Forex trading has drawn much attention over the years. However, as many people try to find how to make money from their comfort zone and leisure time, unfortunately, most don’t know the details of this trading concept, while others take enormous risks hoping to make huge profits fast.
This forex trading article explores the essential tips every newbie forex trader should know, cut across the top forex trading terminologies, and the risks every beginner should be aware of to trade the forex market successfully.
Let’s get right into it!
What Is Forex Trading?
Forex, or foreign exchange, can be described as a network of buyers and sellers who transfer currency at fixed prices. Forex trading is taking risks on currency price movements to make a profit.
The amount of currency changed daily can make price movements of some currencies enormously volatile, making forex attractive to traders and bringing about a more significant opportunity to make high profits while – as well – increasing the risk.
How Do Currency Markets Work?
Forex trading does not occur on exchanges like shares or commodities but directly between two individuals in an over-the-counter (OTC) market. The forex market spans four main trading centers with different time zones, including New York, London, Tokyo, and Sydney.
Because there is no dominant location, forex can be traded 24 hours a day.
Types Of Forex Market
There are three different types of the forex market:
- Spot Forex Market: This is the primary market where a currency pair’s physical exchange occurs at the exact point the trade is performed – that is, ‘on the spot’ – or within a short period.
- Forward Forex Market: a deal is agreed to buy or sell a certain amount of a currency at an agreed price, to be executed at a particular date or within a future date range.
- Future Forex Market: Unlike the forwards’ forex market, a futures contract is legally binding in this market. A deal is agreed to buy or sell a specific amount of a particular currency at a specified price and date.
Most traders speculating on forex prices won’t plan to take delivery of the currency itself; instead, they make exchange rate forecasts to benefit from market price movements.
Top 7 Forex Trading Tips for Beginners
1. Know Your Markets
One of the most effective ways to avoid losses in trading as a beginner is specialized knowledge of the Forex market. Taking time to educate yourself on the currency pairs and what changes their prices before risking your capital may save you from making simple errors that could cost you more than you can afford to lose.
While it is not complicated, forex trading needs expert knowledge. For instance, the leverage ratio for forex trades is higher than equities, and currency price change drivers differ from equity markets.
2. Set Up a Brokerage Account
To start with forex trading, you will need a forex trading account at a brokerage. Forex brokers do not charge commissions. Instead, they make money through spreads, also known as pips, between the buying and selling prices.
It is good to set up a micro forex trading account with low asset requirements for beginner traders. Such accounts have variable trading limits, allowing brokers to reduce their trades to as low as 1,000 units of a currency; a micro forex account will make you comfortable with forex trading.
3. Develop A Trading Strategy
While it is always impossible to forecast the time the market will act, having a trading strategy will help set broad rules and a road map for your trading.
A good trading strategy is based on your finances and the certainty of the market. It considers the amount of money you are willing to trade with and, consistently, the risk amount that you can tolerate without wiping out your position.
Remember that forex trading is mostly a high-leverage atmosphere. But it also gives more returns to those willing to take the risk.
4. Stick To Your Plan
Setting up a trading plan is a vital component of avoiding losses. Many traders include their risk tolerance level, profit goals, evaluation criteria, and methodology. However, educating yourself and developing a trading plan is good, but the real test is sticking to that plan through patience and discipline.
Once you have created a plan, ensure every trade you make doesn’t fall outside your plan. And always remember that you are probably the most rational person before you go into a trade and less rational after you place the trade.
Furthermore, sticking to a trading plan will help you to take out emotions in your trades and determine your entry and exit plans.
5. Know Your Limits
Another thing to remember as a beginner is, knowing when to leave a losing trade. In other words, set stop loss levels accordingly, using a leverage ratio according to your needs. This tip is simple yet vital when it comes to forex trading.
Since one cannot have all the time to sit and view the markets daily, you can best manage your risk and safeguard prospective profits by setting stop and limit orders to help you get out of the market at your specified price or time.
Also, trailing stops are beneficial; they follow your position at a specific distance as the market fluctuates, helping you to protect your profits if the market reverse.
6. Don’t Fear Growth
While consistency by sticking to your trading plan is vital, be free to re-assess your trading plan if things aren’t going as supposed. As your experience increases, your desires may change; your strategy should always replicate your goals. Therefore, your plan should change if your financial situation or goals change.
7. Use Appropriate Trading Tools
Some traders estimate the markets based on what’s happening in the news or other financial and political data. These are known as fundamental traders.
Others predict market movements based on technical analysis tools such as moving averages, Fibonacci retracements, and other indicators. These are called technical traders.
Many traders use both. Regardless of your trading style, you must not forget the tools available via your platform to help you predict the markets more accurately.
Forex Terminology
The forex market has its jargon, just like every other market has its terms. Below are some terminologies to know before considering forex trading:
- Pip.
- Leverage or Margin.
- Currency Pair.
- CFD.
- Order.
- Position.
Risks Every Newbie Forex Trader Should Be Aware Of
As a beginner’s Forex trader, there are different kinds of risks you should be careful of to trade the forex market successfully; these include:
- Interest Rate Risk: When a nation’s interest rate increases, the currency could fortify. The increase in strength can be identified as an investment influx in that nation’s currency markets because more returns could be possible with a stronger currency. But if the interest rate drops, the coin may deteriorate, resulting in more investors withdrawing their investments.
- Leverage Risk: Leverage in trading can positively or negatively influence your trading: the more your leverage, the more your profits or losses.
- Transaction Risk: This exchange rate risk can be identified between the various nations (trading time zone) at different times. It can sometimes happen between the contract entry and exit position. For example, the exchange rates might change during the 24 hours even before settling a trade. The transaction risk increases the more the differences in time between entering and booking a deal.
The Bottom Line
By now, I believe this article has equipped you well enough to dive into forex trading as a beginner. Meanwhile, take your time to choose a sound broker, learn strategies, don’t shy away from online seminars, and research currency pairs to discover the one that is best suitable for you.
Also, remember always to have a risk management strategy and exercise discipline when trading. In no time, you’ll successfully master forex trading.
Should you have further thoughts that this forex trading article didn’t cover, or do you have other general questions about the forex market? Let’s chat in the comment section below – I’ll gladly hear from you. You can also check out my Forex Trading Academy for a one-on-one trading class and mentorship program with me.