Have you thought about how to start Forex trading? Welcome to the club!
But first, it’s essential to understand a few basics.
Forex, short for foreign exchange, is a worldwide market where people trade currencies. It’s mainly about making predictions – if you think one currency will do better than another, and you’re right, you make a profit. It’s really that simple!
Even though the Forex market is the biggest financial market, making money isn’t always easy. You need to know how the market works and the key terms. So, where do you start, and what should you focus on?
You may ask yourself, what is traded in Forex? The simple answer is money or, a better answer, currencies!
Forex trading isn’t about physical goods but buying shares in a country or company. You’re betting that the value of that country’s currency will go up, and when it does, you sell it for a profit. It’s a thrilling way to grow your wealth, which can be an excellent motivator for beginners!
If you’re wondering what Forex trading is all about, the answer is currencies!
Major and minor currencies
So what’s all about this major and minor currency thing?
As new traders, it’s essential for you to get familiar with the ‘major currencies.’ These are the main currencies traded in the Forex market. By learning about them, you’ll establish a strong foundation for your trading journey, which will help you feel more confident moving forward.
These are called ‘major currencies’ because they are the most traded and represent some of the world’s largest economies. In other words, they’re the big players in the Forex market.
We have eight major currencies: USD, EUR, JPY, GBP, CHF, CAD, AUD, and NZD.
Currency symbols consist of three letters: the first two letters represent the country, while the third letter indicates the currency name, typically the first letter of the currency’s name.
The major currency pairs represent the most liquid instruments in the global financial markets.
Liquidity is defined as the degree of activity present within a financial market. In the foreign exchange market context, liquidity is influenced by the number of active traders buying and selling specific currency pairs and the associated trading volume.
A currency pair exhibits higher liquidity when it is traded more frequently. The major currency pairs are the most liquid in the world. As mentioned, liquidity refers to the financial market’s activity level. In the Forex market, liquidity is determined by the number of active traders buying and selling a specific currency pair and the trading volume. The more frequently a currency pair is traded, the higher its liquidity.
Currency pairs that include any two major currencies except the U.S. dollar are called cross-currency pairs or simply “crosses.” Major crosses are also known as “minors.”
Exotic currency refers to the currency from a country with a developing or emerging market. These currency pairs consist of one “major currency” paired with the currency of an emerging economy. Examples of such currencies come from countries like Brazil, Mexico, Indonesia, Poland, Chile, Turkey, and Hungary. Therefore, an exotic currency pair includes one “major currency” and one exotic currency.
So what are “Long” and “Short” Positions in Trading?
When engaging in trading, it is essential to ascertain whether one intends to buy or sell an asset.
If one decides to buy, which involves purchasing the base currency while selling the quote currency, the expectation is that the value of the base currency will appreciate. Subsequently, the trader would sell the asset at a higher price. This strategy is called “going long” or taking a “long position.” It is important to remember that “long” signifies a buying action. Upon establishing a long position, a trader may express, “I am long.”
Conversely, if the intention is to sell, which entails selling the base currency and purchasing the quote currency, the trader anticipates a depreciation in the value of the base currency. By doing so, the trader would then be able to repurchase it at a lower price. This approach is “going short” or taking a “short position.” Remembering that “short” corresponds to a selling action is crucial.
Which Forex broker should I choose for trading?
Now that we’ve learned some basics about the Forex market, it’s time to discuss the broker. Choosing an appropriate broker is an essential phase in Forex trading.
It is advisable to wait before trading with a real account and actual money. Instead, you should practice on a demo account, which allows you to explore different strategies, analyze the market, and become familiar with the available tools. A demo account closely simulates actual market conditions, giving you access to live charts and price movements, but the money used for trading is not real. Some successful traders have practiced on demo accounts for months, testing their strategies.
You can create a free demo account using MetaTrader and other platforms and brokers offering this service.
Some brokers provide bonuses for signing up, completing the verification process, making your first deposit, or executing your initial trade. However, you should remember that these bonuses come with specific terms and conditions regarding eligibility and the withdrawal of any profits generated. The purpose of these bonuses is to encourage users to engage with the broker.
Be cautious when selecting a broker! Do not rely solely on the bonuses offered. Always review the terms and conditions of these bonuses and consider other important factors about the broker.
To successfully engage in Forex trading, you must open a trading account with a reputable online foreign exchange (FX) trading services provider. These providers are typically known as retail “Forex brokers” or “CFD (Contract for Difference) providers.”
When choosing a broker, you must consider their regulatory status, trading fees, available trading platforms, and the range of currency pairs offered.
Once you’ve selected a broker and completed their account registration process, you must fund your trading account. This process involves depositing money into the account as your trading capital. The deposit amount can vary based on the broker’s minimum requirements and your trading strategy or goals. After funding your account, you can start trading Forex and exploring the vast opportunities available in the foreign exchange market.
Verifying a broker’s regulatory status is insufficient; you must also know the regulatory agency with which it is registered and whether that agency oversees the jurisdiction covering your country of residence.
Forex market regulation involves the rules and laws that companies in the Forex industry must adhere to. Regulation aims to protect you from hidden financial risks, abusive practices such as price and order manipulation, and fraud.
A regulated Forex broker must comply with standards set by a regulatory agency, which helps ensure that the broker conducts business ethically and fairly. For instance, in the U.S., a legitimate Forex broker must be registered as a Retail Foreign Exchange Dealer (RFED). If you are not satisfied with the level of service or believe that your broker is scamming you, you can report a regulated broker to its regulatory agency.
Every Forex broker licensed and authorized by its regulatory agency is assigned a unique ID number. Regulated brokers are required to display this information prominently on their websites so that customers can easily find their ID number, which is usually located at the bottom of each page.
While it cannot be asserted that every unregulated broker seeks to defraud clients, it is essential to note that the retail Forex industry has historically been susceptible to fraudulent activities. Therefore, it is prudent to consider the potential risks involved.
How can I analyze Forex for trading?
If you feel the urge to start trading, wait. The next step is to learn how to analyze the market.
There are three types of market analysis: Technical Analysis, Fundamental Analysis, and Sentiment Analysis.
Technical Analysis
Technical analysis fundamentally involves the study of price charts and patterns. It is based on the premise that historical price movements can provide insights into future trends. Traders employ various tools, including trend lines, moving averages, and other technical indicators, to identify potential entry and exit points in the market.
Fundamental Analysis
Fundamental analysis investigates the economic and political factors that influence currency values. It involves examining financial indicators, central bank policies, and geopolitical events. This approach is favored by those who take a big-picture perspective and believe in understanding the underlying forces that drive the market.
Sentiment Analysis
Sentiment analysis evaluates the overall mood of the market. Its goal is to understand the emotions of current traders and the positions held by different market participants. This contrarian approach aims to leverage extreme sentiment levels, enabling predictions of market reversals.
There has always been an ongoing debate about which type of analysis is superior. However, it is essential to understand them all in order to consider every factor and predict how prices will behave. You can think of this as a three-legged stool; if you neglect one leg, the stool becomes unstable and breaks.
To gain a deeper understanding of different types of analysis, you should start by learning about price charts. Studying the movement of currency pair prices requires observing their historical and current price behavior.
A chart, specifically a price chart, is an essential tool for every trader who uses technical analysis. It visually represents a currency pair’s price over a specified period.
Using a chart makes identifying and analyzing a currency pair’s movements, patterns, and trends easier. Price changes are often a series of random events, so as traders, our primary focus is managing risk and assessing probabilities. This is where charting proves to be beneficial.
After all these steps, you need to learn about all indicators to test and find the best strategy that works for you. Sometimes, you may see an approach that mixes different indicators.
Risk management in Forex trading
To wrap things up, let’s talk about risk management and how to handle your finances, including the necessity of accepting losses.
Recognizing when to let go of losing trades is essential for long-term success. Protective stop-loss can be competent; it helps secure your earnings or minimize further losses by employing stop-loss or limit orders. Additionally, it’s wise for traders to set a maximum loss limit for each day. Once this threshold is hit, they should close all active positions and refrain from making new trades until the following day.
Keeping a trading journal is a powerful way to learn from your losses and wins in Forex trading. Documenting your trading activities—like the date, instruments used, profits, losses, and emotional responses—can give you deeper insights into your performance. This practice can be precious for your growth as a trader.
The Forex market attracts many traders because it has low account requirements, operates 24 hours a day, and offers the potential for significant leverage. While trading can be profitable and rewarding if treated like a business, achieving success requires effort, time, and patience.
To improve your chances of success, you should take active steps to minimize losses. This means doing thorough research, avoiding excessive leverage, applying solid money management strategies, and keeping a professional trading mindset.
Periodically reviewing your journal can highlight patterns and provide essential feedback to enhance your learning experience. As Einstein wisely noted, “Insanity is doing the same thing repeatedly and expecting different results.” Without a trading journal and detailed record-keeping, you risk repeating the same mistakes, which can significantly reduce your chances of becoming a successful trader.