Forex Trading for Beginners
What is FOREX Trading
Forex is a combination of the words Forex Exchange. Forex trading is also referred to as FX trading and currency trading.
It’s a bit of a misnomer by calling it an exchange as suggests there is a central point of control like the London or New York stock exchanges, but there isn’.
It is actually a free-flowing, unregulated market, where over $5 trillion are traded each day.
Now that is super impressive you have to admit. It’s the sheer size of the market that also provides a significant benefit for smaller and larger traders, liquidity.
It means that there is always someone available to buy and/or sell a currency when you enter the market.
Who Trades the Forex Market
Banks
Banks are probably the largest currency traders in the market. They perform 2 main services. They facilitate transactions for their business and corporate clients as well as conduct speculative trades on their own behalf.
Central Banks
These are the banks of individual governments and are responsible for controlling the value of that country’s currency.
They often intervene in the forex market by increasing or reducing the supply of a particular currency to help maintain its stability.
Hedge Funds and Institutional Investors
These are large investment firms who trade currencies, again for profit, often on behalf of large accounts such as pension funds.
These hedge funds can be worth billions of dollars and can have a significant impact on currency prices.
Corporations
Large corporations rely on the foreign exchange market quite heavily, particularly if they are involved in either importing or exporting products globally.
For example, if you are a car manufacturer in Europe you might buy components from Japan. To do this you need to convert euros into Japanese yen. Likewise, if you are a multinational with employees all around the world you need to pay them in their local currency. Therefore you need to exchange your base currency into their local currency.
Individual and Retail Traders
Individual and Retail TradersThat’s us!
We are an extremely small element of the overall trading volume but an important element nonetheless.
Unfortunately, retail traders are often seen as the small fish that provide food (liquidity) for the larger traders.
The Forex market is becoming increasingly popular with new investors because of the generally low barriers to entry and the fact that anybody from central banks to you and I can get involved.
What Forex Pairs Can I Trade?
There are literally hundreds of different currencies around the world that you can trade, but the 8 major currencies are as follows:
- USD – The US Dollar
- EUR – The Euro
- JPY – The Japanese Yen
- GBP – The British Pound
- CHF – The Swiss Franc
- CAD – The Canadian Dollar
- AUD – The Australian Dollar
- NZD – The New Zealand Dollar
Currencies are traded in pairs, for example, the EURUSD, as you are trading one currency against another, as opposed to shares, where you are buying or selling an individual share. The major currency pairs are anything crossed with the US dollar (USD) for example, EURUSD, GBPUSD and USDJPY. You also have minor currency pairs, sometimes referred to as cross pairs, where they are not paired against USD. For example, the AUDNZD, EURCHF etc. Then there are is not it currencies such as the Mexican peso, the South African rand and many others.
The first part of the currency pair is called the “base currency”, with the second currency being referred to as the “quote currency”. In a simple example, if USD was half the value of the Euro, the price of EURUSD would be 2.0000. That is because you would need to sell two dollars to buy 1 Euro and 1 Euro would buy you two dollars.
How do you Make Money Trading Forex
Essentially you are buying and selling currencies at different prices in an attempt to capitalise on the changes in currency values. For example, if you were buying the EURUSD in the example above, sometimes referred to as a long trade, you hope that the value of that pair is going to increase from 2.0000. Likewise, if you were to sell, often referred to as going short, then you would look for the value to drop.
Why Trade Forex
Ease of access is a significant reason, not to mention that you can trade forex currencies with very little starting capital. Brokers can give up to 500:1 leverage (that is too high so best advice is onkly go to 100:1. What that means is you are able to increase your potential profits dramatically.
Some brokers offer something called a micro account which is the smallest type of account you can get and enables you to start with as little as $100. That being said, you should never trade forex with money that you can’t afford to lose. Do not use trading as a way of solving a financial problem such as paying the mortgage, rent, buying food etc. Only ever use “spare money” that if you lose it won’t make any difference to your lifestyle.
Forex trading is comparatively cheap compared to trading stocks and shares as you are only paying a percentage (spread) between your base and quote currency. Therefore its proportional against the value of the trade making it very affordable. Also, all you actually need to get started is a PC/laptop and access to the Internet meaning you can trade pretty much anywhere.
All of the tools and charts required to trade are often provided free of charge by your broker, most commonly Metatrader, although some brokers have their own proprietary trading platform. These platforms give you the ability to get in and out of the market very quickly.
What Skills do I Need to Trade Forex?
This is a difficult question to answer because there are many different ways of trading. For example, if you are good at pattern recognition you can use technical trading as your primary method. Certain patterns can be made on a price chart depending on how a currency pair moves, and because these are common patterns they often become self-fulfilling. You might be an economics geek and trade fundamentals, which is looking at the overall economic picture of a country to determine whether the currency is going to increase or decrease in value. You might be a maths expert and use quantitative analysis or even a programmer and create an automated trading system.
Whatever your skills the chances are there is a way to apply it to trading.
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