How to trade forex for beginners
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In this section of tradingonlineguide.com, we’ll be looking at how to trade forex for beginners with a tutorial. Forex, which stands for foreign exchange trading, is one of the most popular assets in the market to trade in.
That’s why we wanted to look at some of the main things you need to know about Forex trading. In this article we will also go through what the main points to consider are when starting trading.
All the forex key features such as financial leverage, pips and long position or short position will be explained.
You will also learn how to set up a pending order in your trades and how they really work.
Let’s begin with the first steps to start trading in Forex and CFDs that you must read if you are a beginner.
How to Trade Forex and CFDs for Beginners
Let’s know take a look at how to trade forex, which is also known as currency trading.
For trading Forex you need to follow 4 important steps, especially if you are a beginner:
- Have the right mindset
- Trade with the best and most legit trading platform
- Follow a good trading strategy
- Open your trades
1- The Right Mindset
By the right mindset, we mean to trade with the clear aim to make as many profits as you can. Whilst being aware to avoid trading with the least amount of losses possible.
To achieve this there are two very important concepts in trading to remember: diversification and risk management.
Why are they so important?
Well, if you’re a beginner forex trader, when you open an account with a certain amount of money, a good thing to do is to trade some not all of it. For example by using just a small part of your currency to trade with- normally the 5% to 10%. This is called risk management.
Following this strategy, you won’t risk all your funds, but instead you’ll manage the money you use in a more secure and safe way.
At the same time, managing your risk allows you to be satisfied with your profits too.
To make good profits you don’t need to risk a lot of money, but just to invest in the right market at the right time.
2- Choose the Best Trading Platform
How to trade forex using the best platform?
When you create your forex account, there are many things to consider.
The most important point is probably regulation. To be sure you are not depositing your money with an illegal broker, always check that the broker is fully licensed and regulated by an official trading authority.
Regulation is important because it makes sure that the broker is being monitored by an official body. The forex broker has to follow strict trading guidelines put in place to protect traders.
By using a regulated broker you can be assured that they’re not a scam or fraudulent.
Regulated brokers also have to ensure that client’s money is kept in accounts separate from the businesses running accounts. So should an online broker experience financial problems, your money that may be in a trading account with them would not be affected.
Regulation is all about customer protection.
Another thing to take in consideration is the minimum deposit. This is normally $100 or even just $10 with some brokers.
The last important factors to consider are the spreads and commissions.
Some brokers offer accounts with a small spread and zero commission on trades. Others have the opposite scenario. It’s always up to you to decide which one is the best option for your trading needs.
All the forex trading platforms listed below are trusted and regulated brokers. They all allow the option to create a free account with them.
‘CFDs are complex instruments and come with a high risk of losing money rapidly due to the leverage. Between 74-89% of retail investors lose money when trading CFDs. You should consider whether you understand how CFDs work and if you can afford to take the high risk of losing your money.’
3- How to Trade Forex With a Good Trading Strategy
Investing in the right market at the right time brings us to the third important concept: having a good trading strategy.
How can using a good strategy help you to trade forex?
There are many valid strategies a trader can follow with foreign exchange trading, but the main ones are:
- News Trading
- Fundamental Analysis
- Technical Analysis
How to Trade Forex With News Trading
News trading is the most common strategy used by beginners. It consists of reading the economic news related to the economic calendar.
From your research you can then start making trades based on that. (Here is an example of an economic calendar).
For example, if today at 14:00 hours there is an important news announcement about the American interest rates, it could be a good chance to trade in dollar-related markets such as EUR/USD or USD/JPY.
This is because in these markets there will be high volatility to take advantage of when the market reacts to the news.
How to trade Forex With the Fundamental Analysis
The fundamental analysis is the study of the macroeconomic situation of a certain market. This is done in order to predict how it will move in the future, which is quite important for beginners.
This kind of analysis takes into consideration different macroeconomic factors such as the national GDP or a country’s unemployment rate.
Another factor for instance could be the national industrial production rate. All of these factors that countries experience have a daily impact on the foreign exchange market.
Thanks to this analysis, it’s possible to understand how these factors could change the market in the future.
To learn more about what the term macroeconomic means, see this page: worldatlas.com
How to Trade Forex With Technical Analysis
The final analysis type is called technical analysis. This consists of pure chart analysis. This is the second most popular analysis that novice traders like to do.
If a chart is analyzed in different time frames, it’s possible to see whether the graphic might have repetitive trends.
For instance, if a graphic has tried to go higher than a certain price level several times to then be bounced, that level price is called resistance.
On the other side, a graphic could have tried to go below a certain price many times – which has then bounced up. That level is called support and it’s possible that the price will try to reach that level again.
For a more detailed explanation of all the trading strategies, please go to the trading strategies page.
4- How to Trade Forex and Open a Trade
Now that everything is set, you’re ready to go and open your trades.
How do I open a trade? Let’s see it in the following tutorial.
The first thing you need to do is to select the market (asset) you want to trade. For instance this can be a currency such as EUR/USD, or a commodity such as Gold. As we’ve previously said, with foreign exchange trading everything is available
Then you must decide if you want to buy or sell.
In this phase, beginners usually trade with the support of the take profit and stop loss.
These represent the price level your investment will automatically close with. This can either be in profit- (take profit), or with what price the trade will be stopped at- (stop loss).
The final step consists of monitoring and keeping under control the opened trades.
This is important because it’s possible to close trades manually if they don’t reach any take profit or stop loss prices. Usually, there is an “X” symbol featured at the end of every opened position. Clicking on this will close the open trade.
What is a Pip in Forex?
When talking about how to trade forex there is another popular term you’ll hear a lot. We are talking about Pips. (If you are a beginner this is very important to learn).
What is a pip in forex?
A pip (percentage of a point) measures the smallest change in an asset price and it’s the Forex unit of measure.
Usually in Forex the prices are represented by 4 units after the unit figure. These units are called pips.
For instance, if the price of EUR/USD changes from 1,2201 to 1,2209, it has moved a total of 8 pips. You have to count the difference between the unit figures.
For this example the unit figures are highlighted in bold: 1,2201 to 1,2209.
The bigger the movement is, the larger the amount of pips used.
Long Position and Short Position
When learning how to trade forex there are some important terms that every beginner should know.
The most common ones are short position and long position.
We have already mentioned that in trading there are just 2 different possible actions to do: buy or sell.
Because of this, a buy position is known as a long position.
Whereas a sell position takes the name of a short position.
For example, if a position has been opened in a sell position, it’s because of an expected drop in that asset’s price.
They are both two potentially profitable trades, but only if the prediction matches with the trading strategy and the expectation also aligns.
When trading a common question a lot of beginners ask themselves is:
Do I need to spend the whole day in front of my computer to open a position at that certain price?
The answer is: NO!
In every forex platform, there is the chance to use the so-called pending orders.
A pending order is an option which allows you to set up a trade which will be automatically opened once it reaches the set price.
Let’s make an example:
The price of oil is $60.00 at the moment, and we only want to sell when it reaches $61,00.
In this situation we would need to set up a pending order called sell limit. This will automatically sell the oil only when the price meets $61,00.
If the price doesn’t reach $61,00 the order will never enter the market so you won’t be risking anything.
There are 4 different pending orders:
- Buy limit: in this case it’s necessary to set up a lower price than the actual price. The expectation is that the price will drop down to the selected level to suddenly grow again.
- Sell limit: in this case the aim is to sell at a higher price than the actual one to suddenly see the price drop down again.
- Buy stop: the price keeps on growing after it passes a certain level higher than the actual one. It’s necessary to select a price higher than the actual one in this case.
- Sell stop: here the goal is to see if the price keeps falling once it has gone lower than a certain level. In this last case it’s necessary to select a lower price than the actual one.
To conclude this tutorial, hopefully you’ll feel more confident now when it comes to trading forex. Once you’re aware of what the terms mean and the various analyses available you’re in a good position to start trading.
If you’re fairly new to the forex and CFDs world, we’d always recommend trying the various trading strategies to see which one suits you best.
These can always be tested in your real trading account or a broker’s demo account.
With so many options available you are free to start trading exactly how you want.