How to trade Forex
Are you new to forex trading? Do you want to find out how to trade forex and participate in the Forex Market? Then this article if for you. Trading in the Forex Market can be exciting and intimidating at the same time.
For this reason, it is important for beginner traders to learn the basics about trading before they decide to jump into the markets.
However, knowing how to trade Forex and knowing how to trade successfully is two vastly different things.
The first thing that beginner traders need to realise is that Forex Trading is not an easy skill to master. Furthermore, the financial markets can be a very unforgiving place for newbies who don’t know what they are doing.
If you though that Forex Trading is a get rich quick scheme, then think again. Even though trading can be very rewarding, it takes a lot of hard work and commitment to make it as a trader.
In this article, we aim to provide the beginner trader with an idea of how they can participate in Forex Trading.
The very first thing that you will need before you start trading forex is the right equipment. Firstly, you will need a laptop or desktop computer. With this in mind, you don’t have to go and buy one of the strongest computers out there.
However, you also don’t want to use a computer that takes an hour to start up. Below is a short list of some basic computer system requirements for trading. Keep in mind, we trade on the MetaTrader 4 platform. Thus, these settings might not be sufficient if you are using other trading platforms.
A stable internet connection is an absolute must. The last thing you want is a lag in your connection when you need to get in and out of trades fast. Furthermore, you do not require eight laptop monitors like they have in the movies.
Obviously, having more than one monitor will be beneficial because you will want to keep an eye on various things. However, you do not have to have multiple monitors for your trading.
If you are going to consider using more than one monitor, make sure your PC’s video card will allow more than one monitor before you run out and buy some.
Also, don’t forget the anti virus software. Trading platform are very well built but hackers are getting smarter and smarter so be careful.
The next thing you will need to start trading forex is a broker. You need to be very careful here. If you are brand new to forex, let me be the first to tell you that not all brokers have your best interests at heart.
Unfortunately, there are a lot of scammers out there trying to con people out of their money.
Make sure to do proper research about a broker before you decide to trade with them. Below is a broker checklist that you can follow as a guideline for choosing a broker…
There are not many brokers out there that can check all of the above boxes. However, if you do your research, you should be able to find some of them that tick most or all of the above requirements.
Doing your own research when it comes to your broker is very important and you need to do it properly. As this is such an important step in your trading we are not going to give you the names of the brokers we trade with.
We encourage you to do the research yourself and make your own calculated decision on this.
If you have done your own research and are still unsure, feel free to contact us via our website contact form for more information on brokers.
Broker Account Types
Various brokers offer different types of accounts. For the most part, the types of account are very similar between brokers. There are a couple of things you can consider when choosing an account type.
Normally, the various account types will require different minimum deposits.Thus, if you only have $1000 available to start trading, don’t choose the account that requires a minimum of $10000.
Furthermore, accounts can differ in terms of the transactional costs involved. For example, account types that require larger minimum deposits normally offer better spread and commission fees.
Conversely, some accounts offer very small minimum deposits, but the transaction costs are very high. Correspondingly, the various account types can also differ in terms of their execution speed.
This might be more and less important depending on the type of trading style you have. For day traders, execution speed can be critically important. However, if you are a swing trader it won’t affect you that much. This brings us to the next section.
What type of trading methodology are you going to follow? Are you going to day trade, swing trade or do a bit of both?
For the most part, your trading methodology will be based on your personality and availability. Below is a short description of some of the difference between day trading and swing trading.
Day Traders should have enough time available to sit in front of their screens for hours each day. Conversely, swing traders can get away with only trading a couple of hours a week.
In terms of personality, someone with little patience would probably not be well suited to swing trading where trades can run for weeks and sometimes months.
Similarly, traders who deal bad with stress will probably lean towards swing trading which normally produces less stress.
Some of the best traders are those that are able to combine day trading and swing trading with each other.
That way, they are able to take advantage of the short term moves in the market while taking advantage of longer running trades as well.
Forex Trading Strategies normally falls into two categories. These categories are known as Technical Analysis and Fundamental Analysis.
The differences between these two styles of trading are based on the way they approach the market. Technical Analysis looks at the way the price is moving on the charts in order to establish the next possible direction the price will move.
Technical Analysis strategies differ vastly from each other. Some are highly dependent on Indicators and Trading Robots to validate the price movement.
Conversely, other Technical strategies uses candlesticks and support and resistance levels in order to analyze where the price might go next.
Additionally, some Technical systems combine different elements together. These ones tend to be the most successful in our opinion.
On the other hand, Fundamental Analysis does not use the charts to dictate where the price might be moving next. Fundamental Analysis uses various tools to determine which currencies are likely to strengthen or weaken.
Some of the things used by Fundamental Analysis includes economic data releases, market impacting news events, central bank policy decisions and geopolitical events.
There is no such thing as a perfect trading strategy or system. In reality, there are successful traders who only use Technical Analysis and successful trader who only uses Fundamental Analysis.
Some traders prefers studying the Technicals and other prefer studying the Fundamentals. Having said that, in our own opinion and trading the Fundamentals are always more important.
However, we use both methods in our own trading approach. We do not believe in strict and rigid trading systems.
The market is dynamic and requires a dynamic and flexible approach.
We prefer to use Fundamental Analysis to determine the best possible direction for a currency pair. Then, we use Technical Analysis to determine the best possible entry and exit locations for our trades.
In our opinion, this way of approaching the market will provide more consistency in the long run.
After you have made your decision on which broker you will use, you need to select the trading platform that you will use. There are quite a number of trading platforms available on the market.
Based on your broker, you will be limited to the ones which are compatible or allowed by them to use. The trading platform that we use is MetaTrader 4. We prefer MT4 to other platforms for a couple of reasons.
Firstly, the platform is free. The broker is the one that picks up the tab for you to use MT4 through their servers. Why pay for a platform when you can use one for free?
Secondly, due to MT4 being around for such a long time, there is always plenty of support available online if you require help with it. Thirdly, the functionality is more than what you need.
The extra features available on some other platform will not necessarily make you a better trader. It might be helpful, but it won’t turn you into a profitable trader. Lastly, some of the other platforms are really expensive.
We would rather spend that extra cost on Forex Trading Tools such as a good news squawk, which also brings us to our next point.
After you have all of the above points completed you can move onto some of the basics of trading. Knowing what Currency Pairs are is essential for those who want to learn how to trade forex.
In Forex, we do not trade single currencies at a time, we trade currencies in pairs.
Thus, the term currency pair refers to the pairing of two different currencies. A good example of a currency pair is called the EUR/USD and is the most popular and highly traded currency pair in the world.
The first currency in a currency pair is known as the Base currency. The second currency is known as the Quote currency. For example, in the EURUSD pair the Euro will be the Base currency and the USD the quote currency.
Currency pairs can either be bought or sold in Forex Trading. For example, traders can choose to either BUY or SELL a currency pair. Whenever a forex trader places a BUY trade on the EURUSD, they are actually buying Euros and selling US Dollars at the same time.
Conversely, when a trader places a SELL trade on the EURUSD they are selling Euros and buying US Dollars at the same time.
Forex Traders speculate whether one currency’s value will go up or down against the other.
Even though this seems simple enough it is far from easy to determine.
Every currency pair on your trading platform will have a specific price. This price is the current exchange rate between the two currencies in that specific currency pair.
The exchange rate between the two currencies is always quoted in the Quote currency.
For example, let us assume the price for the EUR/USD is 1.40. That means, it will cost exactly $1.40 for every 1 Euro.
Thus, when a trader places a buy trade on EURUSD they are speculating that the exchange rate or price will go up.
Correspondingly, when a sell trade is placed we are speculating that the exchange rate or price will go down.
Different currencies will have different strengths and weaknesses depending on the fundamental outlook and sentiment.
The reason why exchange rates fluctuate is because currencies will always move in cycles. For example, let us suppose that a trader expects the Euro to lose strength against the US Dollar .
The trader will then open a sell trade on EURUSD in expectation that the price will climb. If they expect the Euro to gain strength against the US Dollar they will buy the EURUSD pair.
Price Movement Measurement
The terms “pip” or “point” is something that every trader will come across when they start trading. This is a very important thing to understand as a beginner trader.
For this reason, make sure to read up on this and feel comfortable with it before you start trading. In the previous section we learnt that the value in the exchange rate between two currencies are constantly changing.
Now, it is important for us to know how the value of that changes is measured.
These changes in the price is measured in Pips and Points.
A pip usually refers to a 4th decimal change in the exchange rate price as quoted on your trading platform. Similarly, a point refers to a change of the 5th decimal value of the exchange rate.
The example below will illustrate this.
For example, if the current exchange rate for GBPUSD is 1.38488 and moves to 1.38489, it has moved up by exactly 1 point. Similarly, if it moves from 1.38488 to 1.38498, it has moved up by exactly 1 pip.
Thus, if you got the math right you would have noticed that 10 points is equal to 1 pip. For all pairs that contain the Japanese Yen a pip would be a movement on the 2nd decimal and a point a movement on the 3rd decimal.
The reason for this is because pairs with the JPY is normally quoted in 3 decimal places compared to the normal 5 decimal places.
Trading Volume / Lot Size / Trade Size
All Forex orders are placed with various available lot sizes or trade sizes. There are three main trading volumes available to trade.
They are know as Standard Lots, Mini Lots and Micro Lots.
A Standard lot comprises of 100 000 units of the base currency, a mini lot comprises of 10 000 units of the base currency and a micro lot comprises of 1000 units of the base currency.
Every 1 pip movement in price on a standard lot trade size will roughly be worth $10 per 1 pip. On a mini lot trade size it will be roughly worth $1 for each pip movement and on a micro lot it will be roughly worth $0.10 per pip.
This is only a rough average as the average exchange rate prices are constantly changing and fluctuating.
The size of your trading account and your account leverage will determine what volume or lot size you can afford to trade with. A good forex trading course should teach you how to calculate the perfect volume size or lot size for every individual trade you take.
Knowing which volume you can afford to trade with is very important! As a beginner who is interested in knowing how to trade forex, a good understanding of lot sizes and trading volume is crucial to your success.
As we have discussed above, it is possible to trade a currency pair in both a rising and falling market. This means that you can either buy or sell a currency pair. There are a number of ways to do that on the Metatrader 4 platform.
Knowing the difference between the various MT4 trading types are very important.
The easiest way of placing a buy or sell trade is by opening a market execution order.
This means the trader literally opens a buy or sell trade with the touch of a button. Then there are also pending orders. Pending orders can be a little trickier as they are not executed immediately by the trader.
Rather, they are set up to automatically open a buy or sell trade only when the price reaches a specific price level.
Pending orders are helpful as the trader does not have to be present at the screen for the order to be opened. The platform will automatically open up a trade when it reached a certain price point.
If you would like to learn more about how to use MT4 check out our website for more information.
Stop Loss & Take Profit
Your journey of learning how to trade forex would not be complete without knowledge regarding Stop Losses and Take Profits. Apart from knowing how to open up trades, it is also very important to know how to close trades.
A trader can either manually close any open trade by simply closing the trade from your Terminal window on Metatrader 4. Alternatively, you can set up certain predetermined levels where you want your platform to automatically close your trades.
The first example of this is called a stop loss. A Stop Loss will automatically close a trade upon reaching a specified or predetermined loss level.
For example, let us suppose that a trader opens a trade and decides that he does not want to lose more than $100 on that trade.
He will then set his Stop Loss at a level that will automatically close his trade at a loss of $100.
Thus, a Stop Loss is there to protect a trading account from big losses.
The second auto close is known as a take profit. Just like a Stop Loss, a Take Profit will automatically close a trade upon reaching a specified or predetermined price level.
For example, let us suppose that a trader opens a trade and decides that he wants to close his trade at a certain profit amount. He will then set his Take Profit at the desired profit level.
The platform will automatically close the trade when it reaches that profit amount. Traders normally prefer taking their profit at a certain level to minimize the risk of the market turning against them.
Thus, a Take Profit is there to take and protect unrealised profits from pullbacks in the market.
The optimal place of where and when to place a Stop Loss and Take Profit can mean the difference between long term success or failure.
Thus, we strongly advise to educate yourself regarding this subject. Make sure to pay special attention or ask about this topic when you enroll in a forex trading course.
Knowing how to manage your risk is probably one of the most important aspects in trading.
When a trader learns how to trade Forex, risk management should be on the very top of their list.
There is vast amounts of material available regarding this subject, and for a very good reason. Many people shy away from forex trading because they fear the risk involved.
However, without the risk there would not be reward. If you execute proper risk management you should be able to withstand multiple losing trades in a row without it damaging your account.
You cannot be successful as a trader if you do not learn to manage the risk.
There is a way in which it is possible to manage your risk so even a series of losing trades will ever be able to make or break you. Those who practice good risk management accept that trading is a long term business.
They also fully acknowledge that Forex is not a get rich quick scheme. If a trader can manage his risk, the profits will come by themselves.
Remember, in Forex Trading it is much more difficult to keep money than it is to make money.
Follow the Leader
As a beginner trader, do not try to trade against trending markets. This is where Fundamental Analysis will aid a trader immensely.
Fundamental Analysis will help you understand the sentiment in the market and allow you to better pick your trades. You have to always try and trade in the same direction as the institutional traders are trading.
Majority of institutional traders use the Fundamentals when choosing their trade direction. As long as you stick to trading in line with the relevant trends in the market you will have a much higher probability of success.
For now, just stick to trading in the direction of the trend. The trend is your friend.
Knowing how to trade forex is not as easy as placing trades whenever you feel like it.
You need to establish in which direction the market is trading and follow the market in your trades. Going against the trend is like jumping in front of a moving train.
We hope that this article has given all those who are new to forex a good basic understanding of how to trade forex. There are many things beginners need to consider and understand before starting to trade.
As always, our advice is to invest in good forex training before risking real money in the market. Also, make sure to carefully consider whether Forex Trading is the right choice for you.