Basic Guide for Forex Traders for Beginners

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Foreign exchange or forex markets are one of the most liquid markets in the world. They are also one of the largest markets as the daily trading volume of forex is over $5.1 trillion according to a report from the Bank for International Settlements.

If you also want to benefit from the largest and most liquid asset markets in the world then you are in the right place. This basic forex guide will tell you everything you need to know about this market so you can successfully trade.

What Is A Forex Market ?

This is where the exchange of currencies takes place. We need proper currencies for everything. This is how international trades are made and business is conducted.

Of course, everyone wants their country’s currency. So, if a French importer wants to import something to France from the United States then he will have to exchange the equivalent amount of Euros into USD.

This is how trading takes place. So, forex markets are one of the most important markets in the world as this trade takes place daily and in large volumes.

However, one thing to remember is that no one specific centralized market for forex. Instead, trading is done electronically OTC (over the counter). In simple terms, this means that currency is traded through computer networks between traders all over the world.

The forex market is also open for twenty-four hours and 5 days a week. They are also traded across all time zones. So, even if the trading day in one country ends it begins in another country.

How Forex Trading Works

Best 10 Forex Trading Tips for 2020

Since you are a beginner, you need to know a few forex trading essentials before you start trading. This doesn’t work as a traditional exchange. For example, people used to buy a currency, hold it, and then convert it back when it appreciates.

However, when it comes to forex trading you simply have to predict how the two pairs of currencies will move. So, if you think that the value of a currency will appreciate you buy it. This is called going long.

If you think that the currency is going to depreciate then you simply sell it before you make a loss. This is called going short. Apart from that, you will find two types of traders in the forex market. These include:

  • Hedgers: They are always avoiding making extreme movements. These are big conglomerates that want to reduce their exposure to forex movements
  • Speculator: They love risk and they are always looking for the market to be volatile so they can benefit from it. Speculators are usually retail traders or big banks

Of course, apart from these big banks and traders, people also want to trade in forex. Anyone can enter the market and take advantage of the benefits it has to offer.

Key Terms To Know

The forex market has its jargon that may be hard to understand. This is why you need to fully prepare yourself before you enter the market. Here are some key terms that you need to know while trading in a forex market:

Spot Forex

This term is used for the buying and selling of the real currency. This means that you can buy one currency and exchange it for another and once the value of the original currency appreciates you can then change it back again.

Spread

This is the difference between the purchase and sale price of a currency pair. If a currency is not that popular then the spread will be high. However, if a pair is extremely popular in the market then the spread will be low. To make a profit, the value of the currency pair has to exceed the spread.

Also Read: Best Forex Brokers For Scalping With Low Spread

Pip

This is a measurement unit (also known as the base unit). It denotes the change in value between a currency pair. For example, if the value of EUR/USD appreciates from 1.2610 to 1.2611 then the change is equal to 1 pip.

Leverage

This is a term that you can’t ignore as a beginner in forex trading. It allows the traders to control big positions with just a small capital amount.

It is the capital that is provided by the forex broker to appreciate the volume of traders the customers can make. This is why leverage should be used with caution because it can exaggerate both your losses and gains.

Also Read: High Leverage Forex Brokers

Tips For Trading As A Beginner In Forex

Now that you know the basic workings of forex trading and the important terminology that is used you need to know how to trade. Here are a few tried and tested tips that work well for all forex trading beginners.

#1. Research The Forex Market

Every decision in life requires some serious thought. You can’t expect to be successful in the forex market if you don’t even know the condition of it.

This is why before diving into the world of forex trading, make yourself familiar with it. Learn about the different currency pairs and what affects them so that you don’t take a huge risk with your capital.

Researching all of this will save you a lot of money and time. If you don’t study currency pairs and what affects them then you are only setting yourself up for failure.

So, research everything on the forex market and play safe first so you know what to expect.

#2. Come Up With A Trading Plan

Successful trading is not based on intuition or other feelings, it is based on calculations. So, creating a plan is a necessity if you want to be successful at it. Your plan should include:

  • Methodology
  • Risk tolerance level
  • Profit goals
  • Criteria for evaluation

All these are important components of coming up with a successful trading plan. Before making any trade, you should check if it meets the criteria you have set in your plan.

Once it meets all the boxes and parameters you have set then you can go ahead and trade in that pair.

#3. Always Stay Updated

As a forex trader, information is your most important asset. Many factors affect forex trade such as political conditions, financial data, and much more.

So, you need to be updated with the current climate of the forex market. You can make use of different technical analysis tools that can help you predict the movement of the forex market.

Many advanced traders make use of the Fibonacci retracements to forecast the movement of the forex market. Some also use other indicators that work just as well.

It doesn’t matter what your trading style as long as you make use of the tools that are available to you. Doing this will open your mind to many new trading opportunities in the market that you may have missed out on without the tools.

Two things are important: information and tools. You need both to be a successful forex trader so always read up.

#4. Know When To Stop

As a beginner, never make the mistake of investing too much at first. You should always start small. This will help you understand the market and different currency pairs at first.

Once you understand this, then you can start making bigger investments. This will also teach you how to set a leverage ratio that is in alignment with your needs.

It will help you to hedge your bets and you will not lose more than what you can afford. Always set a proper leverage ratio to not risk too much. Apart from leverage, you can also manage your risk through stop and limit orders.

This will limit your risk of loss and help you in protecting the profits you make on the forex market.

#5. Stay Consistent

If you want long-term and positive results then you need to stay consistent on this path. The key to being successful is knowledge and consistency.

It is okay to lose money and at some point, even the most skilled traders have lost money. However, this shouldn’t deter you from forex trading. You should use the losses as a guide for making a better trading plan.

Always tweak your plan according to the market conditions you are in. After every few weeks or a month, you should sit down and re-evaluate your trading plan if you are not making any improvement.

This will help you to reflect on your goals and you can change the plan accordingly. Once this is done, you can start trading with your new plan. The forex market keeps on evolving and your situation will keep on changing so always take out time to re-evaluate strategies.

Final Words

This is everything you need to know as a beginner forex trader. Do remember, that it takes time and consistency to get to a profitable place in any trading venture.

So, use this guide as a starting point. Stay focused, be dedicated, be consistent, and don’t lose sight of why you started forex trading in the first place.

Once you do, you will soon see the results and you can then build on that to trade even more successfully.

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