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Forex Trading: A Beginner’s Guide
Searching for Forex Trading beginner’s guide on the internet, what do you expect from a thorough and detailed tutorial? The basic knowledge, the must-know terms, several useful tips for newcomers, or the steps to start a Forex trade? If these are what you need, congratulations, this article is written for you.
We will dive deeper into the fundamental understanding of what a newbie in Forex Trading should have. Keep scrolling down and check it out!
1. Forex Trading: A Beginner’s Guide
1.1. How does Forex work?
Forex stands for Foreign Exchange, and Forex Trading indicates the activity of exchange of world currencies. Simply put, Forex Trading provides a large financial market where traders, investors, institutions and central banks buy and sell currency pairs. Most traders gain profits through the price movement of one currency.
Just with a computer and internet connection, you can start trade in the network. When it comes to Forex Trading, you can earn huge profits, meanwhile, you also have to accept hidden risks. However, this over-the-counter market has attracted tons of energetic beginners to participate in trading, which creates one of the most dynamic markets in the world.
To acquire more complete knowledge of Forex Trading, we will discuss some essential terminologies in the next section.
1.2. Common Forex Terms
- Currency Pair
A currency pair includes two different currencies, a base currency and a quote (counter) one. It shows the amount of the quote currency you need to pay to get a unit of the base currency.
For example, with the quotation EUR/USD 1.17, the first appeared currency is the base, and the second one is the quote. It means you need 1.17 US Dollar to buy 1 Euro.
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There are 3 main types of currency pairs, containing major, cross, and exotic currency pair:
Major currency pairs indicate the most frequently traded pairs in the market which contain US Dollar as the base/quote side. They are EUR/USD, USD/JPY, GBP/USD, USD/CHF, USD/CAD, AUD/USD, and NZD/USD.
Cross-currency pairs (or minors) describe the pairs that are not associated with USD. Although they are not as highly liquid as the major ones, minor pairs are still a good choice for traders. Some typical crosses are GBP/JPY, EUR/CAD, or NZD/JPY.
Exotic currency pairs usually include one major currency and the currency of an emerging market (E.g: Singapore, Brazil, Polish Zloty, etc.). We can mention several pairs like USD/SGD, USD/ZAR, or USD/BRL.
- Ask/ Bid Price
The bid price is the price you are willing to sell a currency pair. The ask price shows the price you will buy a currency pair. Two types of price are updated continuously in real-time.
The difference between the bid and the ask price of an underlying pair is called the spread. To calculate the spread: Spread = Ask Price – Bid Price
Spread is quoted in PIP – a special unit in Forex Trading. Let’s move to the next term, PIP, to know deeper about spread.
PIP (Point in Percentage) was known as the smallest and fundamental unit of measurement that Forex traders use. It points out the changes between the value of two currencies, and one pip is equal to 0.0001.
For example, the price quote of EUR/USD is 1.1725, meaning that you can get 1 EUR when selling 1.1725 USD. If the quote increases by one PIP to 1.1726, it shows that you need to pay slightly more to buy 1 EUR.
It can be said that a Forex broker is the middle-man between the traders and the market. Along with supplying the trading platform, in several cases, they also work as a market maker (who plays the counter side for each trade of traders).
When working with a reliable broker, you will be provided with the necessary platforms and tools, as well as education courses. And if you are searching for the best Forex brokers, let’s check out this article!
Leverage can be considered as a loan, which means you borrow an amount of money from your broker to increase your trading volume. You can invest a small amount of capital and then borrow the broker’s money to open positions with high contract size.
For example, with $1000, you can buy 0.01 lot (1 standard lot = $ 100,000). However, if you trade with a broker that offers 1: 100 leverage, you can buy 1 standard lot for just $ 1000. In other words, you would open a position with volume: 1000 * 100 = 100,000. In this situation, the maximum size you can use is 100 times the original trading capital.
However, leverage is a double-edged sword. While enlarging your profits, leverage also might result in huge losses.
Some Forex-newbies have a common mistake that margin is a transaction fee or cost. However, margin can be thought of as a deposit (collateral) required for you to open a trade or keep it from being closed when your order is at a loss. Margin and leverage have an inverse relationship.
For instance, if you want to buy USD / JPY worth 100,000 USD, you don’t need to offer the full amount, you only need to offer a portion, like 3,000 USD. The actual amount depends on your broker.
Equity is the current value of your trading account, which represents the sum of the Balance of the Account and the total profit/loss on open trades.
EQUITY = BALANCE + FLOATING PROFIT
Because the price is always in constant movement, floating profit is always changing. It means at the same time, equity is also changing continuously.
If your account doesn’t have any open positions (Floating profit = 0), then Equity = Balance.
Let’s see an example. You have $ 1000 into your account, so Balance = $ 1000. You have not made any transactions on the market: Equity = Balance = 1000 $. When you make a trade and have a loss of $ 50 (Floating Profit = $ -50). Now Equity = 1000 + (-50) = $ 950.
Equity reflects the real value of your account.
- Long/short position
Long position, simply put, indicates the case when you buy the base currency and expect it to go up, then sell for a higher price and gain a profit in the future.
For example, in a Forex trade, the pair currency here is EUR/CNY 8.00. When you go long in this case, you are betting that in the coming days, 1 EUR will be equal to more than 8 CNY.
Unlike going long, when you go short in a Forex trade, after selling one currency, you expect that its value will be weakened to buy them back at a lower price in the future.
For instance, with the currency pair EUR/CNY 8.00, in the beginning, you use 1000 EUR to buy 8.000 CNY. In the next months, the value of the quote currency downs, 1 EUR = 5 CNY. Thereby, with 8000 CNY you had, you will have 1600 EUR, and you profit 600 EUR.
1.3. Benefits and Challenges of Forex Trading
As a 24/5 market, Forex offers many benefits that would tickle your fancy.
- High liquidity
Because the Forex market is extremely huge, so is its liquidity. This market liquidity ensures that traders can achieve a good balance and have opportunities at their fingertips.
Normally, with just one click, you can instantly buy or sell one currency because there are always any traders in the market willing to fill your orders.
- Ease of Entry
Unlike the stock market, Forex requires a small amount of money to get started. You just need to pay a minimum deposit of $50 to own a “mini” trading account from brokers. Low capital requirements help the Forex market become more accessible to beginners who don’t have a large initial investment.
In addition, thanks to the development of the internet, you can easily find free materials or guidelines, fundamental analysis theories and tools, the latest news and charts about Forex trading.
Numerous online brokers offer demo accounts for you to experience before trading the real money. Take advantage of these benefits to shorten the learning curve, guys!
However, huge profits and benefits always come along with huge risks. You have to accept these challenges to become a Forex trader.
- Lack of Transparency
A fact shows that the Forex market doesn’t work under the control of regulators, but the traders and brokers. With the decentralized nature, mainly trading activities through the internet, the market has created opportunities for many brokers to profit from dishonesty.
Therefore, it is crucial to find reputable Forex brokers, licensed and managed by trust-worthy regulators in the world.
- High Leverage, High Risk
Forex allows traders to use high leverage, 50:1 or even 1000:1, which exposes your profits multiple times. When you can gain great benefits from leverage, it means you have to accept the magnified risk.
Any trade can turn into a losing order, any profitable system can fail under certain market conditions. So, be cautious in every step in the Forex world.
2. Forex Trading for Beginners Manual: Steps by Steps
- Step 1: Choose a broker
The first step you need to take is to find a reliable forex broker. In this industry, the broker – your important partner is an integral part of every trade.
There are many criteria for the broker that you need to take into consideration. The broker you are planning to collaborate with should be regulated and supervised by a local or international authority. Conducting transactions with a legal Forex broker ensures the safety of your investment as well as minimizing risks for users.
You should spend time on further investigation by consulting their website and reading about Trading Principles, Commitments and Policies, their terms and conditions.
You can suppose whether this broker would provide transparent trades through their addresses, phone numbers, customer support services, and information presence of their regulatory bodies.
- Step 2: Open an account & select a trading platform
After finding out the appropriate broker, you need to access their website to open a Forex account, and then get a trading platform MetaTrader – MT4 or MT5.
As a novice, we recommend you opening a forex demo account to practice skills, get similar to the trading procedure such as placing orders, closing orders, or understand a live trading environment.
Any broker has these two types of accounts, so you can feel free to experience it. For the demo account, there will be a certain amount of virtual money in the account for you to trade.
Once you have completed the account opening step, just go to the main website, navigate to the Platform and select MT4 or MT5 to download. After that, choose the correct trading platform you registered. Each Forex broker might have different servers, make sure that you fill in your username and password correctly.
It is time to conquer a new world!
- Step 3: Learn technical analysis
Technical analysis in Forex is one of the vital issues for regular traders. If you understand the technical method, traders can easily identify the appropriate times, prices, and trends that are on the market.
For example, when analyzing price charts, you can gain valuable information including price stability in the past and present, price volatility before and after major events, transaction volume history etc. This information will help you find the resistance and support level and help you make the last order.
Technical analysis is a useful tool for traders to identify possible risks and realize a good opportunity to place a buy/sell order.
Along with the technical analysis, a trader also needs to learn fundamental analysis and sentiment analysis. Fundamental analysis provides relevant information about a country’s economy, while sentiment analysis tries to find the market’s mood to see if the market is in a positive or negative state.
- Step 4: Start a real trade
Now, it is high time to deposit and “play” with real money!
Although you come to the forex market to make money, the sad news for you is that “You will definitely lose money” when you first step here. According to statistics, new forex traders have a very high failure rate: It is estimated that about 90% of forex traders lose in their first year.
Therefore, be patient. Practice makes perfect and learns from failure.
- Step 5: Gain experiences and keep learning
Even professional traders, who make stable profits every year and can live comfortably with their trading, still learn and practice daily. The market might work in this way today, but it will definitely be different tomorrow. Hence, don’t be satisfied with our current successes.
We always have to change to keep up with the changes of the Forex market. This market is always changing, and if we stop, we are the loser.
Keep learning and gaining experiences and skills continuously.
If you still have any doubts, feel free to leave a comment in the section below. We are pleased to share with you more knowledge and tips about Forex Trading!
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