Forex trading is a great way to make money and, for those who take the time to learn it, it can be a fun and exciting hobby. However, many beginner forex traders who are new to forex trading get discouraged by all the hype surrounding this topic. There is so much information being shared that it can be difficult to find the right source of information for you. This article presents a beginner's guide to trading forex markets that will take you through the basics of forex trading, tips for how to trade successfully, and some helpful resources.
Brief History of Forex
Forex, short for foreign exchange, is the largest financial market in the world, with a daily trading volume of over $5 trillion USD. It's this huge volume that makes Forex such a lucrative market to trade, especially since Forex dealers invest their own capital to trade for a profit. In other words, Forex is basically a zero-sum game, where one party's profit is another party's loss.
The history of the Forex market dates back to the 1970s when the first currency exchange took place. At that time, a single American citizen could travel to Europe and exchange their U.S. dollars for British pounds and vice versa. Currency exchange was a very simple process because it was only done by banks and major financial institutions. The first currency exchange took place in 1971 between the US dollar and the Swiss franc.
In the early days of currency exchange, the process was very slow because of the time involved with international paper transactions. In the 1980s, currency trading became more of a 24-hour-a-day operation due to the development of telephone and electronic communication. With this technology, the price of a currency could be determined instantly. In the 1990s, the Internet allowed for 24-hour currency trading in all of the world’s currencies.
Modern Forex World
In today’s world, the forex industry is dominated by large institutions like banks, investment and hedge funds, and corporations. The forex market is open 24 hours a day, 5 days a week, and currencies are traded in pairs. The forex market is an international market that influences the global economy in a great way, and it is a great source of revenue for both individual investors and major corporations. On the other hand, it is one of the most risky markets in the world, where the slightest change in the rates can lead to a significant loss for traders. Fortunately for new traders, there are a few best practices that can help them avoid such losses, and hopefully, even increase their profits.
Currency trading is simply the buying and selling of one currency against another. For example, a trader might sell the USD/EUR currency pair, which would mean they are selling dollars and buying euros, simultaneously. There are upward of 200 currency pairs available to trade and exotic pairs are some of the more difficult to grasp.
The main currency pairs we trade at Falcon FX:
Exotic currency pairs are the currency pairs that don’t consist of the most common foreign exchange trading pairs such as the EUR/USD. These pairs are very commonly being traded on the market and usually, there is a significant difference in the spreads of these pairs compared to the more common pairs. There are around 20 currency pairs in the world that are most commonly traded; the rest are considered as "exotics".
“You need to know very well when to move away, or give up the loss, and not allow the anxiety to trick you into trying again.” – Warren Buffett
Best Pairs to Trade
The most common currency pairs are EUR/USD, EUR/GBP, EUR/JPY, USD/JPY, and USD/CAD. Most price action strategies involve analyzing the price of a currency pair and using this analysis to predict the future price of the currency pairs. The most important characteristic of any currency pair is the price. The price of a currency, therefore, depends on how much demand there is for that currency in each market and how much is available.
Trading the current pair is a simple strategy that involves trading the most liquid currency pair in the market. This strategy can be used to enter a position in the direction of the trend and as an alternative to taking a directional trade on the next most liquid currency pair. This can be a successful strategy for currency traders who have a limited amount of capital and want to trade with less risk. If you just got into forex trading, we highly recommend starting with EUR/USD (EURUSD) as the main currency pair to practice and conquer. The EUR/USD is the largest and most widely traded currency pair in the foreign exchange market. Therefore, traders who use this strategy should be able to find liquid currency pairs to trade with comparative ease.
Fundamental vs Technical Analysis
Fundamental Analysis: Fundamental analysis is a study of the economic factors that affect the price of an asset. For forex trading, fundamental analysis is a study of economic factors that affect the forex market. The main factors that affect the forex market are:
- The gross domestic product (GDP) of a country
- The unemployment rate
- The rate of inflation
- The balance of payments
- The monetary policy of a country, etc.
Technical Analysis: Technical Analysis is a trading system based on prices and chart patterns. In technical analysis, we seek to identify opportunities where we can profit from the behavior of the market, regardless of the direction of the market. Technical Analysis is based on the past performance of market indicators, no prediction is made, and many TA indicators do not indicate a market direction. For example, a quick TA of Precious Metals Technical Analysis can give us an edge over other market participants. The forex market is a zero sum game. It is almost like a casino where the house always wins. The FX traders who win in Forex are the ones who truly understood that trading is a probability game. You need to know your odds before placing any trades.
What Moves the FX Markets
As we can see the currency pairs are moving up and down depending on the economic data that is released by the country. The economic data that is released by a country can have an effect on the currency pairs. For example, if the country reports a higher than expected number on their GDP then the currency pairs will move up. If the country reports a lower than expected number on their GDP then the currency pairs will move down. The country will also be releasing different types of economic data. The different types of economic data that will be released by the country will be of interest to the currency traders. For example, if the country is expected to release inflation data then this will be of interest to the currency traders.
What affects the forex market? Many factors affect the forex market. These include:
- interest rate differentials
- government intervention
- currency speculation
- the economic health of the countries involved
Forex Glossary (Short Version)
This is just a short version of the glossary list. Check out "Forex Glossary Full Version by Falcon FX".
A pip is a small price movement of a currency pair. When the spot price moves from one currency to another, the pip value moves accordingly. One pip is equal to 1/100th of a percent. For example, if one currency pair is trading at 1.3000/1.3001, then one pip is equal to 0.0001. If the USD/CAD pair moves from 1.3000/1.3001 to 1.2950/1.3000, then one pip will be equal to 0.0001. In total, the USD/CAD will move 50 pips.
Margin is the money that a trader puts down as collateral for a trade. In other words, margin is the amount of money that a trader borrows in order to trade. For example: If a trader buys EURGBP at 1.3450, the trader is required to pay 100,000.00. The trader is using 100K of his own money to buy 1,000,000.00 of GBP. The trader is said to have a 100:1 leverage when trading the EURGBP. If the EURGBP then rises to 1.3500, the trader has made a profit of 50,000.00.
A lot in the foreign exchange market is a standard quantity of a currency pair (e.g., EUR/USD, EUR/JPY, EUR/GBP etc.) traded in the spot market. The size or volume of a lot varies by currency pair and by the dealer (e.g., bank, broker, market maker). For example, one standard lot in the EUR/USD currency pair typically consists of 100,000 units of the base currency (the Euro) and 100,000 units of the quote currency (the US dollar). In the EUR/JPY currency pair, a standard lot is 10,000 units of the Euro and 10,000 units of the Japanese yen. In some cases, the lot size of a currency pair can be expressed as the number of base units or the number of quote units.
“You need to know very well when to move away, or give up the loss, and not allow the anxiety to trick you into trying again.” – Warren Buffett
A forex broker is a company that provides clients with the necessary tools to trade foreign currencies and related products. Clients generally open trading accounts with a forex broker and deposit a certain amount of capital into that account. From there, they can execute trades as they wish. Forex brokers are typically regulated by a governing body that is a part of the financial industry, such as the National Futures Association (NFA).
Bullish and bearish are terms used in the foreign exchange market (forex) to characterize the sentiment, or outlook, for a currency pair. Bullish refers to an upward trend in the price of a financial instrument, such as a stock, currency pair, or index. When the market is bullish, this means that prices are expected to rise, as there is a general upward trend in the market or in a particular security. The opposite of bullish is bearish, which refers to a downward trend in the price of a financial instrument. When the market is bearish, this means that prices are expected to fall in the short term.
You’ve probably heard of long and short positions in stocks, or other instruments. But what does that mean in forex? When trading forex, a long position is when a trader buys a currency, and then sells it at a later time, making a profit. If the price increases, the trader makes a profit. A short position is when the trader sells the currency and then buys it back later, hoping the price will decrease, and then makes a profit. If the price decreases, the trader makes a profit.
Bid/Ask Price & Spread
Bid and ask prices are the two prices quoted for a product or currency pair on the forex market. The bid price is the price at which you can sell a currency, while the asking price is the price at which you can buy a currency. The Bid price is the highest price a buyer is willing to pay for a currency. It is also referred to as the 'offer price' or 'ask price'. The Bid-Ask Spread is the difference between the Ask Price and the Bid Price. It is usually expressed in pips (0.0001).
Types of Charts:
- Line Chart: Line charts are one of the most basic and easiest forms of charting. A line chart (also called a line graph or trend graph) shows the relationship between two variables, such as currency prices, over time. Line graphs are typically used to show a quantity such as stock or currency prices changing over time.
- Bar (OHLC) Chart: The Bar (OHLC) chart is a type of technical charting that displays price movement data in regard to time. OHLC stands for Open, High, Low, and Close, which are the four main points of a data series. A typical bar chart will display a time frame of one day, a week, a month, a year, or several years. Bar charts allow for easy visual analysis of price movement and trends. The main benefit of a bar chart over other types of charts is that it is the simplest to read and understand.
- Candlestick Chart (Most commonly used): Candlestick chart is typically used to represent the price movement of a stock, index, or currency but can also represent the price movement of bonds, derivatives, or other financial instruments. The candlestick chart was introduced in the 17th century by a Japanese rice trader named Homma Munehisa. Candlestick charts can be used as a basic tool to give indications of the supply and demand of specific security and the sentiment of the market during a specific period of time.
Types of Trading:
- Scalping: What is Scalping in forex The word scalping is derived from the verb to scalp. It refers to the art of taking small profits at short intervals to create a positive trading balance. The word scalp has been used in the stock market for more than a century when referring to someone who sells securities at a low price and buys them back at a higher price to create a quick profit.
- Day Trading: Day trading is a form of trading where the trader buys and sells a currency pair on the same trading day. Traders who use this style of trading are known as day traders. Day traders usually hold positions for a few hours during the trading day, opening and closing their trades before the markets close. The day trader’s goal is to profit from intraday price fluctuations of a currency pair or financial instrument, rather than hold it for long periods of time. Day trading is considered risky as the trader holds open positions for only a short period of time.
- Swing Trading: Swing trading is a style of trading that is designed to capture trends and make a profit from them. Swing traders are usually not looking to buy and sell the currency on a daily basis, but rather to capture a trend and hold it for a longer period of time, averaging from a couple of days to a couple of weeks, before getting out.
Risk management is a way of managing the market risks on your position, much like hedging, but the difference is that hedging is used to protect a position that you have already taken, while risk management is used to manage the risks that you take on before you even enter the market.
Risk management is a crucial element of any successful Forex trading strategy. Risk management involves determining the amount of capital that you are willing to risk on any given FX trade and then setting limits on your transactions to ensure that you do not exceed these limits. The main purpose of risk management is to protect your trading capital by setting stop losses on your trades so that you do not lose more than a certain percentage of your trading capital on any given trade.
At Falcon FX, our best risk management strategy is to risk 1% capital per trade. Believe it or now, many traders had blown their trading account in a short period of time due to poor risk management skills.