How to Start Forex Trading

How to Start Forex Trading?

Not long ago, forex trading was available mainly to large players – multinational corporations, banks, and wealthy individuals. This was due to the high capital requirements needed to make transactions.

The emergence of online platforms has made forex trading accessible to a wide range of investors, even those with small capital. Modern technology has greatly simplified the process for any trader, allowing them to take advantage of the opportunities offered by the forex market. However, along with potential profits, there is always risk.

In this article, the experts at Gofaizen & Sherle have compiled the information a broker needs to start trading Forex safely and efficiently.

What Is the Forex Market?

The Forex currency market (from the English Foreign Exchange) is a real giant in finance. It confidently ranks first both in terms of trading volume and total value. According to the data for 2022, the daily trading volume on Forex reached a whopping 7.5 trillion dollars. This makes it the largest financial market, surpassing even the global stock market. Also, up-to-date statistics show that the Forex market continues to grow, constantly reaching new records in daily turnover and trading volume.

A unique feature of the Forex market is that there is no single physical location for transactions. Unlike assets such as stocks and commodities, which are traded on centralized exchanges, currencies are traded through major forex trading centers online.

Currency transactions take place all over the world, but most activity is concentrated in major financial centers, including Frankfurt, New York, Paris, Hong Kong, London, Tokyo, Singapore, Sydney, and Zurich. Thanks to this, the Forex market never sleeps – when the trading day ends in the USA, Tokyo and Hong Kong take over the baton. Currency prices are constantly changing, making Forex one of the most dynamic markets in the world.

The Forex market is the world’s only financial market that operates 24 hours a day, 7 days a week, excluding weekends, and offers trading in over 170 different currencies. Initially, Forex was dominated by large companies and banks that traded on behalf of clients. However, in recent years there have been significant changes. The market has become more oriented towards retail traders and now both experienced and novice investors of all levels can participate.

What Is Forex Trading?

Currency pairs are the basis of Forex trading. A pair includes base and quoted currencies. The exchange rate of a pair shows how many units of the quoted currency should be given for one unit of the base currency. Forex traders buy and sell currency pairs by speculating on changes in their exchange rates.

For example, if a trader predicts that the euro is expected to rise against the U.S. dollar, he may buy EUR/USD. If he believes that the euro will weaken (for example, due to political unrest), he may sell EUR/USD. The trader’s profit will depend on how correctly he predicts the movement of the currency pair.

In addition to trading to make money on the exchange rate changes, the Forex market is also widely used for hedging – protection from the negative impact of currency fluctuations.

Individuals and companies resort to hedging to:

  • minimize losses associated with changes in the exchange rate of the currency in which they earn income or make expenditures;
  • fix the exchange rate for a certain period, thereby making future expenditures more predictable.

A company doing business in a country with a different currency can use forex to protect itself against losses caused by a fall in the exchange rate of the local currency against the currency in which it earns revenue. To do this, the company can sell its expected revenue in foreign currency on forex in advance. In this way, it will lock in a favorable exchange rate and provide itself with more predictable expenses in its local currency.

Forex hedging is an integral part of modern international business, allowing companies to reduce currency risks, increase competitiveness, and plan expenses with greater certainty.

Forex Terminology

Before you start working in the Forex market, you need to learn its terminology:

A currency pair is a quote of two different currencies, where the value of one is expressed through the other. Each currency is labeled with a three-letter code, the first two letters of which usually indicate the country and the third one – the currency itself. For example, USD – American dollar, CAD – Canadian dollar, NOK – Norwegian krona. Exceptions are such codes as EUR for the euro and MXN for the Mexican peso.

Examples of currency pairs: are EUR/USD, GBP/JPY, USD/CAD, and others.

Base currency is the currency that stands first in a currency pair. It serves as a reference for quoting the currency pair.

In the EUR/CAD currency pair, the euro is the base currency.

The quoted currency is the currency that comes second in a currency pair. It shows how many units of this currency are required to buy one unit of the base currency.

In the EUR/CAD pair, the quoted currency is the Canadian dollar.

The exchange rate is the price of one currency expressed in another currency.

Ask – the minimum price at which the seller is ready to sell the currency.

For example, if the Ask price for EUR/CAD pair is 1.2245, it means that 1 euro will be sold to you for 1.2245 Canadian dollars.

Bid is the maximum price at which a buyer is willing to buy the currency.

If the Bid price for EUR/CAD is 1.2248, it means that the buyer will pay 1.2248 Canadian dollars for 1 Euro.

Bid/Ask Spread is the difference between the bid and ask price.

If the EUR/CAD bid price is 1.2245 and the asking price is 1.2248, the spread will be 3 pips.

Pip – the minimum change in the price of a currency pair. Usually, it is the fourth decimal place.

Lot – the standard volume of a transaction on the Forex market. One standard lot is equal to 100,000 units of base currency. There are also:

  • mini lot – 10,000 units;
  • micro lot – 1,000 units;
  • nano lot – 100 units.

Long Position – a position in which a trader buys a currency, expecting its growth.

Short Position – a position in which a trader sells a currency expecting it to fall.

Contract for Difference (CFD) – a financial derivative that allows traders to speculate on changes in the value of the underlying asset without having to buy it. Traders make a profit or loss based on the difference between the opening and closing price of the contract.

Leverage – the use of borrowed funds to increase trading volume.

Trading with a leverage of 1000:1 means being able to control a position of $100,000 using only $1000 of your funds, the rest is borrowed.

Margin – the collateral required to open a position.

As an example, your broker may set a margin requirement of 7%, which means that you will need to deposit 7% of the total value of the position.

Day trading – entering and closing a forex trade within a single day. This is a common strategy used on CFD platforms.

Open position – an active trade.

How to Start Trading Forex?

The attractiveness of the Forex market is largely due to its potential profitability. However, like any kind of investment, trading on the currency market involves risks. Therefore, it is extremely important to approach it with awareness and responsibility. The key to success in trading is good preparation.

Here is an approximate algorithm of the actions of a forex trader:

Learn About the Forex Market

Learning about the Forex market and the basics of trading is the first logical step for a beginning investor. Before you start trading, you should understand the structure of the market, understand how it works, learn the terminology and what currency pairs exist, and understand how to read charts and use indicators.

Choose How You Want to Trade Forex

There are three main ways to trade Forex:

  • Spot;
  • CFDs (contracts for price differences);
  • options.

Each of these instruments has its specifics, advantages, and risks:

Spot trading on Forex is a direct purchase and sale of currency with immediate settlement. The spot market is attractive due to its high liquidity and the possibility of quick realization of transactions. Traders seek to capitalize on small fluctuations in exchange rates by taking advantage of instantaneous changes in the market. However, high volatility can lead to significant risks and losses.

CFD trading allows traders to speculate on changes in currency exchange rates without purchasing actual currency assets. CFDs offer the option of leverage, which increases potential profits but also risks. This instrument is flexible in terms of trading on currency appreciation or depreciation, making it popular with traders looking to utilize short-term strategies. The profitability of CFDs can be high, but due to leverage, losses can accumulate quickly, especially if risk management is inadequate.

Options give traders the right, but not the obligation, to buy or sell a currency at a certain rate in the future. Options are of two types: call (buy) and put (sell). They are used to hedge risks or speculate on future movements in exchange rates. The peculiarity of options is their limited losses (the value of the option premium), which makes them attractive for risk management. The profitability of options depends on the accuracy of the trader’s forecasts regarding the direction and magnitude of currency movements, as well as on the volatility of the market.

Choose a Broker

Choose a broker that will give you access to the forex market. When choosing a broker, it is important to consider several key factors that can significantly affect your trading experience and results.

Pay attention to the following:

  • Regulation and licenses.

Make sure the broker is regulated by a reputable financial authority such as the FCA (Financial Conduct Authority) in the UK, ASIC (Australian Securities and Investments Commission) in Australia, or SEC (Securities and Exchange Commission) in the US. Regulation ensures a certain level of safety and reliability.

  • Commissions and spreads.

Examine the commission and spread structure offered by the broker. Some brokers charge fixed transaction fees, while others may have variable spreads. Low spreads and commissions can significantly reduce your trading costs.

  • Platforms and tools.

A broker’s trading platform should be intuitive, and stable and offer a wide range of tools for technical analysis, charts, and news. Popular platforms include MetaTrader 4 (MT4), MetaTrader 5 (MT5) and cTrader.

  • Account Types.

Brokers offer different account types with different trading conditions, including minimum deposits, leverage, and access to different instruments. Choose the account type that suits your experience level and trading needs.

  • Leverage.

Leverage allows you to trade with larger volumes than your deposit. However, high leverage increases both potential profits and risk. Make sure your broker offers reasonable leverage levels and manageable margin requirements.

  • Customer Support.

Quality customer support is important to quickly resolve any problems or issues. Check the availability and quality of support, including language options, opening hours, and communication channels (phone, chat, email).

  • Deposits and withdrawals.

Find out about the deposit and withdrawal methods offered by the broker, as well as the associated fees and processing times. Make sure these processes are simple and convenient for you.

  • Reputation and reviews.

Check other traders’ reviews and ratings about the broker.

  • Educational resources.

Some brokers offer educational materials, including webinars, courses, articles, and analyst reviews. These can help improve your trading skills and market knowledge.

  • Additional Services.

Evaluate the availability of additional services such as trading signals, automated trading, demo accounts, and other tools that can improve your trading experience.

Careful consideration of these aspects will help you choose a broker that will provide you with a reliable and comfortable forex trading experience.

Open a Trading Account

After choosing a broker, you should open a trading account on their platform. To do this, go to the platform’s website and fill in the online application form, providing personal data and documents for verification. Deposit funds into your account using the chosen method (bank transfer, credit/debit card, e-wallets). After depositing funds, you should receive a confirmation from the broker.

On many platforms, a demo account is available, which allows you to practice trading without the risk of losing real money. Choose this option to familiarize yourself with the platform and develop a strategy without financial costs.

Prepare a Trading Plan

A trading plan is a detailed action plan that defines your trading strategy. It will help you to stay on the right track by following clearly defined goals instead of trading without a system. A trading plan details aspects such as the chosen strategy, trading goals and ambitions, risk management techniques, keeping a trading journal, general trading rules, and aspects of trading psychology.

A trading plan promotes effective trading decisions and the discipline necessary to consistently achieve success in the forex market. It is most important not only to develop a plan but also to adhere to it strictly during trading when emotions can influence decision-making.

Choose a Forex Pair to Trade

There are many currency pairs available on Forex, including major, secondary, and exotic pairs. Pairs differ in liquidity and volatility, which affects their spreads and risk levels.

For beginners, it is recommended to choose highly liquid pairs with low spreads. It is also advisable to trade currencies that are often mentioned in the media so that you have access to the information you need to conduct a quality analysis.

Some of the most popular currency pairs in the Forex market are EUR/USD, EUR/GBP, GBP/USD, USD/JPY, AUD/USD, and USD/CHF.

Analyse the Market

In forex trading, your outcome – profit or loss – is determined by your entry and exit points. You need to analyze the selected assets to identify the best opportunities in the market and determine the optimal prices to effectively take advantage of the current trends.

In Forex, traders mainly resort to three types of analysis:

  • technical analysis – based on the study of price charts, geometric formations, and mathematical models to predict future price changes;
  • fundamental analysis – is based on analyzing economic factors affecting asset prices to determine their real market value;
  • sentimental analysis – examines current market sentiment expressed through open buy/sell positions and Commitment of Traders (COT) reports.

There is no one right or wrong strategy, and there is no one best strategy. Ideally, a trader should have a good understanding of all types of analysis. Using multiple types of analysis helps to identify new opportunities and assess potential risks. With experience, you can develop a strategy that suits your personality and risk tolerance.

Buy or Sell

After analyzing the selected currency pair, you decide to buy or sell.

In the Forex market, you open a long position when you expect the price of the underlying currency to rise. Similarly, you open a short position when you expect the price of the underlying currency to decline.

Suppose you are analyzing the EUR/USD currency pair and your analysis shows that the euro will strengthen against the US dollar. In this case, if you decide to open a buy position, you expect the price of EUR/USD to increase.

Let’s say that the current price of EUR/USD is 1.1500. You open a buy position on 1 lot of EUR/USD. After a while, the market starts to move in your favor and the EUR/USD price increases to 1.1600. At this point, if you decide to close your position, you will make a profit as you will sell the EUR at a higher price than you bought earlier.

Risk Management

Traders are exposed to a variety of risks in the forex market, including:

  • market – related to potential losses due to unpredictable changes in the prices of currency pairs;
  • credit risk – occurs when a broker or counterparty cannot fulfill its obligations under a transaction;
  • liquidation – related to the inability to close a position at the desired price due to low market liquidity;
  • operational – includes losses due to trading errors, technical failures, or fraud;
  • psychological – is related to the trader’s emotional reactions to changes in the market, which may lead to irrational decisions;
  • systemic risk – refers to risks that affect the entire market or the financial system as a whole, such as financial crises or political events.

Understanding and managing forex risk plays a key role in preserving capital and achieving long-term profitability. This includes setting loss levels (Stop Loss), sizing positions for risk, diversifying investments, using trailing stops, and careful planning before trades. Emotional control is also key: it is important to stick to your trading plan, even in the face of unexpected market movements.

Monitor Your Positions

The Forex market is a dynamic and volatile environment full of opportunities and risks. Therefore, monitoring positions is an important part of trading, allowing traders to keep track of their current investments and make appropriate decisions to manage their portfolios.

The following strategies can be used to effectively monitor your trading positions:

  • keep up to date with the latest news and events;
  • set up alerts on market changes;
  • subscribe to specialized trading blogs to receive information from professionals;
  • follow leading traders in social networks;
  • use monitoring and reporting services in the trading platform or application.

Constant control will help minimize losses and increase trading profits.

Close Your Trade

The decisive step that will determine whether you make a profit on a trade or suffer a loss is the decision to close the position. By developing a good exit strategy, you can avoid taking unnecessary risks in the markets and maximize your profits.

When you should close a position:

  • it has reached the stop loss or take profit levels that you have defined for the trade;
  • the trading session is ending and unforeseen risks may arise in a new session;
  • you need to avoid a situation when the broker requires you to replenish your deposit to maintain the minimum margin level;
  • you need to free up capital for the realization of a new profitable deal;
  • the market situation has changed and the forecast you made has lost its relevance.

Popular Forex trading strategies

There are several popular strategies in Forex that traders use depending on their goals, trading style, and time frame. When opening your first position in the currency market, it is important to decide in advance which approach to use. This will help you stay calm and make decisions as coolly as possible.

Here is a brief description of the main strategies that traders follow:

Day trading

Day trading involves opening and closing positions within one trading day. In this case, traders try to profit from short-term price fluctuations, avoiding holding positions overnight to minimize the risks associated with overnight events and news. This strategy requires considerable time and attention, as well as a quick reaction to market changes.

Swing trading

Swing trading involves holding positions for several days to several weeks. Traders try to catch a “swing” or fluctuation in the market by taking advantage of intermediate trends. This strategy allows traders not to spend a lot of time in front of screens every day and is suitable for those who want to trade less intensively than day traders.

Position trading

Position trading is long-term oriented and involves holding positions from several weeks to several months or even years. Traders using this strategy rely on fundamental analysis and long-term market trends, ignoring short-term fluctuations. Position trading requires patience and the ability to withstand short-term market fluctuations.

Trend trading

Trend trading focuses on identifying and following the direction of a market trend. Traders open positions in the direction of the trend, buying in the case of an uptrend and selling in the case of a downtrend. This strategy can be used in both short-term and long-term time frames. Successful trend traders use technical analysis to identify trends and manage their positions.

Each of these strategies has its characteristics and requires different levels of skill, time, and resources. The choice of strategy depends on a trader’s personal preferences, goals, and trading style.

Forex Trading Tips

The Forex currency market beckons traders from all over the world with its huge profit potential. Its scale, liquidity, and round-the-clock availability make it an attractive tool for speculating on currency rates. However, it is important to remember that Forex is not a game, but a serious business. Trading on it involves significant risks. Market volatility, the use of leverage, and the complexity of analysis can lead to significant losses, especially for inexperienced traders.

To become a successful and consistent forex trader, you should adhere to the following tips:

  1. Use a demo account for trading. Even if you consider yourself an experienced trader, a demo account will help you constantly improve your skills and test new strategies without risking your money.
  2. Continually keep learning. The markets are constantly changing, so striving to learn new aspects of trading will help you improve your skills and competencies.
  3. Always protect your trades by setting a stop loss.
  4. Keep your emotions in check, remain objective, and stick to your plan.
  5. Record all your trading actions in a trading journal. This will help you with accountability, as well as identify effective strategies and areas for improvement.

It is important to note that as retail forex trading has grown in popularity, the number of honest participants has increased. Unfortunately, it has also become a haven for fraudsters who use the inexperience of novice traders for their selfish purposes.

Therefore, experts say that in addition to studying the market and developing a trading plan, it is important to master the basic principles of risk management and adhere to the following recommendations:

  • make sure your broker is registered with reputable regulatory bodies (e.g. CFTC or FCA);
  • be skeptical of super-high returns without risks – responsible brokers avoid promises of guaranteed profits and assume some of the risks;
  • research the company, its management, and reputation, look for reviews from reliable sources, and beware of common fraudulent tactics;
  • protect your trading accounts and personal information with VPNs, password managers, and anti-virus software.

As markets evolve, forex fraud is likely to become more sophisticated through the use of sophisticated technological tools to carry out fraudulent transactions. However, with constant vigilance, strict regulation, and safety measures in place, forex trading can be safe and as profitable as possible.

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