4 Things You Need To Know To Start Trading Forex
Trading Forex even very small amounts can reap big rewards. Here are 4 things you really need to know to start trading forex with little money today.
The foreign exchange, or forex, market is the largest financial market in the world. More than $5 trillion is traded daily. This high level of volatility and liquidity makes it very attractive to traders. This is one of the reasons why Forex is very popular among professional traders as well as beginners. If you are new to Forex we’ve outlined Four important things you need to know before you start trading forex on the live markets.
Four Things You need to know before you start trading forex.
1. How Forex Trading Works
It’s important to understand the basics of currency trading before you get started.
Currencies are traded in pairs. The first listed currency is the base, the second is the quote. Every currency has a unique three-letter ISO code. For example, the euro to US dollar exchange rate would be written as EURUSD.
The number given represents the amount of the quote currency needed to buy one unit of the base currency. So a EUR/USD rate of 1.1928 means that €1 is worth $1.1928.
Bid and Ask Prices
Every FX pair has two prices; the bid and ask price. The bid is the maximum the market is willing to pay for the base currency, and the ask is the minimum the market is willing to accept to sell it. When you buy an FX pair, you pay the ask price. When you sell it, you receive the bid price.
There is a slight difference between the two prices: this is known as the spread, and it covers the broker’s costs when executing the trade.
Types of Currency and FX Pairs
Currencies are divided into three categories: majors, minors, and exotics.
Majors are the most traded currencies in the world: the US dollar (USD), the euro (EUR), pound sterling (GBP), the Japanese yen (JPY), the Swiss franc (CHF), the Australian dollar (AUD), and the New Zealand dollar (NZD).
Minor currency pairs are those that don’t include the US dollar as either the base or quote currency. These are also sometimes referred to as crosses.
When a major currency is traded against the currency of a developing economy, such as the Turkish lira (TRY) or South African rand (ZAR), the pair is known as an exotic.
2. What Moves Prices
There are many different factors that move the forex market. Knowing what moves the market is an important part of trading, as many periods of volatility can be identified far in advance and appropriate steps taken to try and capitalise on, and protect yourself from, this.
Supply and demand
Like all markets, forex is governed by supply and demand. If demand for the euro were to rise, the EUR/USD exchange rate would climb. If demand for the euro were to fall, the EURUSD exchange rate would weaken too.
The reverse is true for supply – an increase in supply pushes down the value of a currency as it is more readily available, while a decrease in supply causes its value to rise.
Economic data plays a huge role in determining the value of a currency. Nations release all kinds of updates, such as gross domestic product (GDP), unemployment, industry output, consumer confidence and more.
These all help provide a glimpse into a certain part (or all) of the economy, and therefore have a bearing on the value of the currency of that economy.
If data suggests or proves that a country’s economy is strengthening, this can increase the value of its currency. But if the data shows weakness, the domestic currency’s value can decline.
Central banks are tasked with keeping their respective economies stable, and they do this through controlling the supply of the domestic currency.
Central banks like the US Federal Reserve, the European Central Bank, and the Bank of England can use policy tools such as changing interest rates or buying government debt (which is known as quantitative easing) to either expand or reduce the supply of their own currencies within an economy.
As we’ve seen above, a rise in supply causes a currency to weaken in value, while a reduction in supply boosts its value. The actions of central banks to control supply are therefore closely watched by market participants, and their regular meetings are some of the biggest sources of volatility on the markets.
Events such as elections can have a big impact upon a currency. Different parties or candidates will have different priorities when it comes to the economy, which can affect performance and therefore the value of the nation’s currency.
Brexit has had a big impact upon pound sterling, due to the increased uncertainty surrounding the future of the UK economy.
3. How to Pick Your Strategy and Manage Risk
There are different ways to trade forex pairs. As well as deciding which pairs you want to trade, you’ll need to decide which direction to trade them: short or long.
Going short is where you think the base currency will fall in value, and by placing a sell order you stand to profit if the pair weakens. If you think the base currency will rise in value, you would go long by placing a buy order.
You also need to think about timeframes. Trades can last from a few seconds to several months. Shorter timeframes will involve a greater focus on technical analysis – using past market movements to try and predict future trends – while longer timeframes will often have more of a focus on market fundamentals such as the economic outlooks of the nations involved.
Whatever trading strategy you choose, it’s important to understand the ways in which you can manage risk and protect yourself when the market moves against you. For instance, a stop loss order sets a price below the opening price of your trade, and should the market fall to this level your position is automatically closed.
You can’t protect yourself entirely, but tools like stop losses significantly reduce your losses from unfavourable trades.
4. How to Choose the Right Platform
Choosing the right platform makes all the difference. You want a platform that puts you in control, offers plenty of different FX pairs to trade, and supports you with a wide range of trading tools, news, and analysis.
How To Trade Forex With Markets.com
Markets.com offers premium trading conditions on over 50 of the world’s most popular FOREX pairs through its cutting-edge trading mobile and desktop platform: Marketsx.
Marketsx gives you the opportunity to use contracts for difference (CFDs) on dozens of the world’s most traded currency pairs. CFDs are a derivative product that allows you to trade FOREX with leverage – making your money go further. It’s important to note that leverage can increase losses as well as gains.
Follow The News
See the latest stories that are moving the market with the in-platform Financial News and Financial Commentary feeds. You’ll be updated on the headlines that matter in real-time without having to navigate away from the price charts.
Get Technical Targets
Get daily updates on some of the biggest opportunities in the FX market with technical analysis mailers that identify potential entry and exit points and other key technical information that you can use to shape your strategy.
Find More Opportunities
Use our technical tools, including over 50 indicators and oscillators to get predictions for key price levels, and compare up to 8 FX pairs side-by-side with multi-charts. You can also view different FX pairs on the same chart, making it easier to find the right trade for your strategy.
See The Key Events On The Horizon
Never miss a key event with the integrated Events Calendar: see at a glance the next economic data release that could move the currency pair you’re looking at. Choose whether you want a snapshot of the biggest releases or the full details.
Build Your Trading Knowledge With XRay
Marketsx traders get daily news, insights, and training with the XRay in-platform streaming service. Find new opportunities and learn from some industry leading names in forex education with our shows and webinars.
Now you know the most important 4 things to start trading Forex
Whether you’re just getting started or ready to take your trading to the next level, Markets.com can help. As the market leader, Markets.com offers tight spreads on over 90 pairs and access to 300+ markets.
Remember: Forex trading involves significant risk of loss and is not suitable for all investors