How Do I Get Started in Forex?
How to Start Trading Forex

How to Get
Started with
Forex Trading?

The forex market (short for foreign exchange) is fast-paced and can be especially difficult to navigate if you’re a beginner. There’s a lot to learn and if you go in with unrealistic expectations, you’ll likely be disappointed with your results. Forex trading (or currency trading) is by no means a get-rich-quick scheme and requires a disciplined and well-thought-out approach if you’re to succeed. Although there’s no universal way of doing things, the following are some essentials you need to know to get started in forex.

How to Start
Trading Forex

1. Determine How You
Want to Trade

There are two ways to trade forex: spot forex trading or trading through CFDs.

Spot forex trading involves buying and selling the actual currencies you’re trading. For instance, you can buy a certain amount of Euros and then when the Euro price goes up, you can sell them at a profit.

Trading CFDs is different. A CFD (Contract for Difference) is a contract between a buyer and a seller stipulating that a buyer will pay the seller the difference between the current value of an asset and the asset’s value at a future date. In terms of forex, CFDs allow forex traders to profit from currency price movements without having to buy and sell the currencies.

2. Know the Currencies
You Can Trade

Forex currency pairs come in three groups – majors, minors, and exotics. Major currency pairs are made up of the US dollar (USD) paired against one of the other seven most frequently traded currencies: EUR, GBP, JPY, CHF, CAD, AUD, and NZD.

MAJORS
EUR / USD
GBP / USD
AUD / USD
NZD / USD
USD / JPY
USD / CHF
USD / CAD

Majors make up about 85% of the forex market and so they exhibit high liquidity which also makes them cheaper to trade compared minors and exotics. Minors are pairings of any two of the major currencies except the USD.

MINORS
EUR / CHF EUR / GBP
EUR / CAD EUR / AUD
EUR / NZD EUR / JPY
GBP / CHF GBP / JPY
GBP / AUD GBP / CAD
GBP / NZD CHF / JPY
CAD / JPY AUD / JPY
NZD / JPY AUD / CHF
AUD / CAD AUD / NZD

Finally, exotic currency pairs include one major currency and an exotic currency. Examples of exotic currencies include HKD, NOK, ZAR, and THB. Exotics have low liquidity and so they tend to cost more to trade compared to majors and minors. However, they are highly volatile which means that they offer the potential to earn more.

Note: With currency pairs, the first currency is known as the base currency and the second currency is the quote currency. For example, with EUR/USD, EUR is the base currency and USD is the quote currency.

3. Understand How the
Market is Analysed

Forex trading is about capitalising on price movements. You must analyse these movements to understand them and this is why analysis is vital to trading. There are several approaches to forex analysis but the two key ones are fundamental analysis and technical analysis.

Fundamental Analysis

This form of analysis involves monitoring real-world macroeconomic, political, business, and other major global issues and events that can potentially influence the value of the currencies you want to trade. Some of the indicators that have the most impact on the forex market include:

  • Employment data including unemployment rates

  • Gross Domestic Product (GDP)

  • Interest rates of international banks

  • Retail sales

  • Inflation rates

Technical Analysis

While fundamental analysis focuses on real-world issues and events, technical analysis focuses on analysing trading charts. These charts show price movements over time and they allow a forex trader to identify patterns and make trading decisions based on the assumption that the patterns will likely repeat in the future.

4. Know How Forex
Quotes Work

When you trade forex, you have to know how the bid-ask quote works. The price at which you sell a currency pair is called the ‘Bid’ and it’s always slightly lower than the market price. The price you pay to buy a pair is called the ‘Ask’ and it’s always slightly above the market price. The bid and ask prices quoted are based on the current exchange rate.

For example, if the current GBP/USD exchange rate is 1.3010, you can find a bid-ask quote at 1.3012/1.3014. This means you can buy GBP/USD at 1.3014 and sell at 1.3012.

5. Understand the Basic
Concept of Forex Trading

The basic concept of forex trading involves simultaneously buying and selling two currencies to take advantage of currency price movements and make profits. One of the key reasons why forex trading is very popular is the fact that you can potentially make profits on both downward and upward trends.

Uptrend

In a buy trade, which is also known as a long trade, you buy a currency pair hoping that its value will increase so that you can sell it at a higher price and make a profit on the difference. For instance, if you buy EUR/USD at 1.1250 and the trade closes at 1.1310, you make a profit of 0.006 or 60 pips.

Important term: A pip (point in percentage) is the smallest amount by which a currency quote can change. For USD-related currency pairs, it’s usually denoted as $0.0001, but for other currencies like JPY, it’s denoted as $0.001.

Downtrend

Conversely, in a sell trade, which is also known as a short trade, you sell a currency pair hoping that its value will decrease so that you can buy it back at a lower price and make some gains. For example, if you sell EUR/USD at 1.1245 and the trade closes at 1.1213, you make a profit 0.0032 or 32 pips.

6. Get Familiar with
the Cost of Trading

Unlike brokers in other financial markets who charge traders both a commission and spread, most forex brokers only charge the spread. This makes the forex market more accessible and attractive to forex traders.

The spread is the difference between a currency pair’s bid and ask prices. So if, for example, the bid price of the EUR/USD is 1.1351 and the ask price is 1.1356, the spread will be 0.0005 or 5 pips. Low-spread trading is often a priority for successful traders because it means lower trading costs and forex brokers are catering to this by offering ultra-tight spreads, with some going as low as 0.0 pips.

7. Choose a Broker

With so many brokers to choose from, the broker selection process can be overwhelming. However, considering the following top criteria when making your choice should simplify the process.

Regulation. A regulated broker gives you the guarantee that your funds are safe.


The quality of the broker’s service. A slow system that crashes regularly and a support team that takes ages to respond will destroy your chances of succeeding in the competitive forex market. Look for a broker that offers low spreads, a minimum deposit that works for you, great customer support, and fast execution speeds.

The trading platforms and tools on offer. The quality of the forex trading platform and tools a broker offers can make a difference to your trading experience. When assessing the forex trading platform on offer consider things like reliability, security, availability of in-built analysis tools, and independent account management. Metatrader 4 (MT4), Metatrader 5 (MT5) and Webtrader are three of the most popular forex trading platforms globally and are offered by the best forex brokers.


The availability of educational resources. Ongoing education is essential for your development as a new trader and you need a broker who will help you achieve your trading goals.

8. Create a Trading Plan
and Forex Trading Strategy

A trading plan will instill the discipline you need to succeed in the long run. A plan is a framework for monitoring and measuring your trading performance and with it, you’ll be able to assess whether you’re headed in the right direction. Without a trading plan, you’ll trade arbitrarily, relying on guesses that resemble gambling.

In your plan:

  • Set realistic goals and trading expectations. Starting with the wrong expectations can lead to aggressive trading in the hopes of making profits fast and this can only end badly.

  • Decide how you will finance your fx trading. Only invest money you can afford to lose.

  • Determine your risk tolerance. Are you an aggressive, moderate, or risk-averse trader? Your risk tolerance will influence the size of the positions you take and the losses you’re willing to incur.

  • Define your forex trading strategy. Your trading strategy will help you determine when to enter and exit trades.

  • Have money and risk management rules. Consider how you will effectively manage your money and risk. How much of your capital will you risk on a single trade? Which risk/reward ratio will you use? How much leverage will you use? It’s also important to learn how to use orders to minimise your losses.

Important term: Leverage is a trading tool that allows traders to take large positions with little capital. For example, you can open a $50,000 position with $1,000 in your account using 50:1 leverage. Leverage can magnify your profits, however, it’s essential to use it cautiously because it can also magnify your losses if used incorrectly.

9. Open a Demo Account

Before you can start trading with real capital, you need to learn the fundamentals of trading and test your skills in a risk-free environment.A demo account allows you to trade forex in real market conditions without spending any of your money.

10. Start Trading

Once you have a demo account, you can start placing trades by following the following steps.

Step 1: Decide Whether You’re Going to Buy or Sell a Currency Pair

As a general rule, you buy a currency pair when the market is giving indications that the base currency will strengthen against the quote currency or the quote currency will weaken against the base currency.

On the other hand, you sell a currency pair when the market is giving indications that the base currency will weaken against the quote currency or the quote currency will strengthen against the base currency.

Example: Selling a currency pair

Let’s say the EUR/USD bid-ask quote is at 1.1420/1.1426 and you expect the EUR to weaken against the USD – the best course of action is to sell the currency pair.

If you open one micro-lot (1,000 units of EUR/USD), you’ll just have sold €1,000 which is worth US$1,142. If your market prediction is correct, and the exchange rate falls to 1.1370 you will gain 0.005 or 50 pips. Each pip in a micro-lot is worth $0.1 so you will realise a profit of $5 (50 pips x $0.1).

Step 2: Place Your Orders

As part of your risk and money management, you should define the price levels at which you will close losing trades to minimise your losses and where you will lock in your profits to protect them should the market take a downturn unexpectedly.

To do this you use orders. Stop-loss orders will minimise your losses and take-profit orders will protect your profits.

Example: Using stop-loss and
take-profit orders when short-selling

If you’re selling, you’re at risk of losing out if the price goes up so you place your stop-loss above the price at which you sold your currency pair.

Continuing with the above example, if you enter the trade at 1.1420 and place your stop-loss order at 1.1433, you’re limiting your risk of the trade to 0.0013 or 13 pips. Once the exchange rate starts to decrease (which is what you want when you’re selling) you can adjust the stop-loss to a position where you can protect your profits.

Let’s say that after you sell EUR/USD at 1.1420, the price subsequently decreases to 1.1370. You can place a take-profit order at 1.1385, essentially protecting 70% of your existing should the market take a sudden downturn.

Example: Placing orders when buying

If the scenario is reversed and you’re buying the currency pair, you’ll place a stop-loss at a level below the price at which you enter the trade. For example, if you buy the EUR/USD at 1.1426 and place your stop-loss at 1.1399, you’re limiting your risk to 0.0027 or 27pips.

Let’s say after buying the EUR/USD, the price subsequently increases to 1.1458. If you place a take-profit order at 1.1449, you’ll protect over half of your existing profit in the event the market suddenly moves against you.

Start Trading Forex

Getting started in forex is relatively straightforward but success depends on lots of hard work, stamina, continuous learning, and the ability to adapt to the ever-evolving forex market. Once you’re confident in your strategy and you have a hang of market dynamics, you can move to live trading and capitalise on the many opportunities in the currency market to make some gains.

Source - database | Page ID - 927

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