The Basics of Forex Trading

This article covers the basics of Forex trading and its main terms. It will walk you through the process of your first acquaintance with the trading terminal to opening your first trade.

Forex (FX, currency market) – is a decentralized foreign exchange interbank market. Beginner traders often choose this type of financial markets to make their first steps in trading for a number of reasons:

• low market entry threshold. To open an FX trade with the minimum lot size, you don’t need to invest a huge sum of money – only a couple of dollars. It becomes possible thanks to the leverage.

Leverage allows you to trade using a greater amount of capital, than you actually have in your account. Imagine, you deposited $100 into your account. With this money, you won’t be able to trade even a standard minimum lot – 0,01 lot (1 standard lot in a Forex trade – 100 000 units of the base currency). That’s where leverage comes into play. Say, your broker offers a 1:1000 leverage. We multiply $100 by 1000 and get $10 000 – this amount of money is enough to trade 0,1 lot. Don’t forget that with leverage your risk is now 1000 times higher too.

Therefore, to enter the Forex market, you don’t need to deposit a lot of money. To enter other markets, initial deposit requirements are usually steeper.

• at first glance, Forex seems easier than investing in stocks for example. But this is only an illusion. In FX trading, emotional control, discipline and risk management are even more important. No matter which market you’re trading, you’ll have to face these challenges anyway.
• a large number of training materials. You can find a lot of articles, books, training videos and online Forex courses for beginners on the Internet. Finding educational materials on bond or intermarket arbitrage trading for beginners is much more difficult.

To start trading in the Forex market, you should first choose a reliable broker. Forex Brokers act as intermediaries between private individuals and large financial institutions. When choosing a broker, pay attention not only to the trading conditions it offers, but also to its experience in the industry. It’s best to work with a broker with 10 or more years of experience, preferably a member of a large self regulating organization. If the broker offers trading on ECN accounts, it’s also a great benefit. It means that this broker routes all client orders directly to global liquidity providers, which guarantees that the broker will not interfere with your trading. Spreads on ECN accounts are lower, orders are executed faster.

Making your first steps in trading, start from a demo account. It’s a training account which uses virtual money. Demo account will help you get used to the trading platform, it provides a real-time trading experience, risk-free. Don’t stay on a demo for too long – trading fake money can give you the wrong impression and attitude towards risk. Operating in a totally risk free environment, no matter how real time the demo account appears to be, it doesn’t really involve the risk of losing real money and that makes the new traders more careless.

When you open a trading terminal, you will see two-way quotes consisting of Bid and Ask prices. Let’s take EUR/USD 1.1111-1.1112. In the EUR/USD ticker, the first currency is called the base currency, all price changes are expressed in the base currency. The second is the quote currency, in this case – USD. Looking at the quote, we can see how many US dollars we need to buy 1 euro. To make money in financial markets, you need to buy low then sell high, and vice versa. But when you first open a position, you Buy at the higher price in a quote – or Ask price, in our example it’s 1.1112, and you Sell at the Bid price. The difference between Bid and Ask prices is called the spread.

Forex market works 24/7, like in a famous saying – money never sleeps. You, however, need your sleep and food and can’t perform non-stop around the clock. Trading can be combined with other day to day activities, even with work. Mobile terminals allow trading on the go, wherever you are – you don’t have to be at your desk all the time. To be sure, that your trade is closed in accordance with your trading plan, use Take profit (to lock in your profit) and Stop Loss (to limit your losses) orders.

When trading on a demo account, start building your trading strategy. Having a strategy is essential – it’s like having a business plan for your company or a military operation plan at war. You can’t make profit from trading if you don’t have a solid trading plan. Your strategy should give answers to the following questions:

• when and under which circumstances should I enter the market?
• when should I close my position?
• where should I set my Stop Loss and Take Profit orders?
• which percentage of my deposit can I afford to lose in each trade?

Developing your strategy, consider long-term market behavior. Trades that were winning at one particular period, can turn out unprofitable later. You can’t open the same exact trades just because they were profitable before. Take into account the aspects of your personality. Traders who can react very quickly can benefit from scalping, traders with a more patient character and analytical skills can find themselves in investing.

Once you’ve learned the basics of trading in the Forex market, dive into professional literature, analyze your trading, try to develop and refine your trading strategy. In other words, don’t stop learning to achieve greater results.