WHAT IS FOREX TRADING?
What is forex trading?
Forex trading, also known as foreign exchange trading or currency trading, is the act of buying and selling currencies in the foreign exchange market with the goal of making a profit. The foreign exchange market is the largest and most liquid financial market in the world, where currencies are traded against one another.
In forex trading, traders speculate on the price movements of currency pairs. A currency pair consists of two currencies, where one is being traded against the other. For example, the EUR/USD pair represents the exchange rate between the Euro and the US Dollar.
Here's a basic overview of how forex trading works:
Currency Pairs: Forex trading involves trading one currency for another in pairs. The first currency in the pair is called the "base currency," and the second currency is called the "quote currency" or "counter currency."
Bid and Ask Price: In any currency pair, there are two prices – the bid price (the price at which you can sell the base currency) and the ask price (the price at which you can buy the base currency).
Going Long and Going Short: Traders can take two main positions in forex trading. Going long means buying the base currency and selling the quote currency, expecting the base currency to appreciate. Going short means selling the base currency and buying the quote currency, expecting the base currency to depreciate.
Leverage: Forex trading often involves the use of leverage, which allows traders to control a larger position with a smaller amount of capital. While leverage can amplify profits, it also increases the potential for losses.
Profits and Losses: Profits and losses in forex trading are determined by the price movements of the currency pair. If the trader's speculation is correct, they can make a profit. If the market moves against their prediction, they may incur losses.
Market Hours: The forex market operates 24 hours a day, five days a week, due to the global nature of currency trading. Different trading sessions overlap, creating continuous opportunities for trading.
Analysis: Traders use various methods of analysis, such as technical analysis (using charts and patterns) and fundamental analysis (examining economic and geopolitical factors), to make informed trading decisions.
It's important to note that forex trading carries a high level of risk due to the potential for significant leverage and rapid price fluctuations. As such, it's recommended for individuals have a good understanding of the market, and risk management strategies, and only invest funds they can afford to lose. Many traders also seek education and practice on demo accounts before trading with real money. Additionally, regulations and requirements vary by country, so it's important to ensure you're trading with a reputable and regulated broker.
At its simplest, forex trading is similar to the currency exchange you may do while travelling abroad: A trader buys one currency and sells another, and the exchange rate constantly fluctuates based on supply and demand.
How to Trade Forex for Beginners
Forex trading for beginners can be difficult. In general, this is due to unrealistic but common expectations among newcomers to this market. Whether we are talking about forex trading for beginners or stock trading for beginners, many of the basic principles overlap. In this article, we're going to focus on Forex trading. However, some of the same strategies, terms and general concepts also apply to stock trading.
By the end of it, you'll know all the most essential terms used in Forex trading so you won't be confused at any point while you learn to trade. You'll learn all the basics, including which platform to use, how to execute a trade and 10 Forex trading tips for beginners who want to earn, discover new strategies, and more.
How to Trade Forex for Beginners | Introduction
The next question that comes to everyone's mind is: how to learn Forex from scratch? Can I teach myself to trade Forex? Don't worry, this Forex trading for beginners guide is our definitive manual for all aspects of Forex and general trading. By the end, you'll understand the basics of trading Forex and how to begin.
Trading terminology: Forex trading notes for beginners
Here's where your Forex trading notes for beginners can begin. I'm going to start this trading for beginners guide in the UK by presenting some of the most common terms you'll come across in trading that you'll need to know.
1. Spot Forex
This form of Forex trading involves buying and selling the real currency. For example, you can buy a certain amount of pound sterling and exchange it for euros, and then once the value of the pound increases, you can exchange your euros for pounds again, receiving more money compared to what you originally spent on the purchase.
2. CFDs
The term CFD stands for "Contract for Difference". It is a contract used to represent the movement in the prices of financial instruments. In Forex terms, this means that instead of buying and selling large amounts of currency, you can take advantage of price movements without having to own the asset itself. Along with Forex, CFDs are also available in stocks, indices, bonds, commodities, and cryptocurrencies. In all cases, they allow you to trade in the price movements of these instruments without having to buy them.
If you are interested in knowing how CFDs work in greater detail, we recommend the following article that explains CFD trading for beginners: What is CFD Trading?
3. Pip
A pip is the base unit in the price of the currency pair or 0.0001 of the quoted price, in non-JPY currency pairs. So, when the bid price for the EUR / USD pair goes from 1.16667 to 1.16677, that represents a difference of 1 pip.
4. Spread
The spread is the difference between the purchase price and the sale price of a currency pair. For the most popular currency pairs, the spread is often low, sometimes even less than a pip! For pairs that don't trade as often, the spread tends to be much higher. Before a Forex trade becomes profitable, the value of the currency pair must exceed the spread.
5. Margin
Margin is the money that is retained in the trading account when opening a trade. However, because the average "Retail Forex Trader" lacks the necessary margin to trade at a volume high enough to make a good profit, many Forex brokers offer their clients access to leverage.
6. Leverage
This concept is a must for beginner Forex traders. The leverage is the capital provided by a Forex broker to increase the volume of trades its customers can make.
Example:
The face value of a contract or lot equals 100,000 units of the base currency. In the case of EUR/USD, it would be 100,000 euros.
If you use a 1:10 leverage rate and have 1,000 euros in your trading account, you can trade a currency pair with a $10,000 position size.
If the trade is successful, leverage will maximise your profits by a factor of 10. However, keep in mind that leverage also multiplies your losses to the same degree.
Therefore, leverage should be used with caution, regardless of whether we are talking bout trading for beginners or experts. If your account balance falls below zero euros, you can request the negative balance policy offered by your broker. ESMA regulated brokers offer this protection. Using this protection will mean that your balance cannot move below zero euros, so you will not be indebted to the broker.
7. Bear Market
This is a term used to describe the stock market when it is moving in a downwards trend. In other words, when the prices of stocks are falling. If a stock price falls deep and fast, it's considered very bearish.
8. Bull Market
The opposite of a bear market is a bull market. When the stock market is experiencing a period of rising stock prices, we call it a Bear Market. An individual stock, as well as a sector, can also be called bullish or bearish.
9. Beta
A metric indicating the relationship between a stock's price relative to the whole market's movement. If a stock has a beta measuring 1.5, this means the when the market moves 1 point, this stock moves 1.5 points, and vice versa.
10. Broker
A broker is a person or company that helps facilitate your buying and selling of an instrument through their platform (in the case of an online broker). They usually charge a commission.
11. Bid
The bid is the price traders are willing to pay per share. It is set against the ask price, which is the price sellers are willing to sell their shares for. What do we call the difference between the bid and the ask price? The spread.
12. Exchange
This is a place where trades are made. Two well-known stock exchanges are the NASDAQ and the New York Stock Exchange (NYSE).
13. Close
This is the at which an exchange closes and trading stops. Regular trading hours for the NASDAQ and the NYSE are from 9 a.m. to 4:30 p.m. Eastern time. After-hours trading continues until 8 p.m.
14. Day Trading
This when traders buy and sell within a day. Day trading is a common trading strategy. However, if someone day trades, they may also make long term investments as well (a long-term portfolio).
The following two terms only apply to share trading:
15. Dividend
A proportion of the earnings of a company that is paid out to its shareholders, the people who own their stock. These dividends are paid out either quarterly (four times per year) or annually (once per year). Not every company pays its shareholders dividends. For example, companies that offer penny stocks likely don't pay dividends.
16. Blue Chip Stocks
These are stocks in big, industry-leading firms. Many traders are attracted to Blue chip stocks because of their reputation for paying stable dividend payments and demonstrating long-term sound fiscal management. Some believe that the expression 'blue-chip' derived from the blue chips used in casinos, which are the highest denomination of chips.
How to Trade Forex for Beginners | Making Trades
The next section of this Forex trading for beginners outline covers things to consider before making a trade. Before you make a trade, you'll need to decide which kind of trade to make (short or long), how much it will cost you and how big the spread is (difference between ask and bid price). Knowing these factors will help you decide which trade to enter. Below we describe each of these aspects in detail.
Price and Quote
When you trade Forex, you will see Ask and Bid prices.
Remember, the ask price is the price at which you can buy the currency
And the bid price is the price at which you can sell it
One of the things you should keep in mind when you want to learn Forex from scratch is that you can trade both long and short, but you have to be aware of the risks involved in dealing with a complex product.
Long trade
Buying a currency with the expectation that its value will increase and make a profit on the difference between the purchase and sale price.
Short trade
You sell a currency with the expectation that its value will decrease and you can buy back at a lower value, benefiting from the difference.
The price at which the currency pair trades is based on the current exchange rate of the currencies in the pair, or the amount of the second currency that you would get in exchange for a unit of the first currency (for example, if you could exchange 1 EUR for 1.68 USD, the purchase and sale price your broker gives will be on either side of this number).
If the way brokers make a profit is by collecting the difference between the buy and sell prices of the currency pairs (the spread), the next logical question is: How much can a particular currency be expected to move? This depends on what the liquidity of the currency is like or how much is bought and sold at the same time.
The most liquid currency pairs are those with the highest supply and demand in the Forex market. It is the banks, companies, importers, exporters and traders that generate this supply and demand.
The major currency pairs tend to be the most liquid, with the EUR / USD currency pair moving 90-120 pips on an average day and therefore providing the most opportunities for short-term trading. In contrast, the AUD / NZD pair moves between 50 and 60 pips per day, and the USD / HKD currency pair only moves at an average of 32 pips per day (looking at the value of the currency pairs, most will appear with five decimal points).
The main Forex pairs tend to be the most liquid. However, there are also many opportunities between minor and exotic currencies, especially if you have some specialized knowledge about a certain currency.
How to Read Forex Charts for Beginners
No Forex trading for beginners article would be complete without discussing charts. When viewing the exchange rate in live Forex charts, there are three different options available to traders using the MetaTrader platform: line charts, bar charts or candlestick charts. When in the MetaTrader platform you can toggle between these different chart types by selecting View -> Toolbars -> Standard option. In the toolbar at the top of your screen, you will now be able to see the box below:
