Want to get started with forex trading? But not sure how to do so? If your answer is yes then I am here to help you out.
In this article, I will be explaining everything you need to know about forex trading. So you can have a clear idea about forex trading and what you will need beforehand. So let’s just head into the topic without wasting much of the time:
What is Forex Trading?
Forex is also known as the foreign exchange market or FX in short. It is a decentralized marketplace that facilitates the buying and selling of different currencies. The whole process works over the counter or OTC via the interbank market instead of on a centralized exchange.
And many of us already participated in the forex exchange market without knowing about it. Like if you have ever imported shoes, purchased foreign currency on vacation, or anything, you have already used the forex exchange market.
Also, there are quite a lot of reasons why many traders prefer participating in forex. Some of the common reasons are:
- The size of the forex market.
- Wide range of currencies to trade.
- Differing levels of volatility.
- Low transaction costs
- 24 hour a day trading during the week.
Forex Market Explained
The Forex exchange market works pretty much the same way as any other market. And it is completely based on the concept of supply and demand.
For instance, if there is a strong demand for the US dollar from European citizens holding Euros, then they will exchange their Euros into Dollars. As a result, the value of US Dollars will rise while the value of the Euro will fall.
Also, you should know that this transaction only affects the EUR/USD currency pair and will not, for example, cause the USD to depreciate against the Japanese Yen.
What Moves the Forex Market?
In the above part, I have only mentioned one of the factors that move the FX market. However, it also includes other reasons that can move the forex market.
For example, broad macroeconomic events like the election of a new president or country-specific factors like the prevailing interest rate, GDP, unemployment, inflation, and the debt to GDP ratio play an important role in moving the FX market.
Hence, the top traders use the economic calendar to stay up to date with these economic events or releases that can play an essential role in moving the market.
What Makes Forex so Attractive?
One of the main reasons why forex is so attractive because it allows large institutions, governments, retail, and private individuals to exchange one currency for another. And the whole process takes place via the interbank market or between banks.
Another important thing that makes forex is so attractive is that it is the most liquid market in the world. It has an average daily trading volume of $5.1 trillion, according to the BIS Triennial Survey 2016. As a result, the traders can easily enter and exit positions as many willing buyers and sellers are available in the FX market.
What is Forex Trading, and how does it work?
You must be having this question, how to make money with forex trading? Well, the basics of forex trading are extremely simple.
If you think that the value of a currency will go up, you have to buy the currency. This is known as going long. Alternatively, if you think that the currency’s value will go down, you sell the currency and buy it later. This is known as short trade.
Who Trades Forex?
You can usually see two types of traders in the FX exchange market. This includes hedgers and speculators.
Headers are always looking to avoid extreme movements in the exchange rate. On the other hand, the speculators are risk-seeking and always looking for volatility in exchange rates to take advantage of.
What does a forex trader do?
The main job of a forex trader is to take long or short positions on currency pairs with the goal of making a profit.
As a forex trader, you will need to be strategic, disciplined, and always switched on to the markets. You can analyze a currency pair based on technical or fundamental analysis, get an idea of the behavior of the market, and set up profitable trades.
The best part of Forex is that it is a 24-hour currency market. As a result, trading never sleeps. As a result, you will always find something to trade on. However, at certain times of the day, the forex levels will peak. So you need to be familiar with such timings.
Checklist to Become a Forex trader:
Find a Forex Broker
The first thing that you need to do is find a forex broker. Choosing the best forex broker will have a huge impact on your forex trading. For example, you will get a better user experience, reliable client support, and competitive pricing.
Know how trading capital works
You will also need to have an idea of how the trading capital works. It is important that you must understand concepts like margin and leverage.
Margin allows you to open leveraged position. This means you will get great exposure to the market with small capital. Newer traders often look at the unused margin as buying power and therefore tend to be too aggressive on their position sizing.
On the other hand, the leverage maximizes gains and losses, making your account equity quite volatile. However, I would recommend you to use little or no leverage in your trading to avoid losses.
Start with a demo account
You can always start with a demo account. A demo account will help you to get familiar with the markets. So you can build your own trading strategy, get comfortable with the platform you have to choose, and build confidence that will help you to make profitable trades.
You should also start trading with little money at first and work your way up. You should also consider risk management protocols to avoid huge losses. Make sure you are using stop loss and only trading when you have done a deep analysis of a currency pair. Also, do focus on both technical and fundamental analysis.
Never stop learning
In the end, you should never stop learning and building expertise in key markets. You should have proper knowledge of your selected currency pair inside out. The more expertise you gain over time, the better you will be able to spot trading opportunities and make profits.
Forex Currency Pairs Explained
In FX trading, the currencies are usually expressed in pairs. Also, sometimes it is expressed as crosses. They are usually displayed as:
In the pair above, EUR is called the base currency the USD is the quote currency. The base currency is 1, and the quote currency is how much it’s worth in the base currency. For instance, EUR/USD is 1.05 then it means that the EURO is worth 1.05 US Dollars.
Majors, Minor and Exotic Currency Pairs
Currency pairs are also separated into major, minor and exotic currency pairs. And the major currencies always includes the USD or any of the below-mentioned currency:
- Euro (EUR)
- British Pound (GBP)
- Swiss Franc (CHF)
- Swiss Franc (CHF)
- New Zealand Dollar (NZD)
- Japanese Yen (JPY)
- Canadian Dollar (CAD)
Also, you should know that the major currency pairs are favored by the new traders. As they do have high liquidity and a large amount of available data.
Also, news outlets cover events that affect these currencies quite frequently. So you can always find information and trade better.
Next, there are the minor currency pairs that include the currencies in the above list but not the USD. For instance, you can include AUD/JPY, EUR/CHF, EUR/GBP in minor pairs. Also, the good part is that the minor pairs offer you a large amount of data. As most of the currencies involved are some of the market’s popular.
Lastly, Exotic pairs include currencies from developing countries and a major currency, such as USD/MXN. These pairs usually have less liquidity depending on which currencies are involved. Also, they are usually considered to be significantly more volatile than major pairs or crosses. As a result, these pairs are mostly preferred by experienced traders.
How Much Do I Need to Trade Forex?
Different people would tell you a different amount that you will need to trade forex. However, if you ask me, I would recommend you have a forex trading account with at least $2000 to $5000 for day trading. This will help you to get a decent income.
For instance, if you have $3000 in your account and you can take the risk of $30 per trade. Then you can make $60 per day. In case if you have $5000 in your account, you can risk up to $50 per trade and make about $100 per day from trading forex.
This is pretty much possible considering the fact that you are only risking about 10 pips per trade. So you can take a position size of about 5 mini lots, which will lose you $50, or make you about $75 if your average gain is 15 pips.
However, you should also keep the fact in mind that you will not win every trade. But if you win 3 out of 5 trades, then you will have $125 for the day. Somedays, you might even make more money, and some days you may make fewer bucks.
The $5000 account will help you to get a decent daily income. But if you want to grow more and earn more, you can add up to $10,000 in your forex trading account and make $250 per day.
However, these are just estimates, and don’t promise that you will make the said amount. But yes, if you invest your time in proper technical and fundamental analysis. Then achieving these targets won’t be hard for you.
Also, I am pretty much aware of the fact that not everyone can invest amounts like $2000 to $1000 in forex trading. Instead, you may want to start small and invest about $500. And if you do so, then risk more than 1% of your account on each trade.
Then you can make about $10 per day. Also, as you gain experience and make more money, you can always increase the amount of investment and get bigger profits.
Why should you use a Forex VPS?
Lastly, you can consider using a Forex VPS. Forex VPS is extremely helpful to those traders who want to keep their trading system running and always ready to take trade signals when the market is open.
Also, it will prevent traders from sitting on their computer all day and look at the screen all time. Another reason why people consider using forex VPS is that they want the ability to access it remotely.
So if you are someone who travels frequently and wants to check on your account and trading system from anywhere you go. Then a Forex VPS offers you remote access, so you can remotely execute trades or look at markets.
Furthermore, most of the VPS providers offer you a dedicated power supply. As a result, you will be able to keep your trading system running all the time, even when the power goes out in your area.
Moreover, with the help of a VPS system, you can automate your trade and execute your process successfully at a faster speed. Most of the VPS providers offer you stable and reliable servers, which are ideal for running automated trading tasks. So you can trade when you are sleeping or when you are not on your PC.
So that was a beginner’s guide on how to get started with forex trading. Trading forex is pretty much the same as trading stocks, FnO, and other markets. However, you will need a basic understanding of how the FX market works. And I hope that this article has helped you with all the information you require to trade forex.