How to Start Forex Trading: An All-You-Need-To-Know Guide
Humanity has evolved quite a bit since the days when bartering was the primary form of commerce. Back then, the mere thought of almost every country in the world having its own set of objects used for payments would have sounded preposterous, let alone the idea of those objects being exchanged for profit over an invisible network of devices. Yet, here we are.
Trading currencies on the world’s largest and most active liquid market poses an enticing business opportunity for many new traders. But where to begin, and how to develop a forex trading strategy when even the abbreviation for the market sounds confusing?
Fear not; we’re written a guide on how to start forex trading that will provide you with all the clarifications and instructions you may need.
Basic Concepts of Forex Trading
Before you start trading forex and looking for forex strategies on the web, we’d like first to get you acquainted with a few terms and concepts essential for this topic.
What Is Forex?
If you’ve already done some research on your own, you may already know this, but it’s important enough to at least mention it for the sake of those taking their first steps in the forex markets.
Forex and FX are the two most commonly used abbreviations for foreign exchange, which is, simply put, the exchange of one currency for another. When you trade currencies on a forex trading platform, these transactions happen simultaneously.
What Are Currency Pairs?
You’ll often hear professional traders say they traded a particular currency pair. A currency pair represents the estimated value of a currency unit against a unit of another currency. In other words, it’s the amount you would pay in one currency for the unit of another currency.
The first currency you see in a pair is the base currency, while the second one is called the quote currency. The profit you wish to make through forex trading lies in the difference between your two chosen currencies.
The eight most traded currency pairs are EUR/USD, USD/JPY, GBP/USD, USD/CHF, USD/CAD, AUD/USD, NZD/USD, and GBP/JPY.
As you can see, all but one of them contain the US dollar. This is because it’s the world’s former spare currency and the most common one you’ll see across most financial markets. Currency pairs that don’t include the American dollar are referred to as crosses.
To simplify, let’s say that the current foreign exchange rate for the currency pair EUR/USD is 1.2000 (in most cases, the exchange rate is quoted to four decimal places). This would mean that you’d need to pay $1.20 to buy €1.
How Does the Foreign Exchange Market Work?
The foreign currency market is unlike the markets for trading shares or commodities. It’s an over-the-counter (OTC) market where banks, financial institutions, and natural entities (as opposed to legal entities) can conduct trades. The fact that it’s over-the-counter means that trades take place directly between two parties and not on an exchange of any kind.
To better understand this, you should know that, although markets and exchanges are often used interchangeably in everyday speech, a market represents an aggregation of buyers and sellers, while an exchange is a formal organization that enables trading.
The forex market is decentralized, which just means it doesn’t have a specific physical location. Instead, it’s run by a global network of banks. The four major trading centers are London, New York, Sydney, and Tokyo. Due to the different time zones, trading can be done 24 a day in different parts of the world from 5 p.m. EST on Sunday until 4 p.m. EST on Friday.
What Is a Position?
A position is the amount of security, commodity, or currency you own. In forex trading, you open a position by buying a currency pair when you expect its price to rise or sell it if you expect the exchange rate to fall. Closing a position refers to nothing more than canceling an existing position by doing the exact opposite of what you did to open it.
Opening and closing trades to match price movements is key to successful trading, and if you don’t have a solid trading plan, you risk losing money rapidly by sitting on a position for too long. Position trading is an art, and successful traders do serious trading analysis before doing anything with their forex account.
Long and Short Positions
Entering a short position means selling your asset, hoping the currency will depreciate (go down) so that you can repurchase it at a lower price later. A long position entails purchasing an asset and expecting it to appreciate (go up).
Who Can Participate in a Forex Trade?
The term “broker” is usually associated with people who carry out trades, but they aren’t the only ones who can open retail investor accounts and start to trade online.
Brokers are professionals that sell and buy assets for their clients’ portfolios in return for a commission. Dealers trade assets in the name of a firm and for the firm’s account. One of the main differences between the two is that brokers act as intermediaries and, as such, execute orders only when instructed to do so by their clients, while dealers are free to make their own decisions.
The term “trader” is the broadest one in use. In practice, it’s most frequently used for individuals who trade for their own portfolio.
How Do You Get Started With Forex Trading?
Finally, let’s get down to the exact steps you need to take to begin trading.
1. Learn as Much as You Can
At first glance, becoming a successful forex trader may seem fairly straightforward. Still, considering the numerous factors that affect the forex marketplace, such as political stability, imports and exports, economic growth, and monetary policies, to name a few, trading foreign currencies is not to be taken lightly.
The best way to become a successful trader is to acquire as much knowledge as possible on currency trading and everything associated with it and develop a trading style based on a solid forex trading plan. And, of course, practice trading on popular trading platforms and other financial markets to get a feel for the industry.
2. Choose Who Will Handle Your Trading
As we’ve already mentioned, you can jump straight into a foreign exchange transaction yourself or hire a forex broker to do it for you. Trading through a broker is more expensive, but it’s easier and offers the security of knowing that you’re cooperating with an expert who can offer you advice. On the other hand, aside from the obvious affordability of it, trading by yourself makes it all the more rewarding when you earn a profit.
If you’d like to take on the responsibility of becoming an fx trader but feel insecure about your skills, you might want to research popular robo-advisory options and see if one of them would suit you. You can think of them as low-cost digital assistants.
3. Get a Stable Internet Connection
It may seem trivial, but having a fast internet connection that almost never breaks can make all the difference between success and failure. Being in the middle of a trade and suddenly losing internet access can lead to huge losses if the fx market moves against you.
4. Find a Trading Platform
Nowadays, there are countless trading platforms to choose from. We recommend assessing every foreign currency trading platform you’re interested in based on its reliability, ease of use, costs and charges, analysis tools, charting features, automation and testing capabilities, and customer support team (you never know when you might encounter a problem that you can’t resolve on your own).
Keep in mind that not everyone agrees on what the best forex trading brokerages are since every person has different preferences, needs, and trading styles. For instance, as a beginner, you should prioritize user-friendly trading platforms with good technical analysis functionalities, testing tools, and maybe even forex trading tutorials.
In the beginning, you won’t need an abundance of features since they are more likely to confuse instead of aid you. It’s far more important to find a reliable trading platform that will help you understand forex terminology better and may even feature a forex trading example or two to illustrate how this type of investment business works in practice.
5. Practice by Demo Trading and Backtesting
Before you start trading real money, you can open a demo account, which lets you place trades on the live market in real-time using pretend funds. You can also use backtesting tools that allow you to create strategies and then try them out on historical market data.
Some practice here will help you majorly when you open a live trading account or try your hand at swing trading or day trading.
6. Fund a Trading Account
Some trading platforms don’t have a minimum deposit, so, in most cases, you’ll be free to decide on the amount of money you wish to invest. While you’re still learning forex trading, you should stick to sums that don’t exceed $100.
7. Start Trading
Once you’ve completed all the steps mentioned above, you can commence exchanging currencies. The list we’ve compiled is indeed a bit long but try to resist the temptation of rushing into anything since the risks associated with forex trades are plentiful, which is something we’ll cover in more detail in the next paragraph.
Experienced traders tend to be cautious, and many forex trading strategy types emphasize the importance of balancing quick decisions with some risk management tools and tactics.
Making money off the difference between the value of currencies carries more risk than you might think. We do not wish to scare you away from foreign exchange trading, but we do feel the responsibility to inform you about the potential challenges you’ll face.
There are three main risks you should be aware of, and we’ll be briefly going over them in the next few paragraphs.
Exchange Rate Risk
The supply and demand of a specific currency directly affects its value, and as long as you have an outstanding position, it can be affected by the market changes. For example, you may want to spend $100 to buy some euros in a foreign currency trade, but those euros may depreciate in value instead of increasing over time. Thus, if the currency pair’s price changes and the US dollar strengthens against the euro, you’ll actually be losing money.
If you decide to hire a broker, you’ll need to know about margin trading. It’s a trading method where you borrow money from your broker for trades you can’t afford, but that could potentially involve a higher reward (as opposed to the one you’d receive without borrowing the extra funds).
A forex trader whose estimates are correct will make a profit and repay their debt plus the added interest and have plenty left over. But, as you can probably guess, there’s a catch. In situations in which the trader’s assessments of the market are incorrect, they not only end up with personal financial losses, but they now owe money as well.
Margin trading is called that because every broker requires a margin percentage to give you the loan. Simply put, you need to deposit a part of the sum you wish to trade. Therefore, if a broker offers a 1% margin, to trade $100,000, you’d have to deposit $1,000.
Experienced forex traders watch overseas markets and keep a close eye on the latest news regarding any events that could impact the currencies they are interested in.
A currency issued by a country that has become unstable due to political turmoil tends to devalue. In the best-case scenario, you predict this outcome and move your money out of that country’s currency to something more stable.
Nations may also decide to intentionally lower the value of their currency. Although it may sound odd, it makes the nation’s exports less expensive and thus more desirable. Nevertheless, if you own the said nation's currency, it won’t benefit you.
Forex Trading vs. Stock Trading
The most popular markets to trade in are, without a doubt, the foreign exchange and the stock market, which is why many people freshly stepping into the world of financial trading have a hard time deciding between the two. Of course, once you master one, nothing is stopping you from trading on both. To help you make your mind up, we’ll quickly go over their most prominent differences.
Unlike forex, which allows 24-hour trading, stock trading depends on the opening hours of the exchange the shares you’re interested in are listed on. However, more and more companies are starting to offer trading platforms that allow after-hours trading. These extra hours are usually between 4 p.m. and 8 p.m. EST.
To devise quality forex trading strategies, you need to be acquainted with the economic status of specific countries, whereas with stocks, your focus needs to be on a few factors that directly impact your chosen company.
The stock market is less liquid than forex, which means that it sees fewer trades on a daily basis. Then again, this makes forex more volatile (the market’s prices fluctuate more frequently).
When it all comes down to it, the choice is entirely yours. We hope that our guide on how to start forex trading has given you a good jumping-off point, and remember, whichever one you pick, one thing remains the same: you have to do your research well before you get started.
If you don’t have time for it, you can always look up the top-rated forex brokers or beginner-friendly online stock brokers and hire a professional, at least until you feel confident enough to dive into financial trading yourself.
Can you get rich by trading forex?
Yes, you can… hypothetically. However, you might get disappointed if you go in expecting instant and dramatic results. Although an experienced trader can make a nice profit without extremely deep pockets or an exceptional amount of skill, you shouldn’t expect more than that.
Is forex trading illegal?
The exchange of foreign currency is not illegal in the USA, but many countries around the world have very strict and specific regulations in regard to it. However, if you choose to hire a forex broker to deal with trading currency on your behalf, you must know that not all of them follow the law and that some brokers don’t have US trading licenses. So, make sure to only look for recommendations from reputable websites, and don’t forget to read several client reviews.
Do I need a license to trade forex?
You don’t need any specific license to trade foreign currency if you plan to use your own money, but you do need a stable internet connection and a good trading platform. You should acquire a license if you wish to become a broker, though, or if you’re interested in trading CFDs and other goods.
How can I join forex?
To join the foreign currency exchange market, you’ll need a computer, mobile phone, or tablet from which you can access a trading platform. Most people decide to trade from their computers, but with the rapid advancement of mobile technology, many have started looking for investment apps they can install and use alongside their desktop platform.
Can I teach myself to trade forex?
Yes, you can learn to trade by yourself, but you must understand that it’s a skill like any other. If you’re wondering how to start with forex trading, check out our guide. Aside from reading up on the subject, you should also do some demo trading. If you want to speed up the process, you can always look up a few courses. In the meantime, you can check out our All-You-Need-To-Know Guide for some useful tips.
Albert Einstein is said to have identified compound interest as mankind’s greatest invention. That story’s probably apocryphal, but it conveys a deep truth about the power of fiscal policy to change the world along with our daily lives. Civilization became possible only when Sumerians of the Bronze Age invented money. Today, economic issues influence every aspect of daily life. My job at Fortunly is an opportunity to analyze government policies and banking practices, sharing the results of my research in articles that can help you make better, smarter decisions for yourself and your family.
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