Forex Trading: A Guide for Beginners
Many are interested in forex trading because of its potentially lucrative returns. However, it has a steep learning curve that you have to overcome to be successful. Because of this, many stop mid-way or take the easy way out.
To trade forex as a beginner, you need to:
- Learn the basics
- Understand forex software
- Practice using demo accounts
- Sign up with a reliable service provider
- Learn different trading strategies
- Have a plan for conducting independent analysis and keeping up with news
- Place real trades
Trading forex can be hard as a beginner due to unrealistic expectations set for them. While the above steps may appear overwhelming, beginners take each step at a time to make the learning process easy. Read on for a detailed explanation for each step outlined above.
Basics of Forex Trading for Beginners
"Can I learn how to trade forex by myself?" If you are looking to learn forex from scratch, our guide can help. At the end of our guide, you will understand what forex is and trade forex as a beginner.
What is Forex Trading?
Before discussing how to trade forex, it is important to understand what forex trading is as a beginner. Forex trading refers to the process by which you speculate currency price movement to realize a profit.
Understanding the terms used in forex trading is important to understand. Here are some terms you will come across:
- Broker- A company or person who helps you buy and sell currencies through their platform for a commission.
- Pip- The base unit used to measure the price of any currency pair. So, for example, if a bid for AUD/USD pair goes up from 1.99988 to 1.99999, that is a difference of one pip.
- Bid- The price which traders in the market are willing to pay for every share. A bid is set against the asking price (the price for which traders in the market are willing to sell their shares).
- Margin -Refers to the amount of money that remains in the trading account once you open a trade.
- Exchange- Where forex trading takes place. For example, the stock exchange.
- Leverage- The capital which a forex broker offers their client to increase their customers' volume of trades.
- Close- The time at which the exchange closes, and thus, trading stops.
- Bull Market- A situation where the foreign exchange market is experiencing a constant rise in stock prices.
- Bear Market -When the foreign exchange market is experiencing a continuous downward trend in stock prices.
Understanding Forex Software
Forex software is an analytical computer-based program that helps traders with trading analysis. The software offers interactive price charts for various currency pairs alongside indicators and overlays.
Traders use forex software packages to foretell the direction that a currency pair is likely to take, making an informed decision on the same. You can pair forex software with forecasting or online trading software to have a competitive edge for better results.
Forex software has a graphical interface that displays the movement of currency pairs. Usually, the graphical charts take different forms. For example, they can be line charts, bar charts of candlesticks.
As a beginner, you can choose to have the information presented in an easy-to-understand format. For example, you can have a basic representation of historical prices. Later, when you get accustomed to trading, you can use more complex technical analysis to determine which currencies to trade.
Practise Using Demo Accounts
The best way for a beginner to practice trading and explore it is by using demo accounts. Demo accounts are a replica of real accounts and function the same way. The only difference is, a demo account uses virtual currency.
By practicing with a demo account, you get trading experience. You will be trading in real-time and will first-hand learn how to analyze technical indicators without making any monetary investment. Thus, there is no chance of suffering losses.
Opening a demo account is quite easy, and they are suitable both for use on a laptop and on your mobile device. Also, by practicing through a demo account, you increase your confidence in real trading.
Sign Up With A Reliable Service Provider
The market is flooded with companies that claim to offer forex trading services. You may have heard of horror stories of people who invested in some service providers and lost their hard-earned money. However, not every service provider is a scam.
To ensure you don't lose your money, here are some aspects to consider before signing up with a reliable forex trading service provider:
- Security- Any good broker should have impressively high-security levels. Luckily, each country has regulatory agencies, which make it easy to check the credibility of a service provider. Always check if the broker's name appears in the list of the regulatory body in your country.
- Execution- Your broker should always find you the best prices in the market for your orders. The speed at which you can get your orders filled is important, given the market's volatility.
- Deposits and Withdrawals- The best broker is one who allows you to deposit and withdraw funds when you need to freely. Any broker who sets complex rules regarding withdrawing your earnings should be a red flag.
- Customer Service- as a beginner, you will still need someone to guide you and answer your questions. Therefore, it is important to choose a broker who is easy to communicate with in case of any problems.
- Transaction Costs- irrespective of the currency you trade in, there will always be transaction costs involved. Either you will be paying a commission or for a spread. Therefore, it is important to settle for a broker who offers the cheapest rate, especially as a beginner.
- Trading Platform- remember you will be trading through the service provider's platform. Thus you need to choose a broker whose trading platform is stable and user-friendly. Always consider what the trading platform is offering regarding information representation, news feed, and level of technicality.
Learn Different Trading Strategies
A trading strategy means a system that a trader uses to determine whether he or she should buy or sell currency. There are different trading strategies such as;
- Trend Trading Strategy- This is a commonly used strategy where the trader checks the currency pair's trend before deciding if to buy or sell.
- Price Action Strategy- A trader studies historical prices of the currency pair to come up with a strategy.
- Range Trading Strategy- The trader identifies resistance points that are optimal to place trades.
- Position Trading- It is a long-term strategy that depends on fundamental factors. Trivial changes are not considered as this plan focuses on the broader picture.
Have A Plan For Conducting Independent Analysis And Keeping Up With News
As a trader, you need to be methodological. You need to analyze the market before making any trade. It is essential to keep the analysis simple to note any good trade opportunities and use them. The three common types of analysis include:
- Fundamental Analysis- This focuses on the interest rates of the currencies.
- Sentiment Analysis- It is a popular form of analysis that focuses on the sentiment of most traders in the market.
- Technical Analysis- A type of analysis that considers the price history of the currency and the patterns to determine when to enter and exit a trade.
Once you conduct your analysis, you should keep up with any trending news that will likely affect the currency pair you intend to trade. Significant news could dramatically shift the market.
Forex Trading Tips for a Beginner
Here are some helpful tips that will help increase your chances of succeeding with forex trading:
- Understand the Market
To make a wise trading decision, you need to understand the market fully. Always consider the pair of currencies, and check for any macro-economic or environmental factors affecting the currencies.
- Make a Trading Plan and Stick To It
The forex market is volatile, and emotional trading can be disastrous. Having a trading plan helps avoid emotional trading as you predetermine an entry and exit strategy. Also, a trading plan helps ensure your trades remain consistent and your emotions are kept at bay.
- Don't Shy From Making Losses
It is hard to master the trade and become an expert within a day or a week. Don't be afraid of making losses or letting your profits run. Follow a suitable trading strategy and have risk-mitigation plans in place to avoid emotional trading.
- Test, Evaluate, and Don't Stop Trying
Trading involves careful evaluation after every trade you execute. Evaluating your previous trades help analyze what worked in your favor and what did not. As a beginner, you need to understand trading psychology, and evaluating will help. You can use forex demo accounts to test any trading strategies you may have come up with.
- Trade With the Best Platform
To execute your trades better, you need to choose a reliable trading platform. Choose a platform that offers consistent spreads and excellent customer service.
Our guide above entails everything you need to know to help you trade forex as a beginner. Remember to understand the basic terms before beginning to trade. Then, come up with a trading plan to prevent emotional trading. While you cannot master the art of forex trading overnight, our guide and tips above will make the learning process easy and short for you. Good luck trading!