You are about to discover the basics for forex trading, instead of boring you with the bloated history of forex trading which offers nothing in terms of how to trade, I will skip and make sure I hit the nail on the head.
Forex trading basic is more of an introduction to Forex trading. A head start where you get acquainted with the Forex market, and other Forex trading terminologies.
Before the late 90’s, there was no retail trading. You needed several millions in an account to trade in the Forex market, and even then – you will still be considered as small trader in a big sea.
However, due to leverage and expansion of the Forex market it became readily available for anyone who his willing to trade via brokers who allowed retail participants like you to trade the market and make profit or loss.
So let dive into Forex trading basics proper.
What is Forex Trading?
Forex trading market allows you to buy and sells the currency of any country against another. The most popular traded currencies in the forex market are:
- US Dollar (USD)
- Euro (EUR)
- The Great British Pound (GBP) and the
- Japanese Yen (JPY)
Well, the USD is the most traded currency, while the Euro is the second. Thus, the EUR/USD is the most traded pair on the planet.
Well I had no idea what Forex trading is, until I began to study it part time, as an entrepreneur I love to test a lot of different kind of business, even if I had not planned to venture fully into it. I just need the knowledge, and here is my prior knowledge about Forex trading.
If you think, the Euro is going to rise vs. The USD, then you would buy it vs. The USD. Think it’s going to fall in value – then you would sell it vs. The USD. This is the just the Forex trading basic mechanism of trading currencies.
Pros and cons of Forex trading.
Before I drive, you into Forex trading basic, terms used in Forex trading and learning how to make a trade, let look at the advantages and disadvantages of Forex trading.
Do not get me wrong, Forex trading is the top-notch way of investing, but we will look at the downside and as well, the good side, to maintain balance.
Pros of Forex trading
- All trading is done online and that gives you the privilege to trade from anywhere, any place in the world.
- High liquidity i.e. an investor can buy and sell at virtually any point of time with lower trading costs than stocks.
- It easy to kick-start with an head start of $100
- Unlike stocks, which you generally have to buy, you can profit in rising or falling markets.
Cons of Forex trading.
- Lack of transparency and accountability of some brokers
- Complex price and fluctuating determination process
- There is high risk factor involved in trading
- There are lot of scammers in the form of brokers looting investors money
- The fear of losing all your stake, is high in forex marketer
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Forex trading basics terms
There are similar terms used in Forex trading and you have to get along with these terms if you want to become a successful Forex trader. In other words, It is important to understand the terms which is specific to the Forex market.
|Great Britain Pound||GBP|
|New Zealand Dollar||NZD|
Most traded currency
Forex Trading Hours
The forex trading market is open 24 hours from Monday to Fridays ever week. It is closed on Saturday and Sunday. Because of this 24hour cycle, a trader can buy and sell currencies at any point of the time since minimally one market in the world is always open.
The breakdown of the Forex trading hours above is
- New York and London: between 8:00am – 12:00 noon EST (EDT)
- Sydney and Tokyo: between 7:00pm – 2:00 am EST (EDT)
- London and Tokyo: between 3:00am – 4:00am EST (EDT)
How to choose a broker
You can’t trade in the forex market without a Brooker. A broker is the crucial link between the individual you the retail trader and the Forex market. Individual investors cannot trade in Forex directly via the inter bank market, so this is where the role of a broker comes in.
Some Facts of Forex Broker
- The brokers works to make profit for themselves by providing you the investor an opportunity to speculate in the volatile forex trading market.
- The primary strategy which brokers make money of the market is by spread, which is the difference between the Bid and Ask Price for a currency pair.
- The secondary strategy a broker typically profits from forex is from charging commissions, but this is generally specific to the type of account, and many do not have them.
So seing how important a broker is. You have to critically get a broker which has both good consistent spreads and quick execution during fast markets.
Factors to understand when looking for broker
Capitalization level or overall size – a larger broker with higher capitalization has the ability to offer you better spreads and execution because they have better liquidity
Registered in their host country – always choose a broker that is regulated to offer Forex trading in your country.
Customer service – should be 24hours during while the market is open, such as phone, chat and email support.
The initial deposit requirement – This is highly important for new investors who wish to start with small capital.
Choice – prefer brokers who have educational content regarding their platform in case you have technical question on how to use it.
Forex analysis and trading
Successful trading in forex requires that a trader carries makes their trading decisions based on some type of analysis. The most preferred strategy of analyzing the forex market is via technical or fundamental analysis.
Well, both have their advantages, it is critical to become effective at one, and understand how that will affect your trading. I will start by describing the two types of analysis.
Types of Forex trading analysis
- Fundamental analysis and
- Technical analysis
The general logic behind fundamental analysis is that the strength of a country’s economy at present and future has the potential to strengthen that country’s currency.
So, if the economy is strong, it is bound to attract foreign investment and encourage more and more businesses into the nation.
Some of the important economic events that have a potential of driving forex price movement are listed below.
- The Gross Domestic Product (GDP)
- Interest rates
- Consumer price index or CPI and Producer price index PPI figures
- Housing data
- Trade balance
- Durable goods orders data
This is the study of the price movement over time (also known as Click price action ). It can be done on any instrument, time frame, or environment. The major benefits of technical analysis is that it helps the investors to predict future price movements based on past events.
Some facts to understand about technical analysis is listed below
- it involves identifying patterns that are repeated, and the movement of the price action is based upon order flow, which is the total buying and selling of traders in the world
- through technical analysis you can identify the support and resistance levels by studying charts, and then make your decision to trade or not to trade.
- Technical analysis is done either an intraday basis (short term), medium term basis (Daily and 4hours charts) or long term position basis (weekly charts).
Trading platforms and Charting
The forex market is flooded with a variety of currency trading platforms, but servral factors need to be put into consideration before choosing any one of them. These include the following
- Fee structure
- Product quality
- Types of services provided.
Trading platforms are basically softwares (like ) that help you to trade the market directly and do charting analysis in real time. Most brokers offer them free and they have various advantages.
Some of the platforms do have a demo account before ever trading live, which is great for you to explore and start practicing to get friendly with how forex trading works before eventually going live.
The best way to choose a good trading platform is to try out the software during the trial period to make sure you are comfortable with it and it is user friendly.
Key features when choosing trading platform
Up time – the efficiency of forex trading platform can also be judged by its up time record. A system which fails often will result in you loosing good investments opportunities. So you want to option for a trading platform which has a high up time during trading hours.
Good Charts – it preferable you use a trading platform with good charts so that it will help you in identifying trading opportunities and placing quick orders (technical analysis).
How to trade Forex successfully
Successful trading is as a result of your strategy, discipline and the ability to manage risk. Forex traders venturing into the market without any type of a strategic planning often find it difficult to profit or maintain any consistency.
Not to bit off more than you can chew, ensure you balance these three most important things regarding trading, they are:
- Learn a strategy with an Edge
- Employ proper risk management
- Build a successful training mindset
If you as a trader can balance these three listed above, then most likely they will lead to more consistent trading and profits. But let’s talk about some tips to help you become a successful forex trader.
5 tips to successful Forex trading
- Be Strategic – Have a strategy in other word a plan, that the most important, because if you don’t come up with an effective strategy, you surely gonna blow up your forex trading account.
- Be Psychological – Have a higher level of thinking, and think very fast. You can have a successful trading system that makes money, but if you do not have the discipline to follow it, then you will lose your money.
- Be Mathematical – You will definitely need a great knowledge of mathematics. The most important mathematical rule for trading forex is the risk of ruin, which looks at risk three dimensionally. The measures of risk accuracy, equity risked, and overall payoff ratio.
- Be smart – this requires patience, discipline, and total focus. Luckily, these qualities can be built up over time as the mind has neuro –plasticity to it.
- Don’t just quit your full time or part time job.
Building a trading plan
Since the key feature to becoming a successful forex trader is developing an effective forex trading plan and using it on a daily basis.
You must remember that a trading strategy that might be working well for me might not do the same for you. this is so, because everybody has a different style of thinking, risk tolerance levels and market experience.
At first, it is always better to develop one’s own personalized trading plan and nevertheless keeping an eye and learning from top traders is also effective way to come up with a good forex strategy.
Key feature of a sound trading plan
A sound trading plan should be able to answer these three questions below
- What trading strategies you are using
- What pairs instruments you are trading and
- What are your risk tolerance levels
In conclusion, what I have provided here supercedes Forex trading basics, I went a bit into advanced Forex trading.
However, if they is anything you don’t understand or you want to ask, use the comment section below. I will ensure I provide a tangible reply.