Forex trading has become very popular in the last years, even if it has earned a reputation for being hard and risky. Do not fear! With the right guidance and learning the necessary steps, traders can learn to have realistic expectations and make a steady income.
That is why in this guide we will discuss Forex trading for beginners, explaining the basic concepts that rule the world of currency exchange, as well as trading strategies, and tips on how to become a successful forex trader.
Table of content
- What is forex? Forex trading explained
- History of Forex
- How to become a Forex trader?
- Forex vs Stocks
- Spreads and pips. Forex trading concepts
- Leverage and margin. All you need to know
- Forex trading strategies. Advantages and disadvantages
- Finding a Forex Broker
What is forex? Forex trading explained
Forex trading is the name given to the activity of buying and selling a currency with the purpose of making a profit. There is always a difference between the bid price and the ask price, and traders can exploit this difference to make a profit.
Most people exchange currencies, either for business or travel. The rate exchange of a currency is often considered when talking about the country’s economic situation and financial well-being. And this may change without warning, making the Forex market a very active one, and as potentially profitable, as risky.
In fact, many reasons can influence a currency in relation to another currency.
Inflation is a common cause of fluctuation for a currency. However, not only one factor is usually involved in the movement the price of a currency can experience.
Other factors are interest rates, which can be manipulated by central banks in order to increase or decrease the cost of a currency, and therefore attract more foreign business, and also the political stability of a country’s government.
The Forex market
The Forex market is the largest financial market in the whole world. It’s estimated that more than 5 trillion dollars are exchanged daily.
What is more, the market, which operates OTC (over the counter, meaning exclusively online), is open five and a half days a week, 24 hours a day. This means that there is always something happening in the market, making it also a very liquid one.
In truth, traders do not actually own the money they are investing in, but they speculate on the fluctuations the currencies will experience. Traders end up taking the resulting profit or facing a loss.
History of Forex
The history of Forex starts way back when people exchanged metals and goods. The barter system was popular and in some cases still it. But, the problem with this system for exchanging goods, is that it’s not clear who and how the value of an item is determined.
The history of Forex as we know it today starts at the beginning of the century. Before there was a Forex market, the rule of gold dominated, so all currency was backed up by gold. But in 1931, when there was a panic and people decided to go get gold, emptying the banks’ vaults, the Forex market was born.
Still unknown, the Bretton Woods Agreement meant that all currencies were based on the US dollar, and this one was supported by gold in the banks. By this time, the Second World War had finished and there was a massively increasing international trade. Eventually, this would make the Bretton Woods Agreement invalid, as it devaluated the other countries’ currencies.
By the 70s and 80s, currencies did not depend on gold or dollars. They followed the market forces of supply and demand, and their value fluctuates constantly.
How to become a Forex trader?
Getting started as a Forex trader is easy and can be done right now by just following these steps.
First of all, make sure you have access to a device that is connected to the internet. All Forex trading is done online.
Second, you need a Forex broker that will be your door to the Forex market. There is a wide selection of brokers and you may want to research before committing to one. We will help you choose the perfect broker in the section below.
Now, it’s time to open an account. Using a demo account for a short time may be a good idea if you have never done this before. It will allow you to test different strategies and get used to how the market reacts.
Now you’re ready to call yourself a Forex trader!
Tips to get started in Forex
Forex is an investment path that requires a bit of education if traders want to be successful. There are a few concepts to learn to make wise transactions and a few tricks we want to share with you.
It’s important that traders are familiar with the vocabulary related to Forex. We are talking about spreads, pips, leverage, and margin. These will be the first step in your education as a Forex trader since manipulating them (and understanding them correctly) will make risk manageable.
And in a market as active and liquid as the Forex market, there is a huge potential for profit that comes with an accordingly equal risk.
Traders are also encouraged to learn about the different strategies and test them. Finding the right one for you is of utter importance, as well as sticking to it. A demo account could be a good testing ground for this, and also for the further step that is developing your own strategy.
While Forex trading is easy, there are many factors to consider, and traders should keep this in mind.
Forex vs Stocks
The main difference between Forex and stocks is the asset you’re trading.
The way that currency and shares behave is rather diverse, as well as the way the transactions are made. The market influencers are the same, supply and demand, but in the case of currencies, there may be higher forces in place, like the financial situation a country is in, or international events.
In the case of stocks, the price can also change based on decisions made by private companies and the way they are perceived by the investors.
Another big difference is the market itself. While for Forex the market is open 24 hours a day almost 6 days a week, the stock market is open only a few hours a day from Monday to Friday.
This has a huge impact on how trades are done and what are the most active hours. And, additionally, it has an impact on how strategies are developed for one market or the other. With Forex being active all the time, traders need to develop strategies that can adapt even if they are not monitoring the market.
A final difference is the volatility and liquidity of the markets. Forex has much higher volatility and liquidity and this means that while there are potential chances to make a profit, traders need to take the necessary steps to reduce the chance of losing too much money.
Spreads and pips. Forex trading concepts
A very important concept all traders should be familiar with is spread.
A spread is the difference between the buy and sell prices of a currency pair.
A pip is a measuring unit used for spreads and it’s represented as follows: one pip would be 0.0001. So if a currency pair has a buy price of 1.15677 and a selling price of 1.15687, the spread is 1 pip.
In general, with major currencies like dollars, euros, and pounds, the spread is very low, more often than not even less than a pip.
With more exotic currencies, spreads are usually wider meaning there may be fewer chances to make a profit.
All currencies are presented in pairs when it comes to Forex. Not all brokers offer all currency pairs, so before committing to one make sure they have the currency pairs you’re interested in investing in.
Leverage and margin. All you need to know
In order for forex trading to be profitable, traders have to invest in a large amount of money and make bigger trades. As this would mean huge investments, brokers make the option of leverage available to traders.
What does it mean exactly?
Leverage is the amount of money brokers lend to traders to help them increase the volume of their trades.
It is usually presented as a ratio, like 1:100. This means that with 1000 dollars, traders can actually invest 100.000 dollars.
The margin refers to the money that the broker retains as a deposit when traders opt for using leverage in their trades.
Leverage should be used with care since it indeed multiplies your chances of a profit for 10, for example, it does also for the risk involved in any trading deal.
Forex trading strategies. Advantages and disadvantages
As you may have guessed so far, there are a few pros and cons involved in Forex trading. Being aware of them before starting trading in the currency exchange market is of vital importance for anyone looking into becoming a successful Forex trader.
Pros of Forex trading
Since the Forex market is the most liquid and active market in the world, traders have the option of making deals in a fraction of a second, especially when it comes to the major currencies. This means they can take advantage of slight changes in the market conditions and make a profit in a very short moment.
With the forex market being open 24 hours a day more than 5 days a week, traders have the facility of accessing it whenever is more convenient to them and from wherever they may find themselves.
Cons of Forex trading
The same advantages that we have mentioned come with a counterpart of a risk or a bit of a challenge traders will have to face to become Forex traders.
Concepts like leverage make it tempting for traders to get started into Forex, after all, they can make much bigger deals with a considerably small amount of money. But this may come to bite them back if they end up making failed deals, as they can lose their capital quite quickly.
Learning and experimenting with these strategies is very important in order to be able to use leverage wisely and to your advantage.
Another problem is that while supply and demand rule the price of a certain currency, there is a variety of factors that may have an impact on how a currency pair reacts.
Traders must be informed and keep track of international events and financial news to be able to make wise deals and informed movements.
Forex trading strategies
There are many different strategies when it comes to Forex trading. They all have pros and cons and traders should think carefully about which ones are best suited for their trading style.
- Price action trading.
- Range trading strategy.
- Trend trading strategy.
- Position trading.
- Day trading strategy.
- Forex scalping strategy.
- Swing trading.
- Carry trade strategy.
These are just some of the most successful trading strategies. Trades should consider how much time they have available to dedicate to their Forex trades, as well as if they are interested in a more long-term or short-term strategy.
Finding a Forex Broker
We have discussed all the basics that newer Forex traders need to know to get started in the currency exchange world.
Now, it’s time to find a Forex broker that will be your door into the market, offer leverage, and set up spreads.
There is a wide selection of brokers, all offering different features and options. So, how do you choose a Forex broker?
The first consideration all traders should always look for is the security of the broker they are choosing.
Brokers have to be registered with the appropriate regulatory bodies for the countries in which they are offering their brokerage services.
Most brokers are registered with different entities in order to work internationally and also in some countries where regulations are stricter, like the US.
Brokers offer different spreads, some are higher some are lower. While this alone should not be the single priority, it may have a huge impact on how much profit can be made.
On the same page, considering what leverage they offer may be of vital importance for those looking into using this strategy to increase their income.
All Forex trades happen through the broker’s online platform.
Making sure traders are comfortable with the platform is very important. It has to be intuitive and clear. Traders can find out if they are comfortable with it by trying a demo account.
With such an active and liquid market and the currencies prices fluctuating constantly, it’s vital that traders can take advantage of a moment’s deal and for this brokers must offer a fast execution of your orders. Indeed, it should happen as soon as you click the button buy or sell.
In order to find out how reliable a broker is, you can check out reviews from other users.
A final aspect to check out when choosing a broker is the quality of their customer service.
Traders may need immediate support and a broker that offers different channels, like email, chat, and telephone will surely be more available to help traders. Traders should make sure their broker is reliable.