Forex Trading For Beginners | Learn How Step-by-Step

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Forex Trading for Beginners - Learn Step by step

Forex trading for beginners may seem like a hard task, but it doesn’t have to be.

Have you ever come across an ad or a testimonial by a forex trader describing how they make thousands of dollars a day through forex trading? You know, deep down, that’s what you want for yourself.

As a beginner, you most likely have a million questions about how to get started on forex. From a distance, it seems complicated and some sort of gambling.

Unlike the guesswork and dependence on luck associated with gambling, forex trading involves carefully analyzing charts, following strategies, and trading wisely.

Now that you are interested in forex trading, it’s important to remember that succeeding as a forex trader takes time.

In this article, we shed light on a clear path to follow in your quest to become a profitable forex trader.

Forex Trading Lessons for Beginners

The Forex Market

Foreign Exchange, popularly known as Forex or FX, is the changing of one currency to another. The Forex global marketplace allows for this exchange to occur for diverse reasons, like, trading, tourism, or commerce.

This international market conducts its business electronically over-the-counter as there is no central market place. Traders, investors, banks, and institutions congregate online intending to profit with every movement of the stock price.

Words Commonly Used in Forex Trading

Every industry has its jargon. In Forex trading, you will need to know and understand the meaning of words that are used by investors and traders to do business. Some of these words include:

  1. Pip

Price Interest Point (PIP) refers to the smallest change of price in a currency pair, usually the last decimal place of a price quote.

If, for example, you have EUR/USD moving from 1.1701 to 1.1702, that 0.0001USD rise in value represents one pip.

Most currency pairs go for four decimal places except those with Japanese Yen (JPY), which goes for two decimal places. For example, for EUR/USD, it’s 0.0001, and for USD/JPY, it’s 0.01.

  1. Leverage

Leverage means that you are trading using borrowed funds to amplify profits from a relatively small price change in the currency pair. The money is borrowed from the broker and set aside from your account.

For example, for a $100,000 position, your broker will set aside $1,000 from your account. Therefore, your Leverage, which is expressed as a ratio, will be 100:1.

  1. Margin 

Margin is the capital required to open a new position and maintain it. It’s considered collateral or assurance that you can hold the open position until it is closed and be able to cover the potential loss of trade.

It is expressed as a percentage (%) and varies depending on the forex broker and the currency pair you are working on.

  1. Spread

There are two prices quoted in every currency pair: The bid price (selling price) and the asking price (buying price). The difference between these two prices is called Spread.

Spread is used by traders to determine the liquidity of the market. In currency pairs with high trades, the Spread is very small, sometimes even less than a pip, while in other currency pairs with fewer trades, the Spread is large.

For example, for this currency pair, EUR/USD= 1.1054/1.1056, the Spread is 0.0002.

  1. Bullish/Bearish

They are used to describe the general outlook of the market. When the price is rising, you say the market is Bullish, and when the price is going down, the market is Bearish.

The continuous upward or downward trends help traders to tell the mood of the market instantly.

  1. CFDs

A contract for differences (CFD) allows the traders and investors to profit from price movements without owning the asset. It’s an agreement between the investor and the CFD broker to pay the price difference between the asset’s current price and its final price at the close of trade.

In CFD trading, you make money when this difference of the underlying asset’s price is multiplied by the number of units in the contract.

For example, if you bought 50 gold CFDs for $500 and then sold at $600 after a few months, your profit should be calculated as ($600-$500)*50= $5,000.

Currency Pairs

Currencies are traded in pairs, where one currency is quoted against another currency. All pairs are categorized as either major, cross, or exotic.

Major pairs are all pairs that include the US dollar, while cross pairs are all pairs that do not include the US dollar. Exotic currency pairs include one major currency and one from the emerging market.

Examples of major pairs are EUR/USD, USD/JPY, USD/CAD, USD/CHF, AUD/USD, NZD/USD, and GBP/USD.

Cross-currency pairs that involve a major currency like the Euro, Yen, and Pound are called minor currencies. Examples of Euro cross pairs are EUR/CHF, EUR/GBP, EUR/CAD, EUR/AUD, EUR/NZD, EUR/SEK, and EUR/NOK.

The Yen cross pairs are EUR/JPY, GBP/JPY, CHF/JPY, NZD/JPY, CAD/JPY, and AUD/JPY, while the Pound cross pairs are GBP/CHF, GBP/CAD, GBP/NZD, and GBP/AUD.

Examples of exotic currency pairs are USD/BRL, USD/HKL, USD/SAR, USD/SGD, USD/ZAR, USD/THB, and USD/MXM.

Types of Forex Charts

A chart is a trading tool representing currency price movements over a set period. It helps a trader to technically analyze trading activity on a single trading period (whether it’s 30 minutes, 2 hours, one week, or even one month).

The y-axis of the chart represents the price range, while the x-axis represents the time range. The most recent price of the currency is plotted furthest to the right.

Charts are formed from a complete blend of all activity undertaken by millions of market participants (humans and algorithms).

There are three types of charts:

  1. Line chart
  2. Bar Chart
  3. Candlestick Chart
  • Line Chart

A line chart is drawn by connecting one closing price with another closing point, showing the general price movement over time.

It is simple to follow but does not comprehensively furnish the trader with details about the previous price movement within a set period.

This is what a line chart looks like.

Beginners Guide to Line Charts

You can use this kind of graph to get the “bigger picture” of what has been happening on the currency pair.

  • Bar Chart

A bar chart shows the opening and closing prices and the highest and the lowest prices reached, thus the name OHLC (Open, High, Low, Close).

This kind of chart gives the trader enough information to help make a detailed analysis of the market depending on each period’s price range.

This is how a bar chart looks like.

Beginners Guide to Bar Charts

The bars appear in different sizes, as the currency pair’s trading range differs.

  • Candlestick Chart

A candlestick chart is the prettier and graphical version of a bar chart. A candlestick bar represents the high-to-low price ranges on the currency pair.

The block, which forms the candlestick body, shows the opening and closing prices of the currency pair at that given period.

Here’s an example of a candlestick chart.

Beginners Guide to Candlestick Charts

Candlesticks are suitable for beginners, as they are easy to use and interpret. You can quickly identify chart patterns, turning points, and reversals from trends.

Each chart is different and has its advantages and disadvantages. You can use whichever feels easy and appealing for you.

Best Trading Methods for beginners

As a beginner, you’ll need strategies that you can use to find a fair trade and manage it. There are hundreds of strategies out there, but there are those that are favorable for a beginner to start with on their trading journey.

After finding your chart preference and gathering enough information on the chart, it’s time to find a simple strategy to use for trading so that you can make wise trading decisions.

Let’s look at three easy forex trading strategies that are best for beginners.

  1. Breakout Trading

A breakout occurs when the set price ranges, such as support and resistance levels, are broken, and the trend continues in the same direction. It happens suddenly, and the movement is rapid.

Here’s what I mean:

Beginning Forex Traders Guide to Break Out Trading

Breakouts indicate a volatile market, and a keen trader can make a lot of profit before the volatility boils down.

Trading a breakout means that you enter a trade when the movement is in your favor.

You love a thrill, don’t you? Trading a breakout and having it go along in your favor feels so good like you can literally smell the riches coming your way.

But, the other edge of this sword can tilt and make you bleed your account balance away in case of a false breakout.

These false breakouts make this method not an entirely dependable strategy. However, with a proper risk management plan and timeliness, trading a breakout can be fruitful.

  1. Swing Trading

It is a trading method where a trade position is held on for several days or weeks with the expectation that the price swings.

Swing trading is suitable for you if you work under a tight schedule during the day but can spare a few hours to analyze markets and keep abreast with current financial trends.

This trading method requires patience and calmness because you might notice that the trend is going against you while you are still holding. At this point, you have to remain calm and trust that your analysis was on point.

  1. Trend Trading 

This trading method is the most preferred among traders and investors because of its reduced risk and its high returns in the long run.

Trend trading involves technical analysis of the price movements and finding a way to flow with the wave. Once a trend starts in one currency pair, it is highly likely that other pairs will follow suit.

Whether you are a long-term investor looking to hold a more extended position on the trend or a short-term trend trader looking for quick profits, trend trading will most likely work in your favor.

Take a look at the downward trend below:

Beginning Forex Traders Guide to Trend Trading

Trading Platform for Beginners

The application of knowledge acquired is power! Yes?

To apply this knowledge effectively, you will require a good trading platform that will allow you to analyze charts and trade smoothly technically.

Let’s look at the top three forex brokers for beginners and how you can open an account with each of them.

  1. eToro

eToro is a well-known social trading broker that allows for trading CFDs and cryptocurrencies. It is rated the best broker for cryptocurrency and the best broker for social trading for 2020.

It offers commission-free stock trading and innovative features like social trading, where you can learn and copy strategies from other traders.

Here’s how to open an account:

  1. Go to https://www.etoro.com/
  2. Click on “Join Now”
  3. Fill in your details and click on “Create Account.” You can also sign up using your Facebook or Google account.

After those three steps, you’ll be redirected into the trading platform where you can complete your profile, deposit fund, and begin trading.

For Australia and the USA, residents enjoy a minimum first-time deposit of $50, and those residing in Algeria, Lebanon, the Maldives, and Venezuela are allowed a first-time deposit of $5000.

After the first deposit, the minimum deposit for all is $50. The site allows deposits from Credit cards, Paypal, Neteller, and Skrill.

  1. AXI

Axi is an award-winning Forex broker, with the latest award being “Most Trusted Forex Broker” and “Best MT4 Provider” for the UK Forex Awards.

It is licensed by the major licensing authorities to ensure transparency and trust among the traders and investors in the platform.

Read our Axi Review here

The broker is beginner-friendly, equipped with technical analysis tools, learning materials, and video tutorials, and provides a beginner with a demo account for practice. Cool, right?

Here’s how to open your account:

  1. Go to https://www.axi.com/
  2. Click on the “Open Account” button on the home page.
  3. Proceed to fill in the information required for account creation
  4. Confirm your Identity by following the instructions provided.

After completing these steps, your account is open. You can now fund your account and begin trading.

Before diving into the real market and getting to swim with the sharks, I would recommend that you take some time trading on the demo account provided by the broker. Practice makes perfect.

Axi has no minimum deposit limit, and so you can deposit any amount and start trading.

It allows a long list of options of how you can deposit into your Axi account, some of them being Skrill, Credit/Debit cards, Neteller, bank transfers, and many others.

  1. IC Markets

IC Markets offer Forex and CFD services in a beginner-friendly environment. The process of account opening is easy and straightforward.

To open an account:

  1. Go to https://www.icmarkets.com/
  2. Click on the “Start Trading” icon on the home page.
  3. You will be redirected to a page where you can enter your details on the application form.
  4. Once the account is approved, you’ll receive an email with your account login details.

IC Markets allows a minimum deposit of $200. The initial minimum deposit is high to cover their initial costs associated with creating an account and also give you a chance to make large trades for greater profits.

You can deposit into your account using your Credit or debit card, Skrill, Neteller, Paypal, UnionPay, and several other methods. You can choose one that is favorable for you, depending on where you are on the planet.

There is no deposit fee, so no money is deducted as you make a deposit.

Beginner’s Guide to Risk Management

Proper risk management will help you remain calm, tame your gambling instinct, and ensure that you remain sober enough to make wise trading decisions. The focus is to make more money while protecting what you have in your account.

Have you heard of ‘revenge’ trading? It is the mistake of trying to recover all that you have lost in just one trade.

Most traders lose money, not because they lack experience or knowledge, but because of poor risk management.

Forex is not gambling. Therefore you cannot just place trades hoping you win and be ready to stomach any losses incurred.

As a trader, you will face risks like:

  1. False breakouts and reversals – the trend can suddenly reverse and push you to the losing end.
  2. Liquidity risk – how liquid the market is can mean either a loss or a profit for you.
  3. Market instability – you risk sudden changes in the currency interest rates, resulting in a loss on your trade.

Proper risk management involves the following:

  1. Trade with money you can afford to lose.

This is a golden rule. As obvious as that sounds, risking money that you live on is a mistake you need to avoid at all costs.

Why?

Because, in the forex marketplace, it is possible to lose all you have. Also, losing the money you live on will add to you extra pressure and emotional instability, affecting your ability to make wise trading decisions.

  1. Determine your risk tolerance

Forex trading is a risky affair, so start by determining how much loss you can handle. Consider your level of experience and the knowledge you have to determine your risk tolerance.

Advanced traders advise for not more than 5% of your account balance as a reasonable risk margin. However, for a beginner, 1% or 2% of your balance should do the trick.

The more you risk, the faster you are likely to drain your account. Be wise and limit yourself.

  1. Use stop-loss and limit orders. 

Stop-loss is placed in an open position to bail you out of the trade in case it goes against you. It’s advisable to set it such that you lose no more than 2% of your trading balance for any trade.

Limit orders are set for anticipated trades, where a trader instructs the broker to place a trade when the market reaches a certain level.

Stop-losses and limit orders leave the trader with much-needed peace of mind knowing that there’s some degree of protection in case the trade goes south.

  1. Use Leverage wisely

Using Leverage magnifies the profits from each trade, but also losses come with a similar magnitude.

As a beginner, the temptation to leverage high is fueled by the desire to make significant profits in a single trade. But, if you are over-leveraged, a single mistake or an unexpected reversal on your trade could mean a significant loss.

  1. Make a plan and stick to it.

Use a trading journal to make a plan and set goals of the number of trades to make per day despite the outcome.

A proper plan should include a target profit, risk tolerance levels, strategies to use, and evaluation criteria. Sticking to the plan means that you know when to stop and call it a day.

  1. Improve Yourself

The forex trading space is expansive, and there are many things to be learned every day. There are enough resources online at your disposal that you can use to increase your knowledge.

Practice what you learn. Several trading platforms provide beginners with a practice account that they can use to familiarize with the markets and sharpen their skills.

  1. Keep your risk amount consistent

As a beginner, the desire to make a lot of profit is always itching. The thought that you could make more profit by staking more money keeps lingering.

Another scenario that could trigger the urge to increase the amount of the money staked, is a previous trade loss. The intention is to recover the amount lost.

As profitable as this action would be, it is possible to lose all the money in your account balance in just one trade.

Final Thoughts

Forex trading, however risky, can be advantageous and very rewarding. Most things about forex may seem a little complex for a beginner, but with time you’ll begin to flow with it.

Have you found a broker that is favorable for you? Before making a decision on which trading broker to trade on, it is crucial to conduct research on it and rule out any possibility of losing your money to a con.

With the current economic conditions, you must keep abreast of the current affairs such as COVID-19 and its impact on the market’s leading currencies.

The forex marketplace may be vast, but it’s not impossible to navigate and become successful. You have to remember to learn at every step and always have a safety net to catch you if things turn out otherwise.

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