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Forex Trading: How to start Forex Trading (Step by Step)

How to start Forex trading

 

Overview

Forex trading, in its very essence, is the trading of currency pairs in one of the largest financial markets in the world, the forex market. Here, there is around $5 trillion worth of trades executed by a variety of market participants daily.

 

 

Numerous new traders are beginning to discover what the fuss is all about and discovering the obvious and hidden potential that this market offers. However, to start forex trading, beginners need to start at one point and work through a process before they can consider themselves avid forex traders.

 

Understanding Forex Terminology

Forex trading may seem like an extremely daunting task to many beginner traders but in learning the basics, such as terminology, traders can slowly start understanding how it works, especially when beginners move on to practice trading by making use of demo accounts.

The very first step in trading forex which cannot be skipped is gaining a better understanding of the most common terms that traders will encounter early in their trading.

Some of the most common terms include the following:

  • Currency – or money, which is used as a medium of circulation in the world. There are approximately 180 currencies from 195 countries globally that are recognized by the United Nations as official currency.
  • Currency pairs – single currencies cannot be bought or sold and thus they are bought and sold in pairs. The first currency in a currency pair is known as the base currency. It is also the one which is being sold. The second is the quote currency, or the one being bought.
  • There are various pairs including majors, minors, exotics, and cross-pairs – these are the categories into which pairs are divided according to which are being traded the most such as EUR/USD, GBP/USD, USD/CHF, and various others.
  • Exchange rate – which is followed not only by traders but all financial market participants. The exchange rate is the price of the base currency expressed in terms of the counter, or quote, currency.
  • The Bid/Ask price – which are prices associated with a currency pair. The bid price is the price that buyers are willing to pay while the asking price is that which the sellers are willing to sell for.
  • Spread – which is simply the difference between the two pairs as well as the cost of the transaction. This is expressed either in pips or it can be expressed as a percentage, as can be seen with non-forex financial instruments.
  • Pip – This is the smallest increment in which an exchange rate, or the price, can move in either an upwards or a downwards direction. The pip is generally equal to the fourth decimal of most currency pairs.
  • Going long or going short – when traders go long, it means that they are buying while going short is when they sell.
  • Resistance – these levels track previous prices according to which the price had difficulties in breaking above the resistance lines.
  • Support – these levels track previous lows associated with a currency pair where the price has a likely chance to retrace and move upwards.
  • Leverage – which is a useful tool offered by brokers. Leverage is applied to financial instruments to provide traders with the opportunity of opening larger positions despite their trading account balance or initial deposit.
  • Margin – which is a certain amount required by the broker to serve as collateral for leveraged trading. When using leverage, the margin amount is often lowered substantially, allowing the trader to open more positions.
  • Lot size – this is the size of the position that the trader takes in the forex market. It subsequently also determines the profit and loss sizes in dollar value by affecting the value of a single pip.

 

Forex Brokers – how to choose the right broker

Numerous brokers in the industry connect traders from around the world with the forex market. It may seem like a near-impossible task to choose only one from so many and it is therefore important for traders to know what they are looking for in a broker.

This means that traders need to understand themselves, and their trading needs, first and to put in the necessary time and effort in researching and comparing brokers so that they can choose the right one.

When comparing and evaluating forex brokers, there are a few factors that traders must consider. This will help traders narrow down the list of potential brokers to only a few, allowing the trader to select one which meets and fulfills their trading needs and objectives.

Before selecting a forex broker, traders need to look at the following key factors:

  • Traders need to look at what they need along with determining what their trading objectives are. This involves evaluating their level of trading knowledge, skill, and experience is along with their purpose for trading.
  • Traders need to rigorously evaluate their personality type along with their characteristics, and what trader they are, and what trader they would like to be.
  • Traders need to consider the amount of time that they can dedicate towards trading along with the time they can set aside to learn about trading, practice trading, and more.
  • Traders need to determine, and evaluate, their risk tolerance along with their willingness to be exposed to risk.
  • Traders need to consider and understand the psychology which is involved in trading forex.

These are amongst some of the most important factors that traders need to consider before they start trading forex. By understanding these factors, traders have a more concise idea of what they need from their broker, which will make selection much easier as they will know what to look for in a broker.

 

Regulation and client fund safety

Regulatory entities are tasked with the responsibility of regulating, authorizing, and overseeing the operations of financial service providers and institutions such as forex brokers. Entities such as ASIC, FCA, FSCA, and several others ensure that trading activities are lawful and fair.

Regulated brokers have strict rules and regulations in place according to their regulatory entity which must be followed at all times. In choosing a regulated broker, traders know that their funds are kept safe as these brokers must keep funds in segregated accounts.

These segregated accounts are separate from the broker’s own account where operational funds are kept. This, along with other procedures and processes ensure that the trader is protected against fraud, money laundering, and other threats to capital.

In keeping funds in segregated accounts, brokers also ensure that the trader’s funds are available for withdrawal at any stage.

As an additional measure, traders must ensure that the broker is a member of a compensation scheme as this will ensure that traders are covered should the broker go bankrupt, or they are otherwise unable to fulfill their financial obligations.

 

Fees, spreads, and commissions

Each broker will have its own fees, spreads, and commissions which are charged as payment for rendering services. Each broker differs from the next and that is why traders must rigorously evaluate brokers to find one with a suitable offering as per the trader’s financial needs and/or limitations.

Fees that traders can expect include, but is not limited to:

  • Minimum initial deposits
  • Spreads
  • Commissions
  • Inactivity fees
  • Account maintenance fees
  • Deposit fees and withdrawal fees, and more.

 

Leverage

Brokers offer leverage to traders. It is essentially a loan that the trader takes to enable them to open larger positions to enhance their chances of greater profits. Leverage ratios offered differ from one broker to the next and they are dependent on the broker’s regulatory entity and jurisdiction.

Some brokers offer a set standard of 1:200, 1:400, or 1:500 where others offer less, such as 1:30, and even higher leverage up to 1:3000 and more.

One crucial thing that traders must consider is that even though this enhances the chance of profits, it also means that risks are increased substantially and when used incorrectly, or haphazardly, it can lead to losses that exceed the trader’s account balance should they not have negative balance protection.

 

Trading Platform

Trading platforms are software used to conduct trading activities, amongst other functions. Trading platforms differ as much as brokers differ from one another and it will require further research and testing to find the right one.

Not all brokers offer the same trading platform or collection of trading platforms, and it is therefore important that traders explore a broker’s offering in its entirety.

Trading platforms allow for trading activities as well as the development, testing, and utilization of trading strategies. They also provide the tools necessary for technical and fundamental analysis to be conducted, and more.

 

Range of Markets

This refers to the variety of financial instruments that can be traded from forex to commodities, stocks, indices, cryptocurrencies, and several others.

Where forex is concerned, traders need to look at the variety of forex pairs that are offered along with the trading and non-trading fees involved.

 

 

Education and Research

This is an important factor for both beginner and experienced traders. Beginners must ensure that their broker offers them a range of educational tools, materials, and research as it will help them in their journey towards becoming seasoned traders.

Traders need to ensure that their broker offers a demo account that can be used not only to practice trading in a safe and risk-free environment but provides the chance for exploring the broker’s offering as well as testing strategies without risking capital.

Research tools help traders refine their trading and provide them with a competitive edge. These include, but are not limited to, economic calendars, news, market analysis, and several others.

 

Deposits and withdrawals

When evaluating a broker, traders need to consider both the means through which deposits and withdrawals can be made as well as the processing times involved with both.

Traders also need to ascertain the base account currencies that the broker offers along with the deposit currencies which are supported. This will ensure that traders are not subjected to substantial conversion fees.

 

Customer Support

This is another crucial factor to consider, evaluate, and test. Access to customer support is imperative when traders have questions, queries, or issues not only when they trade, but especially where their trading account is concerned.

The broker must offer a variety of communication channels through which customer support can be contacted and, also, must have a prompt response, which helps resolve any questions, issues, or queries that traders must-have.

In addition to testing customer support first-hand, traders can also evaluate reviews from websites and previous or current customers to see what can be expected from a broker’s customer support.

 

How to develop a trading plan

A trading plan is an organized approach to executing trades. It is developed after traders have conducted their market analysis and they have a better understanding of what market conditions are for the specific day on which they want to trade.

Trading plans contain sets of rules that relate to when traders enter or exit trades, where they need to place their risk management tools such as stop-loss, and numerous other factors.

 

Why is a trading plan important?

A trading plan is used to simplify trading due to the methodological approach associated with trading. It serves the purpose of removing uncertainties as well as unwanted surprises in addition to preparing the trader for what they can expect.

Trading plans also help to identify problems and allow for any corrections to be made. They also help traders gauge their performance and improve on it. They can also help traders counter and prevent a substantial amount of stress as well as psychological factors which can arise from trading.

When using a trading plan, traders are more systematic due to adherence to strict rules that traders have set in their plan to accommodate various conditions that may arise in the market. Thus, while using a trading plan, traders can remain calm and execute their trades accordingly.

 

How is a trading plan developed?

To develop a solid trading plan, traders must acknowledge and understand the components which must be contained in their plan, namely:

  • A thorough skills assessment determines whether the trader is ready to trade, whether they can follow their signals, their confidence level, required knowledge and skills in trading in a live environment, and more.
  • Mental preparation prepares traders to face factors that may either deter or interfere with their trading such as lack of sleep, emotional duress, and several other factors.
  • The risk levels of the trader refer to their risk/reward ratios and what they are willing to risk on a trade. Traders must not risk more than 1% of their capital and the risk/reward ratio must be 1:2 or 1:3. This means that the reward is either twice or thrice of the amount of risk that traders take on.
  • The setting of realistic goals where the risk/reward ratio is concerned.
  • Research must be conducted before trades to avoid trading blindly. Traders must know what the market conditions are, or what they may be the news affecting their trades, and more.
  • Preparation for trade – which involves traders marking their major and minor support and resistance levels on their charts, setting alerts for their entry points, and setting alerts for where they need to exit a trade.
  • Setting entry and exit rules – these will determine when and where a trader enters or exits a trade. Exit rules are executed when the trade reaches a profit target or when it reaches a certain degree of loss. The ideal is that the trader profits or, at the very least, breaks even.
  • Record keeping – this involves the keeping of a journal in which traders make notes about successes, losses, adaptions to strategies, and other important factors which will help improve the trader’s strategy and approaches.

 

An introduction to Trading Strategies

 

What are Trading Strategies?

 

A trading strategy can be defined as a method used by a trader to buy and sell forex in the forex market. Strategies are based on rules and conditions which are predetermined and predefined and used to make trading decisions.

A trading strategy involves a sold trading plan outlining trading objectives, risk tolerance, and several other factors.

What Trading Strategies are there?

 

There is a wide variety of trading strategies that can be employed when trading in different markets. Even when trading forex, there are numerous strategies used which will depend on the individual traders as well as their trading needs and objectives.

There is no holy grail of trading strategies and they are not one-size-fits-all, so, should one strategy work for a trader it cannot be said that it will work in the same way for another.

It is therefore imperative that traders explore the different options available, test them out, and decide which one will work for them.

However, once traders have decided on a strategy, the trader must learn everything that there is to know about it, that they test it, backtest it, adapt it and master it before moving onto another.

Some of the most common trading strategies being used include, but is not limited to:

  • Day Trading – which involves traders who focus on very short-term price movements in the market which allows them to make quick profits within one trading day.
  • Position Trading – which is a strategy involving traders who buy and hold positions instead of actively buying and simultaneously selling. This type of trading can last from a day to several days, weeks, months, and longer.
  • Swing Trading – this strategy focuses on trends that form in the market with the strategy working to harness volatility that exists in the forex market. Positions are generally held for more than one trading day but for a much shorter time than trend or position trading strategies.
  • Algorithmic or Auto trading – this involves the use of a computer or mobile devices along with corresponding software. It employs trading robots that are used to trade on behalf of the trader. These bots work according to set rules and parameters where entry/exit, orders, stops, and other factors, are concerned.
  • Seasonal Trading – which is done by a variety of traders and is based on patterns in the markets that repeat themselves at certain times during the year. This can be during government announcements, corporate earnings releases, and others, which spark fluctuation in the forex market.

 

Why Should you trade Forex?

 

It is the Largest Financial Market

The forex market is the largest financial market in the world, and it is a snapshot of global trade and economic activity. There is a constant exchange of currencies for a variety of reasons.

There are participants from all over the world who partake in trading forex which makes it the most liquid, and volatile, market in the world.

 

Anyone can trade Forex

Forex trading can be done by anyone despite their initial capital. It is not only reserved for large corporations, institutions, and banks. Anyone has the chance to become a forex trader and it is by far the most accessible market in the world.

 

High Volume and Liquidity

The forex market is the largest, with substantial volumes being traded hourly and daily. It is one of the most liquid markets in the world which ensures orders are executed quickly and that traders receive some of the best pricing depending on their broker.

 

You can trade the highs as well as the lows

Regardless of the direction that the prices are moving, traders can profit depending on their speculation. There are a great number of trading strategies that can be used and applied to just about any conditions that may be present in the market.

 

The forex market does not sleep

Regardless of where in the world traders trade from, they have access to the forex market as the forex market operates 24-hours a day, 5-days a week.

Regardless of the time zone, traders have access as, when one market closes, another will open in a different time zone.

 

Leverage

Traders can trade forex using leverage which offers them a greater chance of profits. While it is a useful tool, leverage must be used responsibly as it carries a substantial amount of risk.

 

Low transaction costs

Due to the liquidity of the forex market, traders have access to reduced transaction costs when trading forex. Also, forex brokers offer live trading accounts with minimum deposits from $1 while others do not even require a minimum deposit.

Author Details

Louis Schoeman

Louis Schoeman

Featured Forex and Stocks writer

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