Forex Trading: The Complete Guide to Help You Get Started
In forex trading, you have probably heard or seen reports of people who made millions within a very short time. Therefore, you hastily think it is a great thing, and start digging into books, forums, and apps … and realize that forex trading is not an easy task.
The truth of the matter is that some people make good returns, but many others incur losses, and you want to join those who are raking profits. To make profits in forex trading, it is very important to have the right information. In our experience as traders, we have seen some of the best and worst traders in the niche. This guide will help you learn how to become a competent trader.
What is Foreign Exchange?
The term “forex” is a shortening of foreign exchange and involves changing one currency into another for different reasons, such as balancing the market and commerce. Today, the world forex daily trading volume is in excess of $6 trillion.
While a lot of foreign exchange is done mainly for practical purposes, such as trade and tourism, a significant percentage of currency conversions are done for the purpose of earning profits. The amount of currencies that are converted daily can make the price of currencies become very volatile. This volatility is an element of interest to traders, as it implies price movement and, therefore, potential profit. Of course, the potential profit comes hand in hand with associated risks.
How Does Forex Trading Work?
Unlike commodities or shares, forex trading does not happen in the classical, regular exchanges. Instead, it takes place directly between two parties and is run by a network of global banks that are spread in the four key trading zones, Tokyo, Sydney, New York, and London. Since there is no central location, it implies that you can trade forex for 24 hours/day from Monday to Friday.
There are three main types of forex markets that you can focus on:
- Spot Forex Market
This is the physical exchange of a selected currency and takes place at the point of trade or within a short period. For example, you can buy a currency and sell it after the value increases to make a profit. The price changes in spot markets are dependent on a number of things, including economic performance, current interest rates, and perception about future performance.
- Forward Forex Market
Unlike in the spot market, the forward market involves buying and selling contracts over the counter between several parties. The two parties have to start by agreeing on the terms and conditions of the agreement. For example, the parties might agree to buy or sell a specific quantity of currency at a certain price to be settled on a set date. Note that this agreement is not legally binding.
- Future Market
In the futures forex market, a contract is agreed between several parties to buy or sell a specific amount of currency, at a set price and date in the future. However, futures differ from forwards because they are legally binding.
Things You Must Understand when Trading Forex
When trading in forex markets, you work with currency pairs, meaning that as you sell one currency, you buy the other. Therefore, the price of one currency is relative to the other. In addition to currency pairs, here are other things that you need to know as a new trader:
This involves buying a specific currency expecting its value to increase and make a profit based on the difference between the buying and selling price.
A short trade involves selling a currency with the expectation that the price will go down so that you can re-buy at a lower value, gaining from the different in price.
When viewing or trading in forex, there are three chart options for traders using Meta Trader platforms, including bar charts, line charts, and candlestick charts. Although you can easily toggle between the charts, it is important to understand how they work.
- Line Charts
This type of chart connects the closing prices based on the timeframe that you are viewing. So, if you are viewing the hourly chart, the line will connect the closing price of each hour. This chart is considered the most basic type of chart in forex trading and is a great way to get the bigger picture trends.
- Candlestick Charts
The candlesticks were first used by Japanese rice traders and have become very popular in forex trading today. They are preferred because they provide more information compared to the line graphs. Besides, they are also more physically appealing. With a candlestick chart, you are able to know the open, high, low, and close values, the direction, the amplitude of movement and others over a specific period.
- OHLC bar charts
An OHLC bar chart is used to show the open, high, low, and close price for a specific timeframe.
The dash you see on the left indicates the opening price, and the one of the right shows the closing price. Then, the top of the bar denotes the highest price while the bottom shows the lowest price. Like in candlestick charts, the green bars are referred to as buyer bars, and the red ones are seller bars. Most traders consider OHLC bar chart easier to use compared to the line charts.
Top Pro Forex Trading Tips
Now that you know how forex trading works, it is time to start trading or improve your strategy in order to be more efficient. To help you become a better trader, here are some useful tips to help you:
- Make sure to start by identifying the right broker
- Ensure you have a good trading strategy
- Avoid trading with emotions
- Practice and keep improving your skills
- Keep your trading simple
- Know when to stop
- Review your strategy after some time and make improvements
If you are new to forex trading, the success you can achieve depends on the knowledge you have about trading and adopting a good strategy. More importantly, you need to have the right broker, such as capex.com. The company offers clients, as per the regulation it possesses, negative balance protection, and access to trade CFDs in cryptocurrencies, commodities, forex, shares, ETFs and many more.
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