Many newbies have little or no knowledge about Forex trading as different opinion and views are being expressed, but this guide to Forex trading for beginners will get you informed.
Every day, hundreds of thousands of people around the world keep searching for investment opportunities and businesses they can start online in their homes.
Interestingly, Forex trading is one of those opportunities that has proven to be profitable if you’re informed and know your way around it.
With everything being lucrative, there is a certain risk involved in losing money instead of making money. But thankfully, you can minimize and completely eradicate those risks by making sure that you are adequately educated on that particular topic.
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In this Forex trading for beginners guide, we are going to share with you everything that you need to know to get started.
Some of the things you’ll learn in this post are coined from Forexdominant.com – a top forex blog dedicated to helping every trader succeed.
Definition of Forex Trading for Beginners
What is Forex trading?
Forex simple stands for “foreign exchange”. So, Forex Trading is when individuals known as Forex Traders buy and sell various real-life currencies (Forex transaction) in the hope that they can turn a profit.
How Does the Forex Market Works?
The Forex market is a global market with no definite location. Come to think of it; every country in the world involve in foreign exchange, so the forex market having a central location wouldn’t just cut it.
This is so because trades are carried out via ECN which stands for Electronic Communication Networks (ECNs) in different markets across the world.
The ECN is the computer system that facilitates the trading of financial products. The ECN creation was authorized by the Securities and Exchange Commission in 1998.
Generally a market is dictated by demand and supply of the commodity that is being traded and this is particularly true for Forex Markets.
However it is also important to note that the value of currencies is heavily controlled by their respective governments or central banks as is the case for the Euro currency which is used by the majority of countries that are part of the European Union.
So, theoretically if the Central Bank or governing body that manages a currency decides to take an action such as printing more money it can affect the value of the currency.
More information is available below in our Forex trading for beginners guide.
Another important factor that dictates the value of a currency on the Forex Market is news and current events.
For example when the British people voted for Brexit in 2016 the British Pound fell in value as people anticipate that Brexit will overall not be good for the British economy.
From this, you can see that the value of a currency is closely related to the economy of that country. On average, the stronger the economy of a country the higher the value of its currency.
Who Trades Forex and Why?
The people who trade Forex are known as ‘currency traders’ or ‘Forex traders’ and they can be individual traders either part-time or full-time professionals who make a living from Forex trading.
The type of trader above is one of the most well-known types of Forex traders. However in this Forex trading for beginners guide, we will go in much more detail.
The biggest type of Forex traders in terms of the amount of currency that they trade are the private companies; those who import and export goods as they need to change over their currency back to the currency used in their home country.
For example, a Russian company may sell timber to consumers in China, once it has sold the timber it receives the Chinese Yuan and then needs to convert it back to the Russian Ruble at the foreign exchange or at their bank.
Another major player in the global Forex trading market are banks who are always sending currencies between accounts back and forth.
For example, if someone decides to send money from the United States back to their grandparents in Brazil they will pay a small fee for international transactions that are used by the bank to make the trade and the bank transfer possible in the first place.
Understanding Forex Currency Pairs
The next thing that we will cover in our Forex trading for Beginners guide is ‘Forex currency pairs’, it may sound very complicated, however, it is actually quite easy to get the hang of.
A Forex currency pair is when you sell a currency for the equivalent value of another currency.
For example, if you think that the value of the Euro is going to increase due to the news that you have been reading then you may exchange your US dollars for the Euro.
If you are correct and the value of the Euro increases, you can trade it back for the US dollar and end up with more US dollars than you started with, meaning you have made yourself a nice profit.
Another piece of quality info in our Forex guide for beginners is that currency pairs are also known as crosses by most Forex traders.
The most popular currency pairs all involve the US dollars along with other major currencies such as the Japanese Yen, the British Pound, the Euro, and the Swiss Franc.
It is very important to also add when teaching newbies that during Forex currency pairs, both currencies are bought and sold simultaneously; one is called the Base currency and the other is called the Quote currency.
To put it simply; you are exchanging one currency for another instead of for example, with public company shares where you exchange your money in return for the shares and vice versa.
Types of Currency Pairs
There are majorly 3 categories of currency pairs namely:
- Major currency pairs
- Minor currency pairs
- Exotic currency pairs
Let’s briefly take it one after the other:
Major Currency Pairs:
These are the currency pairs that include US Dollar as one of currency in the pair. Almost 85% of the global trading volume is traded in the majors.
Majors Pairs Include:
- EUR/USD (Euro/US Dollar)
- GBP/USD (Pound/US Dollar)
- USD/JPY (US DOllar/Japanese Yen)
- AUD/USD (Australian Dollar/US Dollar)
- USD/CHF (US Dollar/Swiss Franc)
- NZD/USD (New Zealand Dollar/ US Dollar) and..
- USD/CAD (US Dollar/Canadian Dollar)
Minor Currency Pairs
Minors are also called the cross currency pairs and they contain all the currencies in the major pairs except for US dollar.
- EUR (Euro)/GBP
- GBP (Pound)/AUD
- JPY (Japanese Yen) etc.
Examples: EUR/GBP, EUR/JPY, GBP/JPY etc. As you may have noticed that these are the crosses of all the major currencies excluding US Dollar.
The liquidity & volume are lower than majors, so trading opportunities may be lower than with majors.
Exotic Currency Pairs
Exotic Currency Pairs are made from one of the currency from major pairs and other one from the emerging economies like: Brazil, South Africa, Mexico, Russia etc.
Examples of such pairs include:
- USD/BRL (United States Dollar/Brazilian Real
- USD/HKD (United States Dollar/Hong Kong Dollar)
- USD/ZAR (US Dollar/South African Rand)
- USD/RUB (US Dollar/Russian Ruble) etc.
Exotic Pairs usually don’t have high liquidity & trading volume but they have high volatility plus they have high spreads as compared to Major & Minor Pairs.
As a beginner Forex Trader, you need to stick to major pairs only as it offers high liquidity and predictable market movements.
How Much Do You Need to Start Trading Forex?
If you are looking to make money trading Forex you will need to invest some money to get yourself started.
It is important to note that Forex trading for beginners at first can be a tricky process, and there is no definite amount of money that you need to start with in order to guarantee success for yourself.
In fact, it is recommended that trading for newbies is done with as low amounts of money as possible in order to minimize your likely losses at the start.
This will give you more freedom to test various strategies that can help you increase your earnings.
The truth is, it does not really depend on how much you want to start with as a beginner Forex trader, instead, it depends on the ‘account minimums’ of the Forex trading platform you are going with.
Some Forex trading platforms have minimums of $50 while others have $100 and the Forex trading platform accounts for professionals that offer better commissions on trades have account minimums going into the thousands.
Forex trading for beginners as mentioned above can be risky, therefore you need to have a risk management system in place.
A basic rule that majority of professional and experienced Forex traders follow is that you should never spend more than 1% of your account balance on a Forex trading platform in one trade.
So, for example if you have $100 in your account you should not spend more than $1 on trade but if you have $1,000 in your Forex account you should not spend more than $10.
That is one of the most important tips that we have for you in our Forex trading for beginners guide as it will help you ensure steady long term growth of your account.
Yes, the chances of you blowing your entire account balance due to one trade as no one can predict the market 100% of the time and there will always be trades that you make a loss on.
Quick Steps on How to Start Trading Forex
Now that we have covered all the key topics that will make Forex trading for beginners more easy to comprehend, here’s how to start trading Forex right now.
1. Before you start trading Forex you need to make sure that you have done a bit of reading on the topic and have at least basic knowledge about how everything works, although you will learn the most from experience once you have started trading forex.
Therefore get yourself some good Forex trading books and read them a few times to properly introduce yourself to the world of Forex trading.
2. The first real step will be to choose the right Forex trading platform for you considering that you have already done some research on Forex trading platforms.
A good platform that is friendly towards for Forex newbies is one that has low account minimums of $100 or lower and is also one that has a large community so you can search for and ask questions when you get stuck.
3. Once you have chosen and signed up for a Forex trading platform, your next step will be to deposit some money into your account on that platform.
It is important to always keep your account topped up to the account minimum at least as the majority of Forex trading platforms will charge you an ‘inactivity fee’ if you don’t make any trades in a given month, or your balance remains under the account minimum for a long period of time.
4. Now that you have opened your account and deposited successfully some money in it, it is time to make your first steps towards Forex trading.
See the Step-By-Step Guide on How to Open a Forex Trading Account
Forex Trading For Beginners (Summary)
Many Forex trading beginners will have the urge to just spend their balance as quickly as possible and hope for the best.
However, if you want to be successful you need to take some time to read the graphs of the values of the currencies you are interested in trading and also it is recommended to read some recent news articles.
As a beginner, you are bound to make mistakes and losses however you need to keep being determined and more importantly, learning from your mistakes while also continuing to educate yourself by consuming quality material about Forex trading.
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