FOREX TRADING FOR BEGINNERS
As a beginner, Forex trading can seem a little bit complex and difficult. Especially when you have this mindset that Forex trading is a get-rich-quick scheme. Before you start Forex trading you need to realize that trading isn’t a get rich quick scheme, in fact in Forex trading profits are not that substantial, the idea behind forex trading is to try as much as possible to earn little profits that will increase your portfolio on the long run. And for you to be able to achieve this there are pros and cons that you need to fully grasp, and also rules you need to abide by.
In this article, we’ll be looking at the basics of forex trading, how to start trading and some of the forex terminologies.
SOME FOREX TERMINOLOGIES
Forex terminologies are the terms used in Forex trading. They are not your normal go-to English language and such needs to be fully understood before starting any form of Forex trade. Understanding these forex terms will help you easily comprehend every Forex article you come across.
SPOT FOREX
This is referred to the buying and selling of Forex currencies. Such as buying the pounds Sterling for a certain price, and swapping it for euro, and vice versa.
PIP
A pip is referred to as the base unit of a forex pair. For instance, if the bid price for EUR/USD pair shifts from 1.16667 to 1.16677, it shows that the currency pair has moved by 1 pip.
MARGIN
Margin trading is the act of setting aside a fraction of the required equity needed to open a position in a trader’s trading account so that they can place a trade.
Several Forex brokers provide traders with leverage for their various trades. This amount of leverage varies greatly depending on the Forex broker, or the type of trade being placed.
LEVERAGE
Most traders that venture into Forex do so without having enough capital that could generate huge returns for them. This is where leverage comes in, it is the funds lent to a trader by a Forex broker to help them maintain more open positions and boost their earnings.
For example, The highest amount needed to open a position is 100,000 units of the base currency. Which means EUR/USD equals 100,000.
For a trader that has only 1000 euros in his trading account but then uses a leverage ratio of 1:10, they’ll be able to place a trade with 10,000 lot size. If the trade favors him, his earnings will be maximized by 10.
It is also important to note that, the market can as well move against you, and when that happens your loss will also be maximized by 10, trading with leverage is like fighting using a two-edged sword.
HOW TO TRADE FOREX
Forex trading is the process of exchanging one currency for another currency. It is one of the most frequently traded markets, with average daily trading of about $6.6 trillion. It is a platform for buyers and sellers of currencies. Forex trade can be carried out via a Forex broker, all you’ll require is a smartphone, tablet, or desktop that is linked to an internet connection that is strong enough to help you place trades without any hitches.
There are three distinct types of Forex Market
- Spot Forex Market
- Forwards Forex Market
- Future Forex Market
THE SPOT FOREX MARKET
It is the real exchange of a currency pair that occurs when an agreement has been reached and finalized. It happens within a short period. And this is the most actively traded market.
FORWARD FOREX MARKET
This is an agreement reached to either purchase or sell a particular amount of a currency at a stipulated price, and it is to be finalized at a fixed future date.
FUTURE FOREX MARKET
This is the contract reached to buy or sell a certain amount of a particular currency at a fixed price and interval in the future. A futures contract is bonded legally unlike that of forwards.
POSITIONS
A forex position is referred to the type of trade being opened or placed. There are two types, they are the long trade and the short trade.
A long trade is an act of buying a currency with the hope of generating profits when it is sold off in the future when the price increases. While a short trade is an act of selling off a currency.
CURRENCY PAIRS
A currency pair also referred to as a Forex pair is the currencies being speculated upon by traders. It consists of a base currency and a quote currency. For instance, EUR/USD, EUR is said to be the base currency, while USD is the quote currency.
There are 3 major types of Currency pairs namely:
- Major currency pairs
- Minor currency pairs
- Exotic currency pairs
The Major currency pairs
These are the most liquid currency pairs; they are the actively traded currency pairs in the forex market. They include the EUR/USD currency pair, which generates about 90-120 pips daily.
Minor Currency pairs
These are currencies that do not contain the USD currency, but it is made up of the Euro, Yen, and UK pounds. For example, the AUD/NZD pair moves about 50-60 pairs daily
Exotic currency pairs
These are currencies that are made up of the USD and the currency of an upcoming economy. These currency pairs are normally very volatile and less liquid. For example, USD/HKD, this currency pair moves about 32 pips daily.
FOREX CHARTS
Force charts are a graphical exposition of the price trend of a currency pair over some time. The vertical axis of their graph shows the price of the currency while the horizontal axis shows the time.
Forex charts are of three different types.
- The Line Charts
- The OHLC Bar charts
- The Candlesticks Charts
Line charts
This type of chart doesn’t provide much information about the currency pair being monitored by the trader; it only indicates the close price of each market day. It is the most basic forex chart, and it is easy to understand.
OHLC bar charts
The bar chart provides more information about a currency pair unlike that of the line charts, a bar chart shows the open, high, low, and closing price of every currency pair at a given time frame, hence the name OHLC.
CANDLESTICK CHARTS
Candlestick patterns were first used by Japanese rice traders. This is the most used type of chart by traders in the Forex market. Just like OHLC charts, it provides the open, high, low, and close of every currency pair within a particular time frame.
Candlesticks charts provide a vast volume of price action patterns that can be used globally by traders to take advantage of trade opportunities.
THE RISKS OF FOREX TRADING
Just like every other trading system. Forex trading g has its risks too. There is every possibility of losing all your funds while trading Forex. This is why it is highly advisable to fully understand how the Forex market works before starting a real-life trade with funds. And also adhering to strict risk management is also essential, such as using the proper limit orders, not using excess leverage, and most importantly trading with the amount you’re willing to lose.