Forex Trading For Beginners: The Ultimate Guide
Forex trading for beginners can be very powerful. This is often due to unrealistic expectations among newcomers. What you need to know is that currency trading is by no means an outline of quick wealth. This article is our definitive guide to forex trading for beginners. On this page, you will receive an introduction to the Forex market, how it works, and key terms, along with the benefits of different currency trading.
We will cover how to start trading (including selecting the best broker and trading program), the basics of risk management, the different ways in which you can analyze the Forex market, and an overview of the most popular trading strategies. By the end of this guide, you will have the knowledge you need to start testing your trading skills through a free demo account before moving on to a real account.
Forex Trading For Beginners: The Ultimate Guide
What is Forex?
Forex, or foreign exchange market (also called FX for short) is the market where currencies are traded. In its simplest form, it may be a foreign exchange transaction, for example, when you convert your local currency into a new currency for a coming holiday. Across the market, an estimated US $ 5.3 billion is traded every day among governments, banks, companies and speculators.
Knowing how to place the industry on the map is important, because the combination of all participants creates the market in which you trade. The market’s relative weight is measured by the amount of money run by the party – from hedge funds worth $ 1 billion. Investment banks, to private traders with a few thousand dollars to work.
Currencies are traded as a pair, and the movements of currency pairs measure the value of one currency against another. For example, the EURUSD measures the value of the euro against the US dollar. When the value of the pair increases, this means that the value of the euro has risen against the value of the US dollar. When the pair depreciates, this means that the value of the US dollar has increased (or decreased the value of the euro). Through Forex trading and CFDs, traders can take profit from these currency movements.
What currency pairs can you trade?
Forex pairs are known for specializations, minors and strangers.
Major currency pairs consist of the most heavily traded currencies:
USD – USD
Euro – Euro
JPY – Japanese Yen
British Pound – British Pound
Swiss Franc – Swiss Franc
CAD – Canadian Dollar
AUD – Australian Dollar
NZD – New Zealand Dollar
The main currency pair is one that contains any of these currencies associated with the US dollar, such as EUR / USD, USDJPY or GBPUSD. Foreign currency pairs of foreign currencies that do not include the US dollar. These pairs include EURGB, EURCHF, AUDNZD and so on.
Finally, rare currencies are any currencies we have not mentioned before, such as Hong Kong Dollars (HKD), Norwegian Kroner (NOK), South African Rand (ZAR) and Thai Baht (THB). Exotic couples include one exotic coin and one main coin.
When learning forex trading, many novices tend to focus on major currency pairs due to daily volatility and narrow spreads. But there are many other opportunities – from exotic foreign currency pairs, to opportunities for CFD trading on stocks, commodities, future energy and indices. There are indicators to track down sets of indicators, and you can also trade them. How many markets you are looking for are up to you, but do not restrict yourself to one tool or market. Restricting the market can oversold, so be sure to diversify your investments.
How do Forex prices work?
When trading in Forex, you will see that the prices of both the Offer and the Order are listed. The bid price is the price at which you can buy the currency, while the asking price is the price at which you can sell it. If you buy a currency in a trade, this is known as long trading, and the hope is that the currency pair will increase its value so that you can sell it at a higher price and make a profit from the difference. If you sell a currency in a deal, the opposite is true – the hope is that the currency will fall so you can buy it again at a lower price, which means you will benefit from the difference.
The quoted number for these prices depends on the current exchange rate of the currency in the pair, or the amount of the second currency you will receive for one unit of the first currency (for example, if 1 euro is exchanged for $ 1.68, the bid and ask price will be on both sides of this figure). Learn more about Forex rates in this article: Understanding and reading Forex prices.
How often do currency values change (or, to what extent are different currency pairs different)?
If the way traders make a profit is by calculating the difference between the bid and ask price of a currency pair, the next logical question is, to what extent can you expect a particular currency to move?
This depends on how liquid the currency is, or how much is bought and sold at any time. The most liquid currency pairs have the greatest supply and demand in the Forex market, and this supply and demand is generated by banks, companies, importers, exporters and traders. Major currency pairs tend to be the most liquid, with EUR / USD moving 90-120 pips on an average day.
By contrast, the AUD / NZD is trading 50-60 pips per day, and the USDHKD is trading only at an average of 32 pips per day (when looking at currency pairs, most of them will be listed by five decimal points.) A ‘Pip’ is 0.0001, so if the EUR / USD moves from 1.16667 to 1.16677, it will be a one-point change. The major foreign currency pairs tend to be the most liquid, thus providing the greatest opportunities for short-term trading. Small and also exotic, especially if you have some specialized knowledge about a particular coin.
What is the spread of Forex?
The difference in Forex is the difference between the bid and ask price of a currency pair. For example, if the bid price for EUR / USD is 1.16668, the selling price is 1.16669, the difference will be 0.0001, or one point. In any forex trade, the value of the currency pair will need to exceed the gap before it becomes profitable. To continue the above example, if the trader enters long term EUR / USD trading at 1.16668, the trade will not be profitable until the pair is above 1.16669.
In a currency pair with a wider spread, such as EURCZK, the currency will need to make a larger move to make the trade profitable. At the time of writing, the bid price for this pair is 25.4373, while the asking price is 25.4124, so the difference is 0.0200, or 20 points. It is not uncommon for a currency pair to get below 20 pips a day, which means traders will likely need a long-term trade to make a profit.
This means that low-spread trading is often a priority for forex traders, where their deals can become profitable faster, meaning they can make a large number of smaller deals, rather than relying on larger deals to make money.
What are CFDs in Forex?
If you’ve been looking at forex trading, you might have seen the term “Forex CFDs” at some point. There are two ways to trade Forex: use CFDs or FOREX (also known as margin). Forex includes buying and selling the actual currency. For example, you can buy a certain amount of sterling against the euro, and then, once the pound is appreciated, you can then exchange the euro for the pound again, and receive more money than you originally spent on the purchase.
CFD refers to “Contract For Difference”, a contract used to represent movement in the prices of financial instruments. In terms of Forex, this means that instead of buying and selling large amounts of currencies, you can take advantage of price movements without owning the same asset. Along with Forex, CFDs are also available on stocks, indices, bonds, commodities, currencies and cryptocurrencies. In each case, it allows you to trade the price movements of these instruments without having to buy them.
Investing, Derivatives, Spread betting and CFD trading carry a high level of risk to your capital and can result in losses that exceed your initial deposit. They may not be suitable for everyone, so please ensure that you fully understand the risks involved.
ESMA & FCA Risk Warning – “CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 80% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. Capital at risk”