Forex trading basics
Before you start to trade forex, it is important to do your research and familiarise yourself with the market, as there is a vast array of options, platforms and terminology that can be overwhelming for beginners. Here is a rundown of some key things you should know, and tips on how to get started.
What is forex?
Forex is short-hand for foreign exchange, and is the market in which currencies are traded. Forex is traded in pairs, for example British pound/US dollar (GBP/USD), and the value represents the worth of the former in terms of the latter.
It is the largest market in the world, worth over $4 trillion, with trading going on 24 hours a day five days a week. It provides a means for companies, nations and individuals to exchange currency, as well as for traders to speculate on market direction.
What moves forex markets?
Like all markets, the FX market is moved by buyers and sellers, with the changing prices representing the shifting of opinion about the worth of one currency versus another. Speculative buyers think a FX pair is undervalued, for whatever reason, while speculative sellers think it is expensive. Companies may simply be using the FX market to facilitate operations, with no view on future direction, but their participation can help move markets nonetheless.
Which currency pairs to trade?
This will depend on your own personal preferences, but you should take into account the timings of data releases that can cause volatility on markets. Many people stick to the top-traded pairs such as EUR/USD, GBP/USD and USD/JPY, since these are very liquid and can be less susceptible to sudden changes. Others prefer the more esoteric combinations of pairs.
Forex trading tips for beginners
Every trader is different, and how you approach your first trade will depend on your attitude to the markets. But here are a few steps you should follow before you make your first trade:
Choosing your forex trading strategy
When choosing your preferred trading strategy you should take what you want to achieve into account, as well as how quickly you want to get there and how much time you can dedicate to the markets. Popular forex trading strategies include:
- Day trading. Buying and selling assets within a single trading day, to take advantage of small market movements
- Scalping. Opening and closing a position very quickly to profit from small changes in price
- Swing trading. Entering trades at the point the market is expected to change direction, known as a ‘swing’, in order to profit from the small oscillations in asset prices
- Position trading. Hold positions long-term to maximise from major shifts in prices
Each type of trading strategy has a different risk profile and trading timeframe – for example, if you don’t like the idea of leaving a position open overnight, you may want to consider day trading.
Determining which type of trading strategy suits you is crucial to success, as a personality mismatch could lead to unnecessary stress and potential losses.
You can read more on three of the top forex trading strategies.
Using forex fundamental analysis or technical analysis
There are two main schools of thought when it comes to analysing the markets:
- Fundamental analysis, which tries to determine the worth of a pair through economic data and other such figures. Political news and economic data can cause prices to change dramatically
- Technical analysis, which relies on charts. Although price-based indicators receive a lot of attention, a simple approach utilising support and resistance, trendlines and just one or two indicators will prove more effective than adding in indicators for their own sake
Take steps to manage your risk
Risk management is a crucial skill for all traders, regardless of what asset or market they trade. In leveraged trading, preservation of capital is key, which is why the common rule of thumb is that each trade should risk no more than 2% of the account. This means that each loss does not overwhelm the trader, and allows them to stick to the correct psychological approach.
Though the forex market has the potential for increased profits, it also presents increased risk due to the fast paced and volatile nature of the market. It is important to take steps to effectively manage this risk by managing position sizes, using stop losses or implementing technical indicators.
Learn more about managing your risk.