An Extensive Guide on How to Get Started With Forex Trading
Forex trading is the biggest financial market in the world. Its over-the-counter feature is what makes it most accessible to people all around the world. In the foreign exchange market, the main participants that run the market are the Governments, Central Banks, large multinational firms, and business companies. Retail traders form only a small part in this giant ocean. Moreover, the exchange rates of the currency pairs are decided not solely by the demand and supply and a wide range of economic factors.
Traders trade the currency pairs by analysing price action charts and fundamental news. However, the biggest mistake made is to enter the market with little to no knowledge. Being global, online, and having no central authority to regulate the vast market, it leaves an open space for scammers to enter into the market. A beginner forex trader has two primary duties to fulfil. One – to first learn about forex trading and imbibe all the necessary knowledge and skills. Two – to find a good, trustworthy and reliable broker. In this guide, we will look at both of these in detail.
Learn and Gain Knowledge
The first step to the road of success is knowledge. The forex market is very complex. In fact, equities and cryptos have an easier concept to understand. The reason why the forex market is so complex is because currencies from all over the world are listed. Every currency is paired up against another currency, making an infinite number of exchange rates. The good news is that brokers list only a limited number of currency pairs amidst this plethora. Anyhow, even if taking only one currency pair in consideration, it is made up of two currencies – a base and a quote currency. For example in EUR/USD, the base currency is USD, and quote currency is EUR.
In order to successfully trade a currency pair, a trader must have knowledge. The trader must perform technical analysis or fundamental analysis, or both, whatever suits him/her the best. After analysis, comes speculation. Whether the currency pair will match the speculation of the trader or not decides if the opened trade will result in a profit or loss. As legal tenders of a nation, currencies are affected by a wide range of economical, political, and social factors. Forex traders have to keep an eye out for all of them.
Before a trader enters a forex market, they need to develop some important skills. Only reading a course, or completing some books and making notes will not help. The forex market is very practical. Which is why gathering only bookish knowledge is not sufficient. A trader needs to convert his theoretical concepts into practicality by applying them in the actual market and see for themselves how the market works.
Below are some important skills that a person must acquire and develop before entering the live market. The best way to get a good grasp of them by demo trading for around 6 months or more.
Fundamental analysis is the process of analysing important market news that helps in speculation of price changes in the exchange rates. Such news can cover events or updates relating to social causes, politics, and economics. The news related to economics carries the most weightage. It can be Consumer Price Index, Retail sale news, unemployment rate, Gross Domestic Product (GDP), overnight interest rate, growth rate, non-farm payrolls, etc.
A trader must also keep an eye out for any news or press releases from meetings of pertinent government agencies because they could influence the market in addition to these important economic updates. For instance, debates about the government’s monetary policy, interest rates, inflation, and other issues that have an impact on the value of currencies.
By analysing such news and reading and analysing economic reports, forex traders can improve their fundamental analysis skills. Although it is not the only way to make profit in the market, fundamental analysis is crucial for all traders. Since understanding how the market functions will help them better understand long-term market trends. Fundamental analysis can also be advantageous for short-term traders because it teaches them how to capitalise on extraordinary events by relating news events to market movements.
Observing and speculating on price trends of the currency pairs is a part of technical analysis in the forex market. The primary distinction between technical analysis and fundamental analysis is clear: one is founded on news, while the other is based entirely on technical factors like price action, charts, etc. Therefore, price actions, identifying entry and exit points, and indicators like Fibonacci, Parabolic SAR, and Pivot Points are all included in technical analysis tools.
In a layman’s terms, forex risk management basically means all the steps and processes taken by a trader in order to mitigate risks of losing capital. It refers to putting in place a series of stringent controls to make sure that any unfavourable effects of a forex trade are controlled and do not significantly reduce the account capital.
Since it is not a good idea to start trading and then try to manage your risk as you go, an effective strategy necessitates careful planning from beginning to end. Risks in forex include – the constantly changing exchange rates, risks of higher interest rate differentiation, risk of low liquidity, and risks of leverage.
Below are some simple steps how you can manage risks in forex –
- Understand the market before trading – There are different types of forex market like spot, options, forward, and futures. You need to have complete and thorough knowledge of the forex market before you start trading. Practise on a demo as much as you can so that when you trade on a live account, you can know about the risks and take necessary steps to mitigate it.
- Leverage – Use leverage carefully. Always remember it is a double-edged sword. If you are using a high leverage without doing proper market analysis and being sure of winning the trade, you are at a high risk of losing capital. Using high leverage on a losing trade can put your account at margin call.
- Trading Plan – Always make a trading plan before opening a position in the market. The planning of trades is crucial for you. It entails conducting your own market analysis and choosing your lot size, profit target, time frame, etc. Copping someone else’s plan won’t help you because they probably have different objectives, attitudes, and viewpoints than you do.
- Risk Reward Ratio – The risk/reward ratio aids forex traders in controlling their potential for trade loss. Your capital should be worth the risk you take in every trade. The main objective is for your total profit to exceed your total loss. Then and only then will a trader be successful and ultimately profitable. Your risk-reward ratio should be set as part of your forex trading strategy in order to determine the value of a trade. The difference between a trade entry point to a stop-loss and a sell or take-profit order is measured by the risk/reward ratio.
- Stop Loss/Take Profit – Stop Loss and Take Profits are tools that are used by traders (provided by the broker) to place orders to automatically close trades at certain levels. Stop loss is placed below the entry level. It is the point till which you risk to lose. Take profit is placed above the entry point. It is the point at which you are satisfied with the profits. Both are calculated in pips.
The foreign exchange market is challenging and erratic. There is no doubt that it can have a negative impact on a trader’s mental health, particularly if they are unable to manage their emotions. If not managed, emotions like fear, greed, temptation, doubt, and anxiety can have a negative impact on your trading.
You might go too far and lose as a result. Trading outcomes may suffer if a trader allows their emotions to interfere with their ability to analyse the market and make decisions. That is just how business is done. That is why it is important to learn and develop forex trading psychology.
Successful forex traders are able to control their emotions and prevent them from interfering with their trading. By overcoming greed, anger, anxiety, and fear, one can develop a successful trading mindset. A trader who has developed their trading psychology will also naturally reduce their risk of losing, which will aid in risk management.
Choosing The Right Broker
Choosing the right broker for yourself may not sound like a big or an important task at first. But it actually plays a major role because it is through a broker that you trade, analyse the market, pay commission, deposit money, and withdraw profits – it matters a lot.
Regulated and Reliable : Always choose a broker who is regulated and reliable. Unlike share market brokers, forex brokers are connected to Banks and large trading firms. This is because brokers need a huge amount of capital in order to facilitate high scale leverage in forex trading. But this does not mean that they are regulated. Instead, search for forex brokers that are registered under the National trading regulatory authority of a country. It should be listed on the forex broker’s website.
Spreads – Spreads refer to the difference between bid and ask prices. They are usually calculated in pips.You should choose brokers that offer low spreads to avoid additional costs. Do some extra research by searching for honest reviews on reddit, quora or youtube. In addition to spreads, some brokers also charge commissions on trades. Commissions can either be fixed dollar amounts or percentages of trade values. Therefore, a trader must be careful and conduct research diligently in order to choose the right broker.
Leverage – Leverage in the forex market represents the loan you are taking from the broker in order to open a trade with a higher capital. For example, in a leverage of 100:1, if the trader puts $ 1 out of his own pocket for trading, the forex broker provides the trader with 100 times of the capital the trader uses for trading. In other words, for $5 lent by the trader, the forex broker lends 100 times, making the total capital for trading as $500.
However, leverage is a double sided sword. If you lose the trade, you have to pay back the whole amount back to the broker. Hence, select a leverage that you can handle.
Necessary Tools – The forex broker you are choosing should pay necessary tools required for trading. Necessary tools include price action charts, real time price, VPS, pips calculators, real time news, economic calendars and spreads index. The broker should also have a platform that allows trading systems to be used. You can use demo accounts of different brokers to personally test and see which broker offers you the best services.
We have discussed the complete guide on how to get started with forex trading. It is important to note that the majority of traders who are profitable create a strategy and hone it over time. So, create your own strategy after learning more about the market. Utilising a demo account is the most effective way to create and test a strategy. Open a practice account with a reputable broker and trade using your strategy there until you start to see consistent profits. Additionally, it is advised to combine fundamental and technical analysis in order to forecast the future and identify entry and exit points for best results.