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A Beginner’s Guide to Trading Forex
Posted on | April 29, 2016 | Comments Off on A Beginner’s Guide to Trading Forex
The global currency market is the largest financial market in the world, with an average of over $5 trillion traded every day. This works out to be $220 billion per hour, dwarfing the futures, equities and stock markets. It is also the most liquid market in the world, which provides many advantages for traders hoping to enter and exit the market.
There are many benefits to trading forex on the currency market and it can be an appealing option for those looking to make worthwhile investments and a bit of money on the side, or turn it into a full-time career. It can be a lengthy learning process, especially when coming into it from a non-financial background. This brief guide provides an overview for beginners wanting to start trading forex.
How Forex Trading Works
Forex trading is essentially buying one currency with another, which results in the two being exchanged. As the common trading advice goes; “buy low, sell high” is the motto for success. The most successful forex traders make their profits by exchanging one currency for another that then increases in value, then selling before it falls again.
There is more to it though. In forex trading most currencies come in pairs with an exchange rate that will fluctuate on a daily basis. Through this relationship one currency will appreciate (or strengthen) against the other, while the other will depreciate (or weaken). Successful traders buy into the one they believe will strengthen and sell when they believe the exchange price has peaked.
Currency Pairs
To start off you will need to decide which currency pair to begin trading. If you already use the US Dollar or Euros then it is best to start with this currency and trade with one of the other major currencies. There are eight major currencies: US Dollar, Euro, Australian Dollar, Canadian Dollar, Swiss Franc, British Pound, Japanese Yen and New Zealand Dollar. These make up six most tradeable currency pairs:
- EUR/USD
- USD/JPY
- GBP/USD
- USD/CAD
- USD/CHF
- AUD/USD
The US Dollar is the most popular currency to trade, which makes it a good option to start with. You are also far less likely to make large losses trading with major currencies, so it can help prevent against this.
Leverage
As with anything, the more money you put in the more you can make. One benefit of forex trading is that leverage can be used to significantly increase the returns on investment. The leverage available when trading forex is one of the highest investors can ever use, usually 50, 100 or 200:1.
This allows traders with smaller funds to make much larger trades and therefore profits than they would otherwise be able to afford. It may seem risky but it is rare that currency prices fluctuate by more than 1%, so you are unlikely to lose much on unsuccessful trades as long as it is exited before too long.
Where to Start Trading Currencies
When you’ve done plenty of research and read up on a lot of information about the currency market and how to go about forex trading, there are still a few decisions to be made. Forex trading can be done part-time as a financially rewarding hobby, as an extra investment opportunity or those truly serious may consider attempting it as a full-time job.
You will also need to choose which currency pairs to begin trading. It is advisable to begin with just one currency pair, as it will provide a quick learning curve, before expanding your portfolio. Start with one of the six major pairs as their prices should not change too much to put you in a disastrous position.
Short or Long Term Trades
Making short term trades can be a good way to get a feel for forex trading. Opening a position early on and closing it by the end of the day will quickly show how currencies can increase and decrease in value. However, longer trades are a better choice for minimising risk which is useful in your first few trades. The forex market is essentially open 24 hours a day, five days a week, as ones all across the world open and close at different times. Stick to one time zone when trading to avoid confusion.
Choose a Platform
In order to begin trading you will need a quality platform, such as one of the ETX Capital models available. Professional trading platforms link across computer desktop, mobile and tablet devices so you can trade using the same account and software from anywhere with an internet connection. These provide all the latest information in charts and graphs with simple to use interfaces that are great for beginners.
Pay Attention to Financial News
Real world events have a big impact on currency price, so it is important to stay up to date with global and financial news and events. National elections, wars and financial events can be used to make predictions on future price changes and your own trades.
Demo Accounts
Before you start making real life trades it is a good idea to take advantage of the demo accounts. Most platforms offer this service and it is a much safer way to see whether your forex trading strategy is likely to be successful or not. They provide as realistic a platform as any so make the most of them before putting actual money on the line.
Key Forex Phrases
Here are a few key phrases to be aware of that will help you be a success trading forex:
- Bid/ask: Bid is the buying price for a currency and ask is the selling price.
- Spread: This is the difference between the bid and ask prices. Every broker attaches a spread to currency they trade where they make a profit.
- Stop loss: Setting a stop loss ensures you will only lose a small amount of the investment if its value decreases.
- Margins: The credit brokers extend to traders so much larger amounts of particular currencies can be traded without large investments.
- Leverage: The use of credit and margins to make large gains and losses.
This brief beginner’s guide to forex trading should stand you in good stead when you feel ready to take the plunge and start your currency trading career.