Forex trading for beginners can be quite challenging. This is mainly due to the unrealistic expectations that are common among new entrants. What you need to know is that currency trading is by no means a get-rich-quick scheme. This article is our definitive guide to forex trading for beginners. On this page, you will receive an introduction to the forex trading market, how it works, and the key terms of the trade, along with the benefits of trading different currencies.
In this article, we will cover how you can get started in forex trading (including choosing the best trading company and best trading software), the basics of risk management, the different ways you can analyze the currency trading market. forex and forex, and an overview of the most popular forex trading strategies. By the end of this guide, you will have the knowledge you need to start testing your trading skills with a free demo account, before moving on to another live account.
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What is forex?
Forex, or currency market, is a market in which currencies are traded. To simplify the understanding of currency trading for beginners, we will take the following example, when you convert your local currency into another national currency for your next trip, you are selling the local currency and buying another foreign currency at a certain price or a certain amount. of units of the first currency for a certain number of units of the second currency at that time Rhombus and this is a simple example of the process. Across the market as a whole, currencies and other commodities are traded on the forex trading market for an estimated $ 5.3 billion each day between governments, banks, businesses, and speculators.
Knowing how currencies are traded and how the market works is very important, because the gathering of participants is what really creates the market in which you are trading. With a few thousand dollars in business.
Currencies are traded in pairs and the movement of currency pairs in the currency market measures the value of one currency against another. For example, the EUR / USD currency pair measures the value of one euro as its equivalent in US dollars. When the value of the pair increases, this means that the value of the euro has risen against the value of the US dollar. When the value of the pair goes down, this means that the value of the US dollar has increased (or the value of the euro has decreased).
By trading Forex and CFDs, traders can profit from these currency movements.
Read more: What is Forex? free forex course 2021.
What are currency pairs in forex trading?
In Forex trading, foreign currency pairs are known as majors, minors, and exotic (non-traditional).
The major currency pairs consist of the most traded currencies, namely:
- USD - US Dollar
- EUR - Euro
- JPY - Japanese Yen
- GBP - Pound sterling
- CHF - Swiss Franc
- CAD - Canadian dollar
- AUD - Australian Dollar
- NZD - New Zealand Dollar
A major currency pair is the pair that has any of these currencies paired with the US dollar, such as EUR / USD, USD / JPY, or GBP / USD. The minor currency pairs consist of these major currencies that do not include the US dollar. These pairs include EUR / GBP, EUR / CHF, AUD / NZD, etc.
Finally, exotic (non-traditional) foreign currencies are currencies that we have not mentioned before, such as the Hong Kong dollar (HKD), the Norwegian krone (NOK), the South African rand (ZAR), and the Thai baht (THB). . Exotic pairs include an exotic and a major currency.
When learning forex, many beginners tend to focus on the major currency pairs due to the wide daily volatility and tight spreads. But there are many other opportunities in the global financial markets, from important and exotic foreign currency pairs to CFD trading opportunities on the global stock market, commodities, energy futures and indices, you can trade them however you prefer.
How do prices work in forex trading?
In this article, we will seek to teach forex trading for beginners. In currency trading, you will see both "bid" and "ask" prices are quoted. The bid price is the price at which you can buy the coin, while the bid price is the price at which you can sell the coin. If you are buying a currency in a trade, what you expect is that the currency pair will increase in value, so that you can sell it at a higher price and make a profit on the difference.
If you sell a currency in a forex trade, the opposite is true - the hope is that the price of the currency will go down, so you can buy it back at a lower price, which means that you will benefit from the difference.
The number quoted for the prices of foreign currency pairs depends on the current exchange rate in the market or the amount of the second currency that you will get for 1 unit of the first currency (for example, if the quoted rate for EUR / USD is 1.68, it means that if you change 1 euro you will get 1.68 US dollars against).
How Liquid Are Different Currency Pairs In Forex Trading?
If the way traders make a profit is by taking advantage of the difference between the buy and sell price of currency pairs, the next logical question is, how far can you expect a given currency to move?
This depends on how liquid the coin is or how much is being bought and sold at any given time. The most liquid currency pairs are those with the greatest supply and demand in the foreign exchange trading market, and this supply and demand is generated by banks, companies, importers, exporters and traders. The major currency pairs tend to be the most liquid, with the EUR / USD moving 90-120 pips on an average day.
In contrast, the AUD / NZD moves 50 to 60 pips per day, and the USD / HKD only moves an average of 32 pips per day (when looking at the value of currency pairs, most will be indicated in five decimal points. A "Pip" is 0.0001, so if the EUR / USD moves from 1.16667 to 1.16677, it would be a change of 1 pip. The major currency pairs tend to be the most liquid and therefore offer the greatest short-term business opportunities.
However, there are also many opportunities between secondary and exotic coins, especially if you have some specialized knowledge about a particular coin.
Basic terms to learn forex and currency trading for beginners
Before continuing, let's summarize some of the key concepts covered so far with this list of key forex learning terms:
- Pip: A pip is the base unit in the price of currency pairs, or 0.0001 of the quoted price. So when the EUR / USD offer price increases from 1.16667 to 1.16677, that is a turning point.
- Spread: the spread is the difference between the bid price of a currency pair and the bid price. For the most popular currency pairs, the spread is usually low, sometimes less than a pip! For pairs that do not trade frequently, the spread tends to be much higher. Before a currency transaction becomes profitable, the value of a currency pair must exceed the difference between the buy and sell price or vice versa, depending on the type of transaction.
- Margin: Margin is the money available in a merchant's account. However, since average beginner forex trading lacks the required margin to trade at a high enough volume to make a good profit, many forex and CFD brokers offer their clients the ability to use leverage.
- Leverage: Leverage is the capital that a forex broker offers to boost the trading volume of its clients. For example, if you use a 1:10 leverage ratio and have $ 1,000 in your trading account, you can trade $ 10,000 in trading instruments. If the trade is successful, the leverage will multiply your profits by 10 times. However, keep in mind that leverage also multiplies your losses to the same degree, so it should be used with caution. If your account balance falls below $ 0, this may trigger a negative balance protection setup (if you trade with a trusted and ESMA regulated broker), which will close the position. Fortunately, this means that your balance cannot move below $ 0, so you will not owe it to the trading company.
Forex Trading Education For Beginners: What Are Contracts For Difference?
If you've ever wondered what the forex market is and have done some research on forex trading education for beginners, you may have seen the term CFD in the forex market at some point. There are two ways to trade forex: using contracts for difference (CFD) or spot forex (also known as margin). The spot forex market involves the buying and selling of real currencies. For example, you can buy a certain amount of British pounds against the euro and then once the value of the pound increases, you can exchange the euro for the pound and receive more money than you originally spent on the purchase.
The term CFD stands for Contract For Difference, a contract used to represent the movement in the prices of financial instruments. In currency terms, this means that instead of buying and selling large amounts of currency, you can benefit from price movements without owning the asset itself. Along with Forex, CFD are also available on stocks, indices, bonds, commodities, and cryptocurrencies. In any case, CFD allow you to trade the price movements of these instruments without having to buy them.
Forex Trading Education For Beginners - What's The Spread?
Once we know what the forex market is and how its prices work, let's talk a little about the spread in forex trading, which is the difference between the bid (sell) price and the buy (buy) price of a currency pair or a particular financial instrument. For example, if the offer price for EUR / USD is 1.21615 and the offer price is 1.21622, the spread will be equal to 0.0005, or half a pip. In any forex trade, the value of a currency pair must exceed the spread before it is profitable. To continue with the example above, if the trader entered a long EUR / USD position at 1.21622, the position will not be profitable until the value of the pair is above 1.21622.
In a currency pair with a wider spread, such as EUR / CZK, the currency will need to move higher for the trade to be profitable. At the time of writing, the bid price for this pair is 25.6824, while the bid price is 25.6624, so the spread is 0.0200 or 20 pips. It is also not uncommon for this pair to make moves of 20 pips per day, which means that traders will likely need to take a multi-day trade to make a profit.
This means that trading low spreads is often a priority for forex traders, as their trades can become profitable faster, which means that they can make a large number of smaller trades, rather than relying on large ones for earn money.
Forex Trading Education For Beginners - How Does Leverage Work?
In addition to being able to access a wide variety of financial markets, another advantage of CFD trading is that the trader can access a larger part of those markets and as a result increase his potential earnings. CFD provide leverage that allows you to gain access to the market, which means that a trader can access a larger portion of the market than he can actually buy outright.
To use gold CFD as an example, at the time of writing this beginner's trading tutorial, to buy an ounce of gold, you would need to spend $ 1,330. However, with 1:20 leverage (meaning a trader can trade up to 20 times the value of what you deposit), a trader can exchange the full value of one ounce of gold (equivalent to $ 1330) for a deposit of just $ 66.5.
Similarly, if you wanted to buy 3,000 US dollars in euros, it would cost 2,654 euros. With 1:30 leverage, you can buy $ 3000 on the forex market for just $ 88.49 right now. The best part is that the potential profit a trader can make is the same as if he had invested in the asset directly without leverage. The danger here is that potential losses are magnified to the same extent as potential gains when using the same leverage.
What are the benefits of forex trading for beginners?
Now that we've posted an overview of the trading market for beginners, why would you want to trade forex or other financial instruments?
There are a number of reasons why people choose to start trading during the day. Some of these reasons may include the ability to earn additional money, for example from the comfort of your home, work office, or anywhere you have an internet connection. One of the reasons to learn forex and trade is that it is the opportunity to learn a new skill in your own time, or even the dream of achieving financial freedom and getting more. Take control of your financial future. When it comes to Forex specifically, there are many advantages that make this financial instrument very attractive to trade.
If you want to learn more about the differences between the forex market and the stock market, why not read our comparison article on the subject. Find out which market is right for you! Forex vs Stocks: Should You Trade Forex or Stocks?
Forex - The World's Largest Financial Trading Market
Forex is the largest financial market in the world, with more than 5.09 trillion dollars traded every day (April 2016). In other words, in one day, more money will be traded in the currency markets than the value of Japan's GDP. Of these transactions, $ 254 billion are traded through CFDs and other financial derivative instruments.
Being the largest and most active financial trading market in the world, it is also the most liquid market in the world, which means that it is easy to participate and exchange currencies for new beginners and to enter and exit trades. And for the more liquid pairs, they can trade currencies at a very low cost (even as low as 1 pip!). This also means that the forex market is very volatile, which creates many opportunities for traders to profit from positive and negative movements in forex trading.
Currency trading 24 hours a day
Forex is the only financial market that never sleeps, which means that you can trade at any time of the day (or at night). Unlike global exchanges, which are found in trading rooms such as the New York Stock Exchange or the London Stock Exchange, the foreign exchange market is known as the "over-the-counter market" (OTC). This means that transactions are made directly between the parties that own the coins, rather than being managed through an exchange.
Therefore, currency trading is not limited to the working hours of any particular global exchange.
However, since the forex trading market is a global market, it means that there is always a part of the world that is awake and running deals and deals, and during these hours, its currencies tend to have the most movement. For example, currency pairs that include the US dollar experience the greatest movement during US business hours (16:00 to 24:00 GMT), while the euro, the pound, the Swiss franc and other currencies Europeans register the highest movement during working hours. , (8:00 and 16:00 GMT).
In contrast, the Australian dollar, New Zealand dollar, and Japanese yen tend to be most active between 00:00 and 08:00 GMT. As a trader, this means that you can trade at any time that suits you; if you work during the day, there will be currencies available to trade before or after your business hours. If you have children and are at home during the day, you can simply choose a different currency. In the forex market, you can trade 24 hours a day, 5 days a week.
One of the most common business and investment philosophies is "buy low, sell high"; This is particularly the case for long-term investments, such as investing in stocks or bonds, which are based on an increase in the value of assets. In the stock market and forex trading, you can also sell high prices and buy them back at low prices. In this way, you can profit both downward and upward.
As mentioned above, in trading stocks with a buy position, the trader will open a deal at the offer price and try to close the deal at a higher price, making a profit on the difference between the purchase value of the stock and sale value. Another example of currency trading, if the EUR / USD offer price is 1.16667 and the position is closed at a price of 1.17568, the difference is 0.00901 or 90.1 pips. (Trading 1 lot equal to 100,000 units would make a profit of $ 901).
Traders can also take short positions, where they sell shares at a higher price, and once the price drops, they buy them at a lower offer price and profit from the difference. In this case, if the price of a particular share is 1.322659 and the sell position is closed at a price of 88.32265, the difference will be $ 3 per share. In a lot (one lot) transaction (the value of one thousand shares) the profit will be 0300 USD.
Low cost of currency trading
Because all stocks and currencies are traded with the help of leverage, traders can access large portions of the forex market with extremely low spreads, sometimes up to 1/500 of the volume of the trading market they wish to access (according to a leverage ratio). of 1: 500). There are also some additional costs - most forex trading accounts have little (or no) commissions, application fees, account management fees, and if there are any trading fees.
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