Forex trading for beginners can be quite extensive. Assessing varied aspects related to the forex market will make it easy to have a concrete understanding.
What is Forex Trading?
When related to retail traders, forex trading can be defined as the speculation on the price of one currency against another. I.e. you can buy the USDCAD currency pair low and then sell it at a higher price to make a profit that is if you feel or think that the US Dollar will rise against the Canadian Dollar.
Always be aware and cautious of the risks involved in forex trading rather than just focusing on the rewards.
What is the Forex Market?
The forex market is where governments, businesses, investors, banks, and traders come together to speculate and exchange currencies.
The forex market is also identified as forex or simply FX, foreign exchange currency market, currency market, or foreign currency market.
It’s not only the biggest but also the most liquid market that has a daily turnover of around $5.2 trillion per day.
For five days a week, the foreign exchange market is open for 24 hours a day.
The biggest and iconic world trading centers are located in cities the likes: Tokyo, Zurich, New York, Frankfurt, Singapore, Hong Kong, Sydney and Paris.
There’s no central market place when it comes to forex trading. Trading is instead conducted ‘over the counter’, and not like in stocks, where there is a central marketplace with all the orders processed like the New York Stock Exchange(NYSE).
Forex is a product quoted by all major banks, but not all banks will have the same price. The brokers’ platforms will take all the feeds from different banks, and the quotes seen from the forex brokers are just an approximate average.
The broker effectively transacts the trade and takes the other side of it; in other words, brokers ‘make the market for you’(or simply they are the “market makers”).
When you purchase a currency pair, your broker sells it to you and not just ‘another trader.’
There are several definitions that ca be included to make forex trading for beginners less cumbersome.
Common Terminologies Related to Forex Trading
PIP (Point in percentage) is the smallest change of price that a given exchange can accommodate. Since the major currency pairs are priced to four decimal places, the smallest change will be that of the last decimal point. The only exception here is the Japanese yen, whose pairs are quoted to the second decimal point.
A currency pair entails the quotation and pricing structure of the traded currencies in the foreign exchange market. The currency’s value is determined by comparing it to another currency. The base currency is the first currency of a currency pair. The second currency is the quote currency. The currency pair is an indication of how much quote currency is needed to buy one unit of the base currency.
The Base currency is typically considered the domestic currency or accounting currency and is the first currency that’s quoted in a currency pair in forex trading.
The Quote currency is the second currency appearing in a forex currency pair. It is mostly the foreign currency in a direct quote. It is also referred to as the counter or secondary currency.
Cross currency pair is a pair of currencies traded in the foreign exchange market that does not include the American dollar. A foreign currency is traded for another without necessarily having to first change the currency into dollars.
Bid price is the price that your broker would be willing to bid or buy the base currency you are holding.
The Ask price is the lowest price that a potential seller (broker)is willing to receive in exchange for you buying the quote currency of your choice. At times it is referred to as the offer price.
Spread is the difference between the asking and the bidding price. In other words, it’s the commission the broker receives.
Margin This the deposit amount required to maintain or open a position. Margin can either be free or used.
- Used margin-this is the amount used to maintain an open position
- Free margin-Is the amount that’s available to open new positions.
With a margin balance of $1000 in your account, and a 1% margin requirement to open a position, you have the option of selling a position worth up to $100000.This gives the trader the ability to leverage their account up to 100 times or a 100:1 leverage ratio.
Are these definitions helpful in forex trading for beginners? There is a lot more that you can find by browsing this blog.
Types of Currency Pairs in Forex Trading for Beginners
Just the way different countries have different currencies, that’s the way there are different currency pairs. However, three types of currency pairs stand out across the globe: minor currency pairs, major currency pairs and the exotic currency pairs.
There are brokerage firms that allow you to trade any existing currency pair in the world.
Currency pairs are classified according to the quantity of volume being traded on a daily basis as a pair.
Major Currency Pairs
All major currency pairs have the USD on either side; base or quote. Major currency pairs are regarded to be the most traded pairs in the forex market.
Major currency pairs, in addition, offer the lowest spread and are the most liquid pairs in the FX market.
The EUR/USD pair, for instance, holds 30% of the entire trade volume of the forex market.
A table showing the major currency pairs
|USD/CAD||United States / Canada|
|GBP/USD||United Kingdom / United States|
|EUR/USD||Euro / United States|
|AUD/USD||Australia / United States|
|USD/JPY||United States / Japan|
|USD/CHF||United States / Switzerland|
|NZD/USD||New Zealand / United States|
Minor Currency Pairs
Also referred to as cross-currency pairs, or just ‘crosses.’
These are major pairs that do not have the USD.
Minor currency pairs have been known to have slightly wider spreads and are not as liquid as major currency pairs but are still sufficiently liquid.
Unlike in the past, where in order to obtain the desired currency, a trader would have to first convert their currencies into US dollars before converting it to their desired currency, Minor currency pairs allow traders to directly convert their currencies into their desired currencies; bypassing all the conversion processes.
A Table Showing the Minor currency pairs
|GBP/NZD||United Kingdom/New Zealand|
|NZD/CHF||New Zealand/ Switzerland|
Exotic Currency Pairs
Exotic currency pairs are made up of a major currency paired with the currency of an emerging economy such as Hong Kong, Mexico or Singapore.
There is a big difference in the liquidity of these currency pairs as compared to major and minor currency pairs.
Exotic Currency Pairs Examples
|USD/SEK||US Dollar/Swedish Krona|
|USD/DKK||US Dollar/Danish Krone|
|USD/HKD||US Dollar/Hong Kong Dollar|
|USD/SGD||US Dollar/Singapore Dollar|
|USD/MXN||US Dollar/Mexican Peso|
|USD/TRY||US Dollar/Turkish Lira|
|USD/NOK||US Dollar/Norwegian Krone|
|USD/SGD||US Dollar/Singapore Dollar|
|USD/MXN||US Dollar/Mexican Peso|
Forex Trading Strategies
At any given time, a forex trader needs a technique to determine whether to buy or sell a currency pair. This is what is referred to as a trading strategy.
A forex trading strategy can be based on technical analysis or fundamental news-based events.
The trader’s strategy is usually made up of signals that trigger buy or sell decisions.
What’s the Best Forex Trading Strategy?
Traders differ in terms of personality traits which need to be taken into account when selecting the best trading strategies.
Whereas some traders prefer fast-paced trading in short time frames, others prefer long-term trades which are held open for days or weeks.
The four main trading styles you should be familiar with are:
Day traders conduct their trades during the day and close when the day ends. Just like scalpers, day traders rely on the technical analysis of small timeframes, ranging from 15 minutes-1 hour.
Scalping is the quickest trading style and involves holding trades for up to a few minutes. During the day, scalpers open numerous trades and aim to profit on the small price movements, closing the trades with small profits. This fast-paced trading style is not suitable for everyone, especially not the slow ones. Scalpers rely on short term analyses and news trading. They then take advantage of the sudden spikes in momentum.
Swing traders hold onto their trades for longer periods; days or weeks, and unlike other traders, they are exposed to increased risks should the market conditions change over a few days, or overnight. The longer period of times allows the swing traders to target bigger profits.
Position traders hold on to their trades for very long periods; going up to months. This always calls for a deeper analysis of market fundamentals since they have a huge impact on long-term currency movements.
Whichever forex trading strategy you prefer, let it fit your personality appropriately.
What to Consider When Developing a Forex Trading Strategy
To become a successful forex trader, you must have a trading strategy that addresses the following:
- Management of funds
- Documentation and analysis of the results
- How and what to learn from mistakes made
- Logic of trading
- Time of trading
- Objective of trading
Have a valid reason for entering a trade; be it technical or fundamental and not just trading just for the sake of it.
Some Forex Trading for Beginners Tips
There’s always a starting point in everything, and so is forex trading for beginners. Here are some tips for beginner traders that will help you succeed and avoid some trading mistakes that I see with many trades.
- Learn as much as you can about the foreign exchange markets before investing your own money. This will save you from making unwanted losses.
- Find a reputable broker as this may be the make it or break it point of your journey as a forex trader.
- Never forget to use a practice account. Forex brokers give their clients the chance to use a demo account before investing their own capital.
- Once you’ve been able to successfully create your trading account, protect it.
- Start small when you think you’re ready to start trading.
- Keep your charts and records clean.
- Forex trading can be treated as a real business if taken seriously, and not just an activity to pass the time.