How to start Forex Trading – The Step by Step Guide

The Foreign Exchange Market, or more commonly known as Forex market, is the largest financial market in the world without any sign of reducing soon.

It is not only the snapshot of global trade along with economic activity, but it is almost literally what makes the world go around. The constant exchange of currencies is one of the most important activities on a global scale.

A quick overview of how to start Forex trading review:

• Why Should you trade Forex?
• Understanding Forex Terminology
• Choosing a Forex Broker
• Developing a Trading Plan
• Trading Strategies

Why Should you trade Forex?

It is the Largest Financial Market

The Foreign Exchange Market, or more commonly known as Forex market, is the largest financial market in the world without any sign of reducing soon.

It is not only the snapshot of global trade along with economic activity, but it is almost literally what makes the world go around. The constant exchange of currencies is one of the most important activities on a global scale.

There is, on average, around $5 trillion in currencies traded daily. When broken down, it is about $200 billion an hour, $3 million a minute, and $50 million per second.

There are participants from all over the world who are constantly trading in the Forex Market, making it the most liquid, and volatile, market in the world. Other markets such as the Futures and Stock markets are large markets, but not as large as the Forex market.

Anyone can trade Forex

Forex trading is not only for participants who possess substantial amounts of capital. Anyone can come a Forex trader as it does not require large funds such as when trading stocks or even options.

A lot more traders are joining the Forex market due to its accessibility. Forex brokers are requiring low minimum deposits to register a live trading account and offering traders with a substantial amount of leverage which allows them to open large positions.

However, as easy as it may sound, to become an experienced and professional trader, takes a lot more than opening an account and starting to trade. Traders must learn the theory surrounding Forex before they can put it into practice.

Even when having covered substantial amounts of guidelines, tutorials, videos, seminars and other sources of education, traders need to hone their skills in a risk-free trading environment by making use of demo accounts.

Forex trading requires dedicated time, commitment, discipline, and patience, amidst several other characteristics, to become a more experienced, and successful trader.

High Volume and Liquidity

Being the largest financial market, and the busiest, results in the Forex market being the most liquid and subsequently, the most volatile. Due to the large volumes traded, orders or trades are executed a lot faster, especially when trading major currencies such as EUR/USD.

Forex trading essentially concerns the buying of one currency while simultaneously selling another and with high liquidity, traders can buy or sell a pair with the assurance that it will either be sold or bought quickly.

The Forex Market is not owned by anyone

Provided that the Forex market is so large and taking the number of participants into consideration, there is no single institutional trader, bank, corporation, or anyone else who can control the prices for an extended period.

Should this happen, the market quickly calibrates itself and it levels the playing field. The Forex market is also decentralized with the absence of middlemen. Participants trade directly with another in the market with a Forex broker merely facilitating the transaction.

However, the Forex market is influenced by certain driving forces that steer prices in different directions. Economic news, political situations, and other forces are what drive price movements, not one single person or a company.

You can trade the highs as well as the lows

Despite the direction in which the prices are moving, whether up or down, trades can be executed. There are numerous trading strategies that cater adequately for either direction that the prices on Forex pairs may move in.

Trading is concerned with the speculation on the direction that a price may move in, if the trader can speculate correctly, they profit. If speculations are wrong, the trader incurs a loss. The quintessential point is to make profits and avoid or minimize losses.

Forex can be traded 24/7

The Forex Market does not sleep. Trades can be executed 24-hours a day, 5 days a week.

Traders can trade regardless of the time zone that they are in. When one market closes, another one will still be open, or one will open. Trading begins when the Sydney session opens until the New York session closes.

Leverage

Forex brokers offer the trade in currencies through leveraged or margin trading. This means that despite the balance of the trading account, or the initial deposit, traders can open larger positions depending on the leverage the broker provides.

Should a trader have an initial deposit of $100 and they have 1:400 leverage offered to them, they can open a position to the value of $40,000. However, great care must be taken when applying leverage.

A maximum leverage of 1:400 does not imply that the trader applies that maximum. Leverage, and the incorrect use, and even abuse thereof, may lead to substantial losses when the trader loses their trade.

Variety of ways to trade

Not only is there a multitude different Forex pairs that can be traded, but there are also numerous trading strategies that can be applied in various ways.

Low transaction costs

The difference between the bid and the ask price is the broker’s spread, or what they make from the execution of a trade and, in most cases, a commission charge that may be added onto the trade.

Forex spreads are generally tight, depending on the broker, and they can either be floating/variable or fixed, depending on the execution model of the broker; whether they are an ECN, STP, or Market Maker, amidst several other types, broker.

Spreads that are variable may change according to the market conditions and the financial instrument, or Forex pair, traded while fixed spreads only change according to the broker’s discretion.

These competitive spreads not only minimize the trader’s trading costs, but it also maximizes profits. Forex brokers often compensate for tight spreads by adding a commission charge to the execution of the trade.

Understanding Forex Terminology

Forex may seem daunting to beginner traders, but as soon as they start learning the basics, such as the terminology, they will slowly start understanding how it works.

The first step in trading Forex is understanding the terminology that traders will come across in their trading activities.

There are 15 common terms that traders must familiarize themselves with, namely:

• Currency – which is money which is used as a medium of circulation. There are around 180 currencies from 195 counties in the world recognised by the United Nations.
• Currency Pair – single currencies cannot be bought or sold. Currencies are traded in pairs with the first one being the base currency – or one being sold, while the second is the quoted currency, or the one being sold.
• Major, Minor, Exotic, Cross-pairs – Forex pairs are divided into these categories with the major pairs being the most traded pairs such as EUR/USD, GBP/USD/ USD/CHF.
• Exchange rate – all traders follow this. It is the price of the base currency which is expressed in terms of the counter-currency.
• Bid and/or ask price – these are the two prices involved in a currency pair. The bid price is what buyers are willing to pay for the pair while the ask price is the price at which sellers are willing to sell the pair.
• Spread – this is the difference between the two pairs and the cost of the transaction expressed in ‘pips.
• Pip – this is the smallest increment that an exchange rate, or price, can move either up or down. It is normally equal to the fourth decimal of most currency pairs.
• Going long and/or short – going long means that you are buying while going short means that you are selling.
• Resistance – Resistance levels track previous prices at which the price had difficulties breaking above.
• Support – track previous lows in the price at which it has a substantial chance to retrace and move in an upwards direction.
• Leverage – is a tool applied which allows traders to open large positions despite their initial deposit.
• Margin – this is a certain amount which is required by the broker as collateral for leveraged trading.
• Lot size – this is the position size that traders take on the market which will subsequently determine the size of profits and losses in dollar value through affecting the value of a single pip.

Choosing a Forex Broker

There are hundreds of Forex brokers that offer traders with the chance to trade in the Forex market. It may seem like an impossible task to choose just one, but traders must take the time in researching and comparing brokers so that they can choose the right one.

There are a few factors to look for when comparing Forex brokers that are imperative. This will greatly help narrowing down the list of potential brokers to only a few and allow the trader to select the one which caters for their trading needs more.

Before a trader selects a Forex broker, are some key things that traders need to understand first:

1. Traders need to identify their level of knowledge, skill, and experience, and what their trading needs and objectives are.
2. Traders need to evaluate their personality type and characteristics, and what type of trader they want to be.
3. Traders need to determine the amount of time that they can dedicate towards trading.
4. Traders need to determine their risk tolerance and willingness to be exposed to risk.
5. Traders need to understand the psychology associated with Forex trading.

These are only a few factors to consider before starting to trade. In understanding these factors, traders will have a clearer idea of what they need from their broker, and this will make the process of selecting one simpler.

Regulation and Safety of funds

Regulatory entities such as ASIC, FSCA, FCA, and others oversee the operations of financial services providers or financial institutions such as Forex brokers. This is to ensure that activities are lawful and fair.

Regulated brokers have strict rules and regulations as per their regulatory entity which must be adhered to. Choosing a regulated broker will mean that client funds can be secured, that the trader is protected against fraud, money laundering, and other threats to capital.

Regulated brokers are required to keep client funds in segregated accounts separate from operational funds. Client funds are only allowed to be used for trading activities and must be withdrawable by the client at any given time.

Regulated brokers are often also members of compensation schemes that pay eligible traders a certain amount should the broker be unable to fulfil their financial obligations.

Fees and commissions

Brokers charge various types of fees and these fees differ from one broker to the next. The important thing is to find a broker which caters for the needs, objectives, and any restrictions that the trader has.

Fees that traders can expect include:

• Minimum initial deposits
• Spreads
• Commissions
• Inactivity fees
• Account maintenance fees
• Deposit fees and withdrawal fees, and more.

Leverage

Brokers offer different levels of leverage and some are strictly regulated in only providing a certain amount due to the risks involved with Forex trading.

Trading Platform

This is the software that the trader will use when trading. Their trades will be executed through a trading platform. Trading platforms differ just as brokers differ, and traders need to explore and research the platforms offered to find one that suits their needs.

Trading platforms also allow traders to develop, test, and use their trading strategies, conduct technical and fundamental analysis, and more.

Range of Markets

Forex brokers offer a vast number of financial instruments and when considering Forex specifically, there are numerous Forex pairs which can be traded. Traders need to research the types of Forex pairs that brokers offer along with the pricing.

Education and research

This is an important factor for both beginners and advanced traders alike. Beginners must ensure that their broker offers them with adequate education so that they can learn about Forex and start their journey to becoming more experienced.

Traders need to look at brokers who offer demo accounts as this forms a part of education. Demo accounts can be used to practice trading and allow traders to gain more trading experience and allows them to hone their skills.

Demo accounts offers traders with access to a mimicked live trading environment without risk to the trader’s funds as they are provided with virtual funds.

Research tools and resources help traders in their trading activities and includes economic calendars, news, market analysis, and other tools.

Deposit and Withdrawals

Traders need to ensure that deposits and withdrawals can be made with ease and quickly. Traders need to investigate the payment methods that the broker offers in addition to the fees that they may charge and the processing times.

Customer Support

Traders need to ensure that the broker provides adequate communication channels such as email, telephone, live chat, and others. This will allow the trader to contact the broker when, and should, they have a query or urgent issue.

Customer response must be prompt, helpful, and thorough in addressing any queries or issues that traders may have.

Developing a Trading Plan

A trading plan can be described as an organized approach to execute trades. This plan is developed after traders have done a market analysis and they have seen what the market conditions are like for their specific trading day.

Trading plans have sets of rules pertaining to when to enter or exit a trade, where to place risk management tools such as stop-loss, and several other factors.

Why Should you have a trading plan?

A trading plan simplifies trading as it is a methodological approach towards trading. It often removes uncertainties and unwanted surprises and prepares the trader for what they can expect.

Trading plans help to identify problems, allow for corrections, and help traders gauge their performance. It also helps to counter and prevent a lot of stress and psychological factors and issues that arise from trading.

With a trading plan, traders can trade more systematically as they adhere to the rules that they set out in their trading plan for various conditions in the markets. Thus, traders can remain calm and execute their trades based on their trading plan.

How do you develop a trading plan?

To develop a solid trading plan, it is imperative that traders acknowledge the components that must be in a trading plan, such as:

• Skill assessment – whether the trader is ready to trade, whether they can follow their signals, whether they have the confidence, required knowledge, and skill to trade in a live trading environment.
• Mental preparation – whether there are any factors that may deter or interfere with trading such as lack of sleep, emotional duress, and other factors.
• Risk levels – traders should not risk more than 1% of their trading account when trading and should thus employ a risk-reward ratio of 1:2 or 1:3 which means that their reward is twice or thrice the amount of risk that they are taking.
• Setting realistic goals according to the risk-reward ratio.
• Research – traders cannot just start trading blindly. They need to know what conditions in the market are, what news there is and how it affects their trading, and more.
• Preparing to trade – traders need to mark their major and minor support and resistance levels on their charts and set up alerts for their entry and exit signals.
• Setting exit rules – this is an important factor which determines when a trade is closed, either when it reaches the profit target, or when it starts showing a certain amount of loss. The ideal is to make profit or, at the very least, break even.
• Setting entry rules – this is the point when a trader opens a position. This will be determined by the trader’s strategy which will indicate the conditions under which traders will enter the market.
• Record keeping – This is imperative to keep track of trades, successes or losses, adaptions to strategies, and more. Traders can use this to identify trends or patterns in their own trading, amidst an array of other uses.

Trading Strategies

What are Trading Strategies?

A trading strategy can simply be defined as the method that a trader uses to buy and sell in the Forex market. Strategies are based on predefined rules and conditions which are used to make trading decisions.

A trading strategy includes a sold trading plan which outlines the trading objectives, risk tolerance, and other factors.

What Trading Strategies are there?

There are numerous trading strategies available and traders must research each to have a clear understanding of what they entail before developing one based on the trading objectives and needs of the trader.

Some of the most common trading strategies include:

• Day Trading – where traders focus on very short-term price movements in the market to make quick profits in one day.
• Position trading – which is a strategy where traders buy and hold positions instead of actively buying and selling. This trading can last from several days to several weeks, and even longer.
• Swing trading – which focuses on trends that form and attempts to harness the volatility in the Forex markets. Positions are often held for more than a day, but for a shorter time than trend strategies.
• Algorithmic trading – which involves the use of computers or mobile devices and programs or applications. Trading robots are used to trade on behalf of the trader according to set rules and parameters for entry/exit, orders, stops, and more.
• Seasonal trading – which occurs due to patterns that repeat themselves at certain times of the year such as during government announcements, corporate earnings, and other occurrences that spark a substantial fluctuation in the Forex market.

Conclusion

Forex trading may seem intimidating and daunting, especially for beginners. Traders need to realize, however, that Forex trading is not a ‘get-rich-quick’ scheme where profits can be made instantly.

Forex trading requires dedication, patience, discipline, attention to detail, willingness to learn, and numerous other factors. To become a professional and successful Forex trader need to ensure that they understand the theory and principles behind it first.

Traders need to educate themselves thoroughly before they take to the live Forex market by preparing themselves to use a demo account. Not only will a demo account introduce them to a live trading account, it is the perfect platform and environment to hone their trading skills as it accurately represents a live trading environment.

Once traders are ready to trade in the live market, there are further options to minimize risk and losses. Traders can look specifically at brokers who offer cent accounts to help them ease into a live trading environment.

There are numerous ways to start trading Forex and each trader’s journey and methodology will be the same, but it is all based on the same core principles and steps that must be followed to succeed in Forex trading.