Forex trading is a great way to earn money. It offers convenient market hours, high liquidity, the ability to trade on margin, and much more. No wonder why people want to start trading forex, but what is forex trading?
Forex trading, or also known as foreign exchange, also known as FX or currency trading, is the largest decentralized financial market in the world. It works by simultaneously buying one currency while selling another.
Forex traders expect the currency they bought to increase in value against the currency they have sold. Then they can close the position for a profit.
This may sound not so easy to understand if you are a beginner, and that’s precisely why you should keep on reading. In this article, I will share with you how to start forex trading if you are a beginner.
How to Start Trading Forex?
Forex trading offers traders a lot of possibilities and allows them to achieve excellent results in this market. And nowadays, the number of people who want to become part of the trading world keeps on getting more significant.
The FX market gives traders the ability to trade 24 hours a day, through different channels all over the world. Transactions can take place in many various forms.
Every day currencies are exchanged for other currencies. Did you know that the average daily forex trading volume is about $5 trillion per day, while the securities market trades about $22 billion per day?
However, there was not a single experienced trader who was not a beginner when he or she first started trading forex. Every successful forex trader now was once in your shoes. Not knowing where to start from, nor knowing what he or she should do to become a forex trader.
So, if you are a beginner and you want to learn how to trade forex, it’s essential to begin with understanding the basic terminology that is used in the forex market. Keep on reading to learn more about some of the basic forex terminology that you will encounter on your trading journey.
The More You Learn About The FX Market and The Basics of Forex Trading, The Better
The very first thing new traders need to do to become successful forex traders is to understand basic forex terminology. Let’s take a look.
Understanding The Basics of FX Terminology
- Base Currency – the type of currency against which exchange rates are generally quoted. In other words, the currency which traders want to spend.
- Quote Currency – the second currency quoted in a currency pair in forex trading. In other words, the currency which traders want to purchase.
In forex trading, traders can sell one currency to purchase another.
- Exchange Rate – the value of one currency expressed in terms of another. In other words, the exchange rate gives you information about how much you have to spend in quote currency to purchase base currency.
Example: EUR/USD = 1.2600, then 1 Euro is worth US$ 1.2600.
- Long Position – when your goal is to buy the base currency and sell the quote currency.
- Short Position – when your goal is to buy the quote currency and sell the base currency.
- Bid Price – the price at which the market or your broker will buy a specific currency pair from you. At the bid price, traders can sell the base currency to their brokers for the best price at which traders are willing to sell their quote currency on the market.
- Ask Price – the price at which the market or your broker will sell a specific currency pair to you. At the ask price, traders can buy the base currency from their brokers for the best available rate at which traders can buy from the market.
- Bid/Ask Spread – the difference between the bid and ask the price.
Example: EUR/USD = 1.2600, then 1 Euro is worth US$ 1.2600.
And if EUR/USD quotes read 1.2600/02, then bid/ask spread is the difference between 1.2600 and 1.2602, or 2 pips.
- Pip – the price move in a given exchange rate.
Learning More About the Major Forex Pairs, Their Nicknames and How to Read Forex Currency Pair Quotes
If you are a beginner, learning the terminology used in forex trading won’t be enough.
Before you start trading any currency pair quote, you have to learn more about the major forex pairs, their nicknames, and you will need to understand how to properly read a currency pair quote to decide what currency you want to buy and sell.
So, let’s take a look at the major currencies.
(EUR/USD) – Euro/Dollar Pair, known as the “Euro”
(USD/JPY) – Dollar/Japanese Yen also called the “Gopher”
(GBP/USD) – British Pound Sterling/US Dollar, often referred to this pair as the “Cable”
(USD/CHF) – US Dollar/Swiss Franc also called the “Swissie”
(AUD/USD) – Australian Dollar/US Dollar, known as the “Aussie”
(NZD/USD) – New Zealand Dollar/US Dollar, often referred to as the “Kiwi”
Now that you have seen the major forex pairs, it’s time to understand how to read a pair quote properly. Let’s use the mentioned above example.
[Exchange Rate] EUR/USD = 1.2600, then 1 Euro is worth US$ 1.2600.
The EUR is the Base Currency, while the USD is the Quote Currency.
The Exchange Rate shows traders how much they need to pay in terms of the quote currency to buy one unit of the Base Currency.
As we can see from the example above, 1 Euro is worth 1.2600 U.S. Dollars.
If traders want to sell instead of buying the same currency pair or any other, the exchange rate shows traders how much of the Quote Currency they will receive for selling one unit of the base currency.
As we can see from the example above, traders will receive 1.2600 U.S. Dollars if they sell 1 Euro.
Since traders are simultaneously buying one currency and selling another, the exchange rate is quoted in a pair, just like in our example EUR/USD. When you buy a pair, and the Base Currency strengthens against the Quote Currency, then you will profit from the trade.
Also, beginners should understand and remember that the most important thing when buying or selling a currency pair is the Base Currency.
Learning How to Calculate Profits Properly
Before you start trading forex, you should understand and learn how to calculate profits too.
A pip measures the price move in a given exchange rate. One pip equals 0.0001 of a change in the value between the two currencies.
[Pip] If EUR/USD quotes read 1.2600/02, then bid/ask spread is the difference between 1.2600 and 1.2602, or 2 pips.
In the example above, the currency value has increased by 2 pips. However, if the spread is the difference between 1.2600 and 1.2620, then the currency value has increased by twenty pips.
To determine how much your account has increased or decreased in value, and whether you have profited or lost money, you need to multiply the number of pips by the exchange rate.
Learning More About the Economy of The Country
By learning more about the market and the economy of a country, you will be able to make predictions about the economy.
For instance, if you believe that the economy of a particular country will continue to weaken, which will lead to a decrease in the currency of that country, then you should consider selling the currency. By buying currency from a country where the economy is strong, your chances of preserving your money are much higher.
You should also consider the country’s trading position before investing your money. For example, a country that has goods that are in demand, if more likely to make money by exporting these goods, which will boost the country’s economy.
If the economy of a country is strong, then the value of its currency will be high and stable.
Once you learn more about the FX market and the basics of forex trading, you are ready to open an online Forex Brokerage Account.
Research Different Brokerages Before You Open an Online Forex Brokerage Account
It is essential to do in-depth research for different brokerages, what they offer, which brokerage is regulated by a significant oversight body, and which not and consider which brokerage is the most trusty one before you open an online account.
Here are some tips on how to find a trustworthy, transparent, and honest brokerage:
- Look for a brokerage who has been in the industry for longer than five years.
- Read reviews, but don’t let reviews make up your mind.
- Look for a brokerage who is regulated by a major oversight body such as NFA in the Unites Stader or FCA in the United Kingdom.
- Consider the transaction cost of each brokerage and consult with your bank how much will they charge you to wire money into your forex account.
Once you have decided which brokerage you want to open an online account in, you have to consider what type of account you wish to have. You will have two options.
- Personal account – you will execute your own trades
- Managed account – your broker will execute trades for you
Once you are ready with this step, you need to fill in the information your brokerage needs to complete and activate your account.
Here are the top three brokers in 2019 and why they are an excellent choice:
- Easy-to-use platform and apps
- Practice trading forex on a demo account, in an environment with reduced risk
- Identify FX opportunities on clear, fast charts as standard, and deepen your analysis with ProRealTime
- Open an account quickly and easily
- You can go long or short
- 24-hour trading
- High liquidity
- Trade on leverage
- Wide range of FX pairs
- Trade over 1500 global markets
- Easy to use, fully customizable
- Superior execution speeds
- Trader’s calculator, performance statistics, sentiment
- Charts trading, market order depth
- High Liquidity
- Available to SMSFs
- Trade on two world-class platforms
- An easy-to-use platform that is available for desktops, laptops, and mobile devices.
- There is a minimum deposit of $300
- Real-time updates and alerts for live traders
- Access to Demo trading accounts
- Lots of algorithmic tools
- Award-winning provider
- Access to a vast number of apps
- High levels of education and resources for clients
- Email alerts and weekend data options
- Access to six different asset classes
- Low fees for standard retail accounts
Analyze the Market and Start Trading
The mentioned above pieces of advice will help you become a trader, even if you had no clue where you had to start. Once your account is approved, you can begin trading.
However, to ensure your success, you need to analyze the market, and there are different strategies you could try.
- Technical analysis – By reviewing charts or historical data, you can predict how the currency will move based on past events.
- Fundamental analysis – By looking at a country’s economic fundamentals, you can use this information to make better trading decisions.
- Sentiment analysis – By trying to analyze and predict the mood of the market, you could determine whether the market is “bearish” or “bullish.”
There is one more thing beginners should learn before they start trading forex, and that is what kinds of orders they can place.
- Market order – You have told your broker to execute your buy or sell order immediately at a current market price.
- Limit order – You have specifically instructed your broker to execute a trade at a specific price or better.
- Stop order – You make the Stop order once the market price reaches a specified stop price. Once the stop price is reached, stop orders become market orders.
After reading this article, you should be ready to start trading forex and become a successful forex trader in the future. Remember, the forex market is volatile. Therefore, you will see a lot of ups and downs, or as some forex traders like to call them with the trading terms “bearish” and “bullish.” Try not to get emotional and stick to your trading plan. Only by analyzing and studying the market will you see profits.