International currency pairs exchanged in the forex market are considered the most liquid and volatile asset class you can find for trading. The frequent price movements happening in the forex market make it an attractive spot for global traders, which is evident from the fact that it is the largest trading market in the world. The trading volume of the currency market is estimated to have crossed $7 trillion in the year 2023. But beginners may still find forex trading to be a complicated process as they need to learn a lot before taking their first move as a forex trader.
With this step-by-step guide, we intend to educate you about forex trading by covering the basics, the trading process, forex trading platforms, trading strategies for forex beginners, and some valuable tips you can follow for easy trading.
What is Forex Trading?
Let’s start by finding an answer to the most basic question a beginner entering the forex market asks. Forex trading, also known as foreign exchange trading, is the act of speculating on the movements of currency prices in order to make a profit. The forex market is a decentralised global marketplace where currencies are traded against one another.
While many currency conversions on the forex market are done for practical purposes such as international trade, travel, or remittances, traders can also participate in the market to speculate on price movements. Forex trading aims to capitalise on correctly forecasting these movements and making a profit.
Forex trading can be done through various methods, including spot transactions, forwards, options, and futures. The most common way of trading forex is spot trading. commonly traded currency pairs in the forex market include the US Dollar, British Pound, Australian Dollar, Canadian Dollar, Swiss Franc, New Zealand Dollar and Japanese Yen, which are recognised as major currencies. Major currency pairs are the chosen trading instrument for the majority of trades happening in the forex market.
A forex trader can open 2 types of trade positions for trading. A buy position is known as going long, where a trader foresees the possibility of a currency pair’s price rising, which means the base currency will gain in value against the quoted currency in the chosen pair. The second one is a sell position, which is known as going short as they anticipate the base currency to fall in value against the quoted currency. The price changes happening in currency pairs are basically the exchange rate differences which are measured with a unit called ‘pips’. A pip is 0.0001 for all currency pairs except the ones with Japanese Yen, as 1 pip for Yen is 0.01 instead.
The process of predicting price changes and opening trades with profit potential is done after a thorough analysis of the market situation. This can be done using economic data, referred to as fundamental analysis, or price data, which is known as technical analysis. Technical analysis involves using visual tools like charts as traders recognise ongoing and upcoming market trends from the price patterns formed on the charts. In short, becoming a forex trader calls for continuous learning and planning and practice on a demo trading account. The ability to assess the market risk and manage the same is a must for becoming a successful trader in the volatile forex market. These are some of the basics of forex trading that a beginner should know about.
Trading Forex Step-by-Step Guide
- Learn and Devise a Trading Plan – The very first step for forex trading should be learning about the currency markets and trading concepts like a good student. Then you can start devising a trading plan and strategy based on what trading style you prefer to try as a beginner.
- Find a Forex Broker and Trading Platform – The next step is related to accessing the forex market as a beginner, for which you need to open a trading account with a forex broker and log in to an online trading platform. Make sure to take your time choosing a trusted broker and platform. Always try their demo account first in order to test the trading conditions offered.
- Choose Your Currency Pair- The next step is picking your trading instrument, preferably a major currency pair, as they are the easiest to trade for a beginner.
- Monitor the Market- The next step is monitoring the market, which is more about watching the price movements happening in the chosen pair. Based on your trading style and strategy, you need to see what kind of trade position would work for this pair.
- Plan and Place Your Trade- Once you spot an ideal trade setup for the pair, plan your trade in advance and place it after necessary calculations. Risk management is the key component for trading in a safe zone. So, always follow your set risk/reward ratio and remember to place a stop loss for every trade.
- Review Your Performance- This is a crucial step for improving your trading skills for the future. You must take some time to analyse your trades and review your performance in order to correct your mistakes in time. This is essential for getting better at what you do, and a trading journal can be a great tool for self-assessment in this case.
Forex Trading Platforms:
- Forex trading platforms are online software traders use to access the foreign exchange market.
- These platforms provide traders with tools for analysing the market, executing trades, and managing their positions.
- Popular forex trading platforms include MetaTrader 4, MetaTrader 5, cTrader, ActTrader etc.
- Traders should choose a platform based on their needs, such as the availability of their preferred trading instruments, and the forex broker should offer ease of use, and the platform you have chosen to open an account with.
Beginner Forex Trading Strategies:
- As a beginner, it’s important to focus on simple strategies that you can easily execute.
- One popular strategy is a trend following, where traders look for a currency pair following a particular trend and trade it to make profits.
- Another strategy is range trading, where traders look for currency pairs that are trading within a specific range and enter a trade when the price reaches the top or bottom of the range.
- Traders can also use technical indicators like moving averages (DMA, EMA & SMA) and the relative strength index (RSI) to figure out the right spots for entering and exiting trades.
Forex Trading Tips for Beginners:
- Before trading with real money, beginners should practise on a demo account to get a feel for the market and their trading platform.
- It’s important to have a trading plan and stick to it, including setting stop-loss and take-profit orders to manage risk.
- Traders should remain abreast with market news and economic events that may affect currency prices.
- Beginner traders should choose small lots initially and once they get a hang of the process, they can trade bigger positions, but even then, they should implement risk management strategies to manage their losses.
- A newbie trader must maintain discipline and consistency at all costs, as that is the only way to attain long-term success in forex trading.
To conclude, the things you just learned are the tip of an iceberg in relation to forex trading. There is so much more to learn and know about Forex trading as you take a deep dive into the Forex world as an active trader. Forex trading can be a profitable venture for anyone, but beginners need to approach it cautiously and be willing to learn. Choosing the right trading platform, using simple strategies, and following trading tips can help beginners build a strong foundation for their trading career. As always, it’s important to remember that trading involves risk, and traders should never risk an amount that they are not comfortable losing in the first place.