Over the past decade or two, all kinds of trading have become more accessible. Whether you are talking about stocks and shares, currencies, or even cryptocurrencies, it is easier than ever for anyone to take up trading. With a selection of websites and apps available in your pocket, it becomes very tempting for many of us to “give it a go.” The stock market is no longer reserved for high-flying traders only!
Although it is easy to set up accounts in many of these trading systems, it’s not always clear exactly what to do or what tactics to follow. If you have an interest in trading, specifically forex trading, then this article is for you. Read on for some important tips on getting started in the world of Forex trading.
What is Forex Trading?
Essentially, forex trading is the process of buying and selling currencies. To be more precise, it involves converting one currency into another in the hope of making a profit over time. This is known as buying or selling currency pairs.
Traders use potential increases in the value of certain currencies to try to buy and sell the right currency at the right time, hoping the value of the purchased currency increases. It is the most liquid marketplace in the world, with over $6.5 trillion worth of currency traded daily. The market is open 24/7, 5 days a week. So traders must be aware of risks or changes that may occur overnight, unlike the regular stock market which closes every evening.
The History of Forex
It is fair to say that, in a very basic sense, currency trading has been around for centuries, much like any other form of trading. However, it has only been since 1971 that the market as we know it today has existed. In 1971, the Smithsonian Agreement was decided upon, allowing multiple currencies to float against one another on the free market. In the ’90s, the market went online, which began the revolution in trading that has led us to this point.
Learn the Basics
Trading currencies, then, sounds relatively simple. However, to learn how to start Forex trading, you must understand the basics. As mentioned, currencies are traded in pairs. This is the first thing to understand. For example, EUR/USD is a pair representing the sale of the Euro into the Dollar or vice-versa. So, as you buy one, you sell the other.
The next thing to understand is that all currencies are priced out into four decimal places. You will hear the phrase “pips” as well as “pairs.” Pips are effectively percentage points of your chosen currency. So, 1/100th equals 1% or 1 pip. This is the smallest amount of trade that can be done within a currency lot.
Speaking of “lots,” this is the name given to the number of units of a given currency being traded with. A micro-lot is 1,000 units of your base currency, while a mini-lot is 10,000 and a standard lot is 100,000. So, a pip of a micro-lot is 10 cents, while in a mini-lot it is $1, making these the smallest amount of value tradeable in each lot.
Choose a Broker
If that all makes enough sense, you can start looking for a broker. Brokers provide a trading platform for you to start making trades on. There are a huge amount of brokers out there, some more suited to beginners than others. Look at their platform and whether you find it easy to understand. Then, check out and compare fees between different brokers. Some may charge fees for making trades, others charge commission. Different platforms also require different minimum deposits or spend amounts, so if you’re looking to start small, find a broker with a low minimum deposit.
Practice Risk-Free
There are many of these platforms to choose from. One of the things worth looking for is whether they offer a demo account. This feature has been added to many forex brokerage sites as it allows you to sign up and try trading risk-free. Everything will look and feel like you are making real trades, except you will have no real money on the line! This is a perfect opportunity to test whether you understand the market and how the trading platform works.
Choose Your Pairs
As mentioned, currencies are traded in pairs. When you see a listing such as EUR/USD, EUR is the base currency and USD is the quote currency. This is known to be the most liquid pairing in forex trading today. As you know, when using this pairing, you would be selling the EUR to the value of the quote currency, USD.
But, how do you choose which pairs to trade with? Well, when starting out, it is often recommended to learn one or two of the major currency pairings. Study them, learn what tends to affect their value, and start trading with just these pairs. Otherwise, if you go too complicated or spread yourself too thin, it can become confusing and overwhelming. Start with EUR/USD or similar, and take plenty of time learning it before expanding your portfolio.
Make a Plan
At this point, you are ready to start trading. But, you need to have a concrete plan in place first. This includes how much you are willing and able to put into your brokerage account. This is how much you are willing to lose without it affecting your life. Don’t trade with money you can’t afford to lose – this is a risky game! Decide on your pairs and your study time, trading time and how much time you will spend in the market. It’s easy to get carried away or let emotions take over at the beginning. But, if you make a solid plan of how much to spend and what your tactics are, you will find it easier to keep the emotions out of your trading.
These are the basic tips and things you need to understand when considering taking up forex trading. The markets can be fascinating to watch and learn about, while successful trades make for happy trading. Good luck on your journey into the forex market.
