate determination of the currencies takes place in the interbank market. Just like other prices, exchange rate changes arise from supply and demand. The more popular currencies are, the higher their value increases.
In turn, demand and supply are influenced by political and economic developments, and this makes the foreign exchange market extremely complicated because it is affected by a large number of factors.
First of all, the economic situation in individual countries has an impact on the supply and demand of the foreign currency they issue. The purchasing power of a currency is reflected in inflation and deflation. National central banks also try to influence economic developments.
An example of this is the zero interest rate policy of the European Central Bank (ECB). If a central bank changes the key interest rate, this has a direct impact on the forex market.
There are also so-called commodity currencies that are particularly sensitive to the price development of certain commodities. One example is the South African Rand (ZAR), which is related to the development of the gold price.
The exchange rate between currencies can also depend on whether the issuing country exports many products to other countries. This is because exports are always paid in the respective national currency, which is therefore in greater demand.
Many other political events can affect the development of foreign exchange. Much is unpredictable and opaque, especially for the layperson.
What Are Some Forex Terms?
Several terms are used specifically in forex trading. You should know these:
|Base currency|| The currency that is bought.|
|Exchange currency|| The currency that is being sold.|
|Lot|| Investment size of the foreign exchange transaction: 1 lot corresponds to the purchase of 100,000 units of the base currency, a mini lot corresponds to 10,000 units, and a micro lot corresponds to 1,000 units.|
|Pip|| A pip (price interest point or percentage in point) is the smallest possible price movement, usually in the range four places behind the decimal point. It is used to indicate price changes.|
|Liquidation || Close position by exchanging the exchanged currency.|
What are currency pairs?
Forex trading takes place with currency pairs (e.g. EUR / USD), and there is speculation on the price development of a selected currency pair. The first-mentioned currency sets the standard and is always in one unit. For example, if the EUR / USD currency pair is specified as 1.15, that means that € 1.00 is worth $ 1.15. The current rate (also called spot rate or spot rate) serves as the basis.
Most of the time, one of the pair’s two currencies is the US dollar, which is the most commonly traded currency market. Currency pairs that consist of two currencies other than the US dollar are called currency crosses.
The most commonly traded currency pairs are US Dollars and Euros (USD / EUR), Japanese Yen (USD / JPY), British Pounds (USD / GBP), Australian Dollars (USD / AUD), Canadian Dollars (USD / CAD) and Swiss Franc (USD / CHF).
Where are foreign currencies traded?
Forex trading mainly takes place over-the-counter in so-called interbank trading, trading between individual banks and financial institutions (excluding central banks). There have been foreign exchange exchanges in the past, but most of them have been abolished as it closed in Germany in 1998.
Who trades forex?
In the past, foreign exchange trading was primarily reserved for institutional investors. But it is now also interesting for many private investors. This is mainly because both the Internet and online brokers simplify access to the foreign exchange market.
When are foreign currencies traded?
Almost anytime. Due to the time difference, currency trading is possible 24 hours a day during the week. The stock exchanges are only close on weekends. There is a lot of trading on weekdays between 1:00 p.m. and 5:00 p.m. because the U.S. and European markets are open at the same time. The constant availability of the Forex market helped to make it one of the most profitable and liquid in the world.
What are the advantages of Forex?
Forex trading offers investors some advantages. So it is initially possible to make profits even in a market environment that is characterized by falling prices. Besides, the lever offers Forex investors high liquidity, low minimum investment volume and, if successful, high opportunities for returns. Direct trading between market participants also creates flexible trading hours.
What are the risks of forex trading?
In addition to the advantages, there are also several disadvantages to forex trading. Due to the high risks, Forex trading is also called the “supreme discipline of trading”.
First of all, the leverage effect can be enormous – it is not uncommon for the broker to borrow four hundred times the actual use. Due to the considerable obligation to make additional payments, only limited orders should be placed. In addition, you should only ever invest as much money as you can handle in the event of a loss.
The complexity of the foreign exchange market can also be fatal to investors. Exchange rate developments are often unpredictable and can be subject to extreme fluctuations within a short period.
As a result, Forex traders are forced to keep an eye on their investments, which makes Forex trading extremely time-consuming.
In addition, the high fees for online brokers adversely affect the investor. They either reduce the return or increase the loss. Seductive advertising encourages potential investors to invest in forex trading. However, due to the extremely great dangers, it is more suitable for institutional investors and very experienced and wealthy private investors.
Inexperienced investors should not engage in forex trading. If you are interested in getting to know how this trading tool works in practice, you can work with demo versions without risk at most online brokers that offer Forex trading.
An alternative to forex trading is a crowd investing. Here, too, the investor benefits from a low minimum investment volume and also receives a fixed interest rate. For example, you can invest from € 10 and investors can expect an interest rate of 5.0% to 7.5% per year.
Since investors join together here as a “crowd” via an internet platform to invest in real estate, crowd investing is also very flexible. You can access the platform anytime, anywhere. With crowd investing, there are no additional funding obligations, no custody account costs and no exchange rate fluctuations.
Let’s move to the practical aspect of Forex trading. We try to break down the question “how to trade Forex?” into bits and pieces to render this guide as ultimate assistance for the beginners.
How to Start Forex Trading from Home?
This isn’t rocket science. All you need is a smartphone or a computer and internet connection. You have to find a legit forex broker and register for any e-wallet for deposit and withdrawal. Open an account, fund it and start trading from anywhere around the world. However, you need to technically and fundamentally sound enough to trade and make money with success.
How to Trade Forex on Your Own?
It is hardly possible to come up with something new besides self-education. The most useful, in my opinion, is reading the comments and blogs of specialists, following the traces of specific news and situations and market reactions to them.
Reading books is useful, but should take place against the background, as auxiliary material, expanding the knowledge base of the futures trader. So a person will always understand what is important and what is not, how the market reacts, and what it leads to. At the same time, from such reconnaissance in battle, it will immediately become clear whose advice is right and who is just a master of reasoning about the past.
Even better, if your guru is a practising trader himself who does not hesitate to talk about specific levels of opening and closing deals. But this is already a rarity.
As a rule, everyone prefers to give advice or trade without disclosing specific strategies. But this is already the last century; openness is more and more welcome. Including this, various signalling services help, where it is possible to copy another person’s real trading activity.
And yet this does not relieve you of the need to begin studying the entire routine process of trading and all the nuances, before betting real money on.
Should I read books? Books provide more fundamental knowledge, but often there will remain the problem of applying them in specific situations. In addition, it is now easy to find a particular definition using search engines. So my first advice is to find a worthy “teacher” (these can be blogs, analytics from forex broker companies or even investment banks).
Next, we try to understand what the professional advises, what factors (technical or fundamental) he pays attention to, and what perspective he is looking for. If his style suits you, try trading on a demo account according to his recommendations. At this stage, you do not risk money.
This advice is most often heard when investing in stocks, but with respect to high-margin forex trading, its relevance is higher than ever: determine for yourself the amount that you can lose without threatening the financial well-being of your family. Because in fact, here you can lose everything. And on the other hand, high levels of leverage allow you to create very impressive orders in comparison with the capital that you have.
Now, for Forex brokers, leverage can reach 1: 1000, 1: 500 is often common, and 1: 100 is considered a classic. Forex is less volatile than the stock market, so here the leverage is higher than what can be obtained from futures (1:15) or liquid stocks (1: 2).
Do not be tempted by the fact that you can set any large amount you want on a demo account. When trading, the ability to draw down an account is important. This is when you can “sit out” losses on a transaction or a series of unsuccessful transactions.
There are frequent situations when a trader receives a margin call, and then the market turns in his direction. Having a large depot on a demo and a small one in real life, you will remain in the game in the first case and get a margin call in the second, which is the most annoying, agree.
If we talk about real numbers, then for standard forex (I’m not talking about micro forex, where lots are ten times smaller), this should be at least a thousand dollars (at least not less than one). Still, at the same time, trading should be either very short-term, or minimal volumes, since Forex is a high-margin market where there may be large drawdowns.
How to Trade Forex for Free?
New traders who come to the foreign exchange market, even in the process of training, begin to think about how much money they can invest in trade and where to get it. And only a few know that there is an opportunity to trade Forex for free, i.e. not investing a penny of personal funds in the trade.
Let’s say more – such trading for the beginners is the most promising because in the absence of risk for your own pocket you can test your skills and decide for yourself whether it is worth doing this business at all. There are several ways to trade Forex without any material investments.
FREE FOREX TRADING ON A DEMO ACCOUNT
This is the easiest way to trade on Forex without attachments. The demo account is a training account. A novice trader has the opportunity to open and close transactions, master the terminal’s functionality and working skills with it, as well as the nuances of the work of a particular forex broker that provided a demo account. The money on the demo account is virtual, so working on it does not pose any threat to the budgets of the novice trader. More experienced traders use demo accounts to test forex strategies and trading tactics.
You can open a demo account for any amount. Novice traders are advised to open a virtual deposit commensurate with the amount that he expects to use in real trading. This practice will help a novice trader to identify all the advantages and disadvantages of their trading system without material losses.
Technically, trading on a demo account and a real deposit is no different. At least, almost all brokers declare this. Nevertheless, it is worthwhile to understand that when using a demo account, a trader will almost not encounter slippage and requotes.
Separately, it is worth mentioning the emotional component of such a free currency market. Trading on a demo account does not carry such a psychological burden as trading on real money. Over time, the loss of a virtual deposit ceases to be something out of the ordinary. A trader simply opens a new demo account, thereby turning trading into a gamble.
It is recommended to switch to trading on a real deposit only after reaching a stable yield on a demo account.
FOREX CONTESTS – FREE TRADER TRAINING
Using a demo account is not the only way to trade Forex for free. All forex brokers periodically hold various contests and tournaments that can be held both on demo accounts and using real deposits provided by forex brokers. As a rule, prizes in such contests are money credited to the winners trading account.
Forex contests and tournaments are a great opportunity to test your skills, Forex trading strategy and, of course, get a cash prize for trading.
Even though there is some element of excitement in Forex contests, this will only help a novice trader who has seriously decided to engage in trading, improve his methods of dealing with emotions and demonstrates the importance of following a trading plan.
BONUSES AND PROMOTIONS OF FOREX BROKERS
Very often, forex brokers, especially only recently started their activities, attract potential customers with all kinds of promotions and bonuses.
For example, in order for a trader to evaluate the advantages of their trading platform, trading conditions and the quality of services provided, a certain amount is available on his account available for trading. Also, a forex broker can offer payment for messages posted on the corresponding forum. This payment, as a bonus, is also credited to the trader’s trading account.
It is worth noting that such gift amounts are available only for trading. However, the profit earned with the help of bonuses is already entirely owned by the trader.
Bonus amounts are usually small, of the order of $ 50, and are not suitable for achieving substantial profits. However, the newcomer gets a good opportunity to trade on “strangers” real money and at the same time, earn a little more.
Thus, a beginner who wants to engage in Forex trading does not have to sit and save money for a real deposit. To do this, there is a unique opportunity to use one of the above methods and start trading on Forex for free.
After learning a lot about the basics and concepts of Forex trading, let’s dive further into currency trading for beginners by exploring the practical steps of Forex trading.
Forex Trading Instructions for Beginners
- Find a reliable broker.
- Register and verify.
- Open a trading account and make a deposit (preferably at least $ 100-300).
- Install a terminal.
- Choose one asset and analyze it.
- Choose the right strategy and follow it.
- Open a deal, wait for changes in the market and close with its profit.
- Withdraw profits to the specified details.
Example of a Trade
We have installed a trading platform called MetaTrader 4. In the list of assets, we selected the AUDUSD currency pair, indicated a small lot size. The price has reached a strong resistance level and should turn around. To open a deal, we pressed the SELL button – sell:
If the price starts to fall, then we will have a profit. What happened next?
We decided to immediately close the transaction in order to fix the profit and get it in our account:
You can see the results below the chart in the Account tab :
Starting to trade Forex is easy and very interesting because it is a huge financial market where you should always be in the know.
This activity is for advanced people who have great opportunities. This is not only the reality of earnings but also the ability to work from almost any place on earth where there is an Internet. But dreams will not become a reality unless you take it seriously and persistently.
Forex trading is complex, and you cannot master it overnight. However, it’s simple to make a start. All you need is to keep learning slowly. No matter what amount of investment you have, it’s important for you to learn the fundamentals and practice one strategy. Mature the strategy and then start growing your small Forex account into a big one.