Forex Trading for Beginners
Think of this post as Forex 101, or forex trading for total beginners.
Here are some of the things you need to know as total beginners, or for anyone looking to learn to trade forex.
Broken it down into seven simple steps:
- What is forex?
You have heard this buzzword being thrown about and wandering, “huh?” Forex is simply short for Foreign Exchange. Have you traded forex? Well, before you say no, the answer is probably YES. “No!” I hear you exclaim, actually, still Yes. Let me explain: if you have been on holiday, you have changed home currency for foreign currency to the country your travelling to… Hence, you have participated in trading forex.
- Why trade forex?
If you confused by the above (and trust me I was when I first heard about this 10 years ago) you may be wandering what the difference between forex and other world markets such as stocks, commodities really is! There are several things you should know before you decide to either learn forex trading or learn stock trading. These are (but not limited to):
- Liquidity: Basically, the number of participants in the market
Simply put, imagine you’re selling a classic car at auction, let’s say it’s a 1966 Shelby Cobra 427 roadster 😉 Would you get a better price for it if there were 5 people in the auction hall or 5000? Of course, the more people there are, the easier it is to get the price you want. Forex is such a large market ($5.1 trillion a day is traded). As soon as you Press Buy or Sell, in almost all instances you get the exact price you want which means for you, it’s easy to get into and out of trades regardless of the size of transaction.
- No Insider Trading
Simply put, this means no one can manipulate the market, which we occasionally see happening on the stock market. Some wise guy working in an accounts department of a listed company, on the eve of a large news release leeks some information out. With that information, someone may buy the stock just before it’s due to rocket. Basically, in some ways, it’s rigged. This doesn’t happen in forex, the market is too large. Again, for you, that means the movements in currency are much smoother, and in theory easier to trade, and make money from.
- Open 24 Hours
Again, unlike stocks, this market is open around the clock, that means forex trading for beginners is ideal as you can tailor trading around your own personal routine.
- When should I trade the forex market?
Great question, and here is the answer: The ideal times are around the world stock market opening times. With Tokyo opening at midnight GMT, London, 8am GMT and New York 1pm GMT – there are also overlaps between markets that yield great volumes. Again in theory that means movement which equals more net bottom line profit for me and you!
- Anything I should look out for?
Yes! As you learn forex trading (like learning anything) I would take things 1 step at a time, but once your ready to go into more depth, you can keep an eye out for high volatility news announcements: http://forexfactory.com/ Ideally, you want to avoid day trading around those, as they can be very unpredictable and volatile. Not a good combination!
- So how or what currency should I trade?
To understand foreign exchange trading, you need to understand a few key points, the first being how to read a currency pair. Currencies are usually married together, meaning they are listed in pairs. In the beginning when you learn to trade you might find it best to stick to EURUSD, USDCHF and GBPUSD. These are some of the “Majors” Majors = most volume = smooth moves = a little more predictable and easier to make consistent gains from.
- How do I read a pair?
EURUSD, Here EUR (the first currency in the pair) is called the BASE, and USD is called the Quote. If someone says EURUSD is currently trading at 1.1480 that means, for 1 Euro, you will get 1.1480 US Dollars.
Now, let’s say, at 7am EURUSD was trading at 1.1480, and you bought at that point and the price climbs to 1.1550 you will have gained 70 Pips. More new terminology! Eek! Don’t worry, it’s really simple, a pip (percentage in points) is just the 4th decimal place 0.0001. In our example, there was a movement of 0.0070 or 70 pips
- So how do I make money already?!
Let’s stop beating around the bush I hear you say! Simply allocate an amount to each pip. Depending on the size of your trading account, you may choose to allocate $5 Per Pip, $10 Per Pip or $50 Per Pip, in our example above, that would result in floating profit of $350, $700 or $3500, don’t forget, you can also lose in the same proportion, so be sure to allocate the correct amount which we cover in Risk Management.
That’s it, Forex Trading for Beginners, oh, and don’t forget, you will need somewhere to practice trading, go ahead an open a Demo account, ask our team about the best broker account to open!
Until the next time, stay disciplined, follow your plan and trade like a master