The trading of forex is similar to the trading of equity. There are a few basics of forex trading that you should know before getting started. Being successful in forex trading requires you to know a few basic concepts and terms related to the market. Start your forex trading journey with these steps.
Basics of Forex Trading
1. Learn about forex: Trading forex requires specialized knowledge, but it is not complicated. Currency price movements are driven by different factors than equity market price movements, for example, and leverage ratios for forex trades are higher than those for equity trades. Beginners can learn how to trade forex online through several online courses.
2. Open a forex trading account: To get started with forex trading, you need a brokerage account. It is not common for forex brokers to charge commissions. They make their money instead by spreading the purchase and sale prices apart (also called pips).
Micro forex trading accounts with low capital requirements are a good choice for beginners. Trading limits on such accounts are variable, so brokers can limit their trades to amounts as small as 1,000 units. For context, 100,000 currency units is a standard account lot. The micro forex account will help you develop your trading style and gain more confidence in forex trading.
3. Creating a trading plan: Trading strategies can help you set broad guidelines and provide a roadmap for trading, even when market movement cannot be predicted or timed. Trading strategies should be based on your financial and personal situation. This translates into a measure of how much money you are willing to invest in trading, and how much risk you are willing to take without losing money. You need to keep in mind that forex trading is mostly a leveraged environment. Risk-takers can also reap greater rewards.
4. Be aware of your numbers: Be sure to check your position at the end of each day once you begin trading. A daily accounting of trades is already provided by most trading software. Ensure that you have sufficient cash in your account to make future trades, and that there are no pending positions.
5. Keep your emotions in check: As someone who is just learning the basics of forex trading, you can often experience many different types of emotions. Was holding your position a bit longer worth more profits? The report that mentioned low GDP numbers led to your portfolio’s overall value dropping? How did you miss it? You can become confused if you obsess over such unanswered questions. Therefore, it is important to maintain emotional equilibrium between profits and losses regardless of your trading positions. Don’t hesitate to close out positions when necessary.
6. Learn the lingo:
The A-Z of Forex Trading
Learning the language of forex is one of the best ways to master the basics of forex trading. To get you started, here are some terms:
Forex account: Currency trades are conducted through a forex account. A forex account comes in three types, depending on the lot size:
- Micro forex accounts: Forex accounts that allow you to trade up to $1,000 worth of currencies at a time.
- Mini forex accounts: Accounts with a lot size of $10,000 each.
- Standard forex accounts: Exchanges up to $100,000 in one lot of currencies.
It is important to remember that the trading limit for each lot includes margin money used for leverage. In other words, the broker provides you with capital based on a predetermined ratio. For example, they may invest $100 for every $1 you put up for trading, so you will only have to invest $10 from your own funds to trade $1,000 worth of currencies.
- Ask: This is the lowest price at which you are willing to purchase a currency. When you place an ask price of $1.3891 for GBP, then that is the lowest price you are willing to pay for a pound. In general, ask prices are higher than bid prices.
- Bid: The price at which you are willing to sell a currency is called a bid. As a result of buyer inquiries, a market maker continuously puts out bids. In situations of high demand, bid prices can be higher than ask prices, even though they are typically lower.
- Bear market: Currency prices decline during a bear market. It occurs when economic fundamentals are depressed or catastrophic events, such as natural disasters or financial crises, occur, resulting in a market downtrend.
- Bull market: A bull market occurs when currency prices rise. An uptrend in the market is signaled by bullish economic news.
- Contract for difference: CFDs are derivatives that allow traders to speculate on currency price movements without actually owning the assets. A trader betting on the growth of an asset will buy CFDs relating to that asset, while one betting on its decline will sell CFDs relating to that asset. CFD trades can lead to heavy losses due to the use of leverage in forex trading.
- Leverage: The use of borrowed capital to multiply returns is referred to as leverage. In the forex market, traders often use leverage to enhance their positions due to the high leverage available.
- Example: A trader might wager $1,000 against the EUR and borrow $9,000 from their broker to bet against the JPY. Trading in the right direction will allow the trader to make significant profits since they have used very little of their own capital. As a result of leverage, downside risks can be enhanced and significant losses can result. Using the example above, the trader’s losses would multiply if the trade went the other way.
- Lot size: Stocks and currencies are traded in lots of a certain size. Standard, mini, micro, and nano are the four most common lot sizes. There are 100,000 units in a standard lot size. Mini lots are 10,000 units, while micro lots are 1,000 units. Brokers may also offer traders nano lots of currencies, which are worth 100 units. There is a significant impact on the overall profits or losses of a trade based on the lot size that is selected. In general, the larger the lot size, the higher the profits (or losses).
- Margin: A margin is the amount of money placed in an account for the purpose of trading currencies. Traders are required to deposit margin money to ensure that they will remain solvent and able to meet their financial obligations no matter how the trade ends. Over time, margins are determined by trader and customer balances. When trading forex, margin and leverage (described above) go hand in hand.
- Pip: “Pips” stands for “percentage in points.” In the currency market, a pip is the minimum move in the price of a currency. The value of one pip is 0.0001. In financial terms, one pip equals one cent, and ten pips equal one dollar. Brokers offer different standard lot sizes, which can affect pip value. The value of each pip in a $100,000 lot will be $10. Due to the significant leverage used by currency markets, small price changes can have an outsized impact on trades.
- Spread: A spread is the difference between a currency’s bid (sell) and ask (buy) prices. The spreads are what make forex traders money; they don’t charge commissions. Many factors influence the spread size. Size of your trade, demand for the currency, and volatility of the currency are some of these factors.
- Sniping and hunting: Purchasing and selling currencies at predetermined points in order to maximize profits is known as sniping and hunting. Networking with fellow traders and observing patterns of such activity are the only ways to catch brokers engaged in this practice.
Learning the basics of forex trading shouldn’t be an intimidating process. There are many resources available on Telegram.forex to guide you through your first trades, so that you can start off positively in the Forex market. Sign up for a free account today.