Forex trading guidelines for beginners (PDF)
Forex trading for beginners is an interesting activity for trading lovers. In fact, Forex is an international market where all world currencies are traded. It is an over-the-counter place open 24 hours a day from Sunday evening to Friday evening. Investors trade more than 5 trillion dollars there every day. Hence, it represents an attractive financial market to trade in. In the following reading, we will explain to you the basics of Forex trading for beginners as well as offer some practical tips.
Forex Trading For Beginners
What is forex trading ?
Forex trading for beginners and trading in general, is an activity that takes place on the financial markets, from your online trading platform in order to place purchase and sale orders on various products such as Forex, stock indices, ETFs, and CFDs ( Contracts for difference). The goal of a trader is to buy or sell a financial instrument at a certain price to make money. Yet, traders should also be careful. Because trading is an activity that can make you lose money. For instance, if you buy the EURUSD currency pair (the euro against the US dollar) and it falls, you will see your capital fall.
Trading also means accessing financial market quotes using an easy-to-use platform. This platform allows you to open a trading account. But first, you should:
- Analyze the asset of your choice
- Buy at the best price if you think the price may go up
- Sell at the best price if you think the price may fall
What is forex market?
Forex, a contraction of Foreign Exchange, also called the foreign exchange market, is the market on which currencies from around the world such as the Dollar, the Euro, the Pound Sterling, or the Yen are listed. Currency prices are expressed as a pair indicating the value of one currency against another. The best-known pair is the Euro Dollar, (EURUSD).
Before speculating on the foreign exchange market, you must learn the basics. Know the specific functioning of this market and understand the language of forex traders. Below, is an example of candlestick charts on the forex platform MetaTrader 5 (MT5).
How to start Forex trading for beginners?
The basics of trading must be known to start trading. So, we should understand what the different financial assets are, and the basic vocabulary. Also, knowing how to use a trading platform and being aware of the different strategies are elements so as not to be lost when you start trading.
In this regard, it is essential for every trader to learn the basics before entering any real experience. That is why traders should practice using demo accounts that most platforms provide for free.
Forex trading for beginners is trading currencies. Like the US Dollar USD or the Euro EUR, the Japanese Yen JPY, and many more. These currencies are traded on the Forex market as a pair of currencies, of which the most traded are.
- EURUSD, the Euro versus the US Dollar.
- GBPUSD, the British Pound versus the US Dollar.
- USDJPY, the American Dollar versus the Japanese Yen.
- EURJPY, the Euro versus the Japanese Yen.
- USDCHF, the American Dollar versus the Swiss Franc
- USDCAD, the American Dollar versus the Canadian Dollar.
The screenshot above shows the different currencies pair you can trade with on the MetaTrader platform.
Basic vocabulary to start trading
Let’s see the basic vocabulary to well start the trading.
- PIP: This is the smallest variation in the quotation of a currency pair. When the EUR/USD pair goes from 1.1000 to 1.1001, it increases by 1 pip.
- A lot: it can be defined as the number of currency units you will buy or sell. It is a unit of measurement of the size of a trading transaction. In Forex, 1 lot corresponds to 100,000 units of the base currency (EUR, USD, GBP, etc.). There are mini lots (0.1 lot) and micro-lots (0.01 lot), of 10,000 and 1,000 units respectively.
- Leverage: Leverage increases the trader’s investment capacity. To clarify, the Forex trader can thus spend a small amount of money and actually invest a lot more in financial markets, such as Forex. Leverage increases gains, but also losses.
- Margin: This is the capital required to open a transaction. It is released when the transaction closes.
- Ask price: is the lowest price at which the investor is willing to sell the currancy pair.
- Bid price: is the highest price at which the investor is willing to buy the currency pair.
- Spread: this is the difference between the buying and selling price of a currency pair, expressed in pips. This is the cost paid for opening a Forex trade.
- Going long: is equivalent to being a buyer on a Forex trade.
- Going short: Equivalent to being a seller on a trade.
- Trade: a trade means opening a position for purchase or sale.
- Broker: He is the intermediary who places stock market orders for his clients against remuneration. It is, thanks to the broke,r that you can make a transaction on the financial markets.
How do Forex market works?
We can find several traders in the foreign exchange market. Central banks, commercial banks (and financial institutions), companies, hedge funds, and, certain individual investors who trade one currency against the other. It can be through derivative products (CFDs, etc.).
Thanks to Forex, all these participants can trade currency pairs with guaranteed liquidity. Each pair, for example, the EUR/USD, is made up of a reference currency (for example the euro) against another currency (for example the dollar). It is the evaluation of the reference currency with regard to its counterpart that provides the quotation.
Currency traders, specialized brokers who intervene in the foreign exchange market on behalf of investors, are remunerated on the difference (spread) between the buying and selling prices. They negotiate it for each investor (for example a bank and a company). The prices being volatile, the promises of daily gains are considerable.
As in the traditional stock market, when a currency is bought, as demand increases, prices rise. This phenomenon is particularly noticeable during periods of crisis, during which investors flock to safe-haven currencies. Such as the dollar, the yen, and the Swiss franc.
Note: the dollar remains the benchmark safe-haven currency. Actually, it is the first currency used and traded globally. 85% of Forex transactions involve US dollars.
Good to know: the notable exception to this system concerns pairs involving the Japanese yen. In this case, a pip corresponds to the movement of the second decimal place after the comma.
Forex profits are produced by the appreciation or depreciation of one currency against another. For example, if you buy dollars with euros, you will have to wait for the value of the single currency to increase against the greenback before reselling it. Generating an exchange gain.
What is the best forex trading platform for beginners?Are you looking to speculate on forex markets? Do you think that the Euro (EUR) currency will go up in value against the U.S. Dollar (USD)? To do so, you can trade (or place a spread bet on) the EUR/USD currency pair, which is a forex investment. The forex market is the most liquid and the largest market in the world. It represents every global currency with 24 hours of trading a day, and five days a week. So, to trade forex, you need a forex platform. Trading with a well-performant forex platform is a crucial factor for success in international currency markets. As a contract for difference (CFD) trader or forex investor, you may certainly have specific needs for some forex platform, trading tools, or requirements you have. So, to start trading, it is important to have access to an intuitive online trading platform. Such as MetaTrader platforms, MT4, MT5, Tradingview, etc… This is an example of the platform Tradingview with which beginners can start their forex trading.
How much capital to start trading?
To start forex trading for beginners, the amount of money needed by a beginner trader depends on the number of currency pairs or instruments (indexes, commodities, etc.) on which you are going to invest. The more Forex pairs you trade, the more capital you will need to maintain the required margin needed to open Forex trades. Here are the three main criteria:
- Your leverage.
- Number of currency pairs you will trade.
- Your risk (number of lots per trade).
Tips to trade in forex for Dummies
Before you start your new forex trading, you should imperatively understand the fundamentals. Let’s have a look at trading tips that are important for every beginner trader.
Know the market
We cannot overemphasize the importance of self-learning in the Forex market. Before risking your own funds, take the time to research currency pairs and their effects; it’s an investment of time that can save you a lot of money.
Make a plan
Developing a trading plan is a crucial part of successful trading. It should include your profit goals, risk tolerance, methodology, and evaluation criteria. Once you have a plan, make sure every trade you consider is within your plan parameters. Remember that you may be the most rational before you trade and the least rational after your trade.
Test your trading plan under real market conditions (demo accounts). You have the opportunity to learn what it’s like to trade currency pairs while taking your trading plan for a test drive without risking your own capital.
Predict the market
Fundamental traders prefer to trade based on news and other financial and political data. Technical traders prefer technical analysis tools such as support and resistance retracements and other forex tools to predict market movements. Most traders use a combination of the two. Regardless of your style, it is important to use the tools at your disposal to find potential trading opportunities in an ever-changing market.
Know where to stop
It is all about knowing how much risk you are willing to take on each trade. Considering the leverage ratio according to your needs. And never risk more than your capacity. Beginner traders don’t have time to sit down and watch the market every moment of every day. You can better manage risk and protect potential profits with stop-loss and limit orders. Which will get you out of the market at the price you set. Trailing stops are especially useful because they trail your position a certain distance during market volatility.And it helps protect profits if the market reverses. Giving conditional orders does not necessarily limit your risk of loss.
You have an open position and the market is not moving in your direction. Maybe you can make up for it with a trade or two that doesn’t fit your trading plan. Thus, don’t let emotions get in the way of your plans to trade successfully. If you have a losing trade, don’t go all out trying to win it back in one fell swoop.
Keep your trading slow
A key to trading is consistency. All traders lose money, but if you maintain a positive edge, you have a better chance of standing out. So, it is good to educate yourself and have a trading plan.
Don’t be afraid to explore
While consistency is important, don’t be afraid to reassess your trading plan when things don’t go your way. Your needs may change as you gain experience. Your plan should always reflect your goals. So, if your goals or financial situation change, so should your plans.
Choose the right broker for you
Choosing the right trading intermediary is crucial when participating in the foreign exchange market. Pricing, execution, and customer service quality can all change your trading experience. So, choose one that offers competitive prices, excellent customer service, and helpful guides and tutorials. And thus, it gives you a wide range of tools to get started trading Forex.
Advantages and disadvantages of forex trading for Dummies
- Forex markets are the largest in terms of daily trading volume in the world. And therefore, offer the best liquidity.
- This makes it easy to take and leave a position in any currency within a fraction of a second for a small spread.
- The forex market is daily traded (means 24 hours a day), five days a week. Each day, it gets starting in Australia and ends in New York.
- The broad time horizon offers traders many opportunities to make profits or cover or even reduce losses.
- The major forex market is Frankfurt, Hong Kong, London, New York, Paris, Singapore, Sydney, Tokyo, and Zurich.
- Forex trading offers to beginner investors an extensive use of leverage. So, this means that you can begin with little capital and amplify your profits.
- The automation of forex markets allows for a rapid and well execution of trading strategies.
- Forex trading generally has the same rules as normal trading and requires less initial capital. Therefore, it is easier to start trading forex than trading in stocks.
- The forex market is much more decentralized than traditional stock or bond markets. There is no centralized exchange that governs currency trade operations, and the potential for manipulation. Also, insider information about a company or equities is lower.
- Even though forex markets are the most liquid markets in the world, they are much more volatile than regular markets.
- Huge amounts of leverage have led to many investors becoming insolvent unexpectedly.
- Intermediaries such as banks, brokers, and dealers in the forex markets allow an extreme amount of leverage. Which means that forex beginner traders can control their positions with relatively little money of their own.
- A trader should have a large understanding of the use of leverage and the risks that leverage introduces to an account.
- Trading currencies requires an understanding of economic fundamentals and indicators.
- A forex trader needs to have a large understanding of the economies of the other countries and their interconnectedness. And this is so, to catch the fundamentals that determine currency values.
- The decentralized nature of forex markets. This means that it is less related to regulation than other financial markets. Forex market regulations depend on the jurisdiction of trading.
- Forex markets do have not enough instruments that provide an important income, such as regular dividends. These cannot be attractive to investors who are interested in potential returns.
As you have understood through your reading, trading is a serious activity. It is very far from the image that one can have to earn money quickly. The work of a trader and the constancy in the efforts are two important ingredients to succeed in making money. And we hope that you have been able to find your answer. So now, know how to answer your question “How does trading work?”.
The psychology of the trader is also something to take into account. This is because it is important to be able to analyze your mistakes and question yourself. So, this is why we strongly advise you to practice your trading with a demo account before switching to a real account and participating in the lives.