What Are The Basics Of Trading Forex For Beginners?
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The Basics Of Trading Forex For Beginners
Before learning how to trade forex, there are a few basics all beginners should understand before they start. Trading forex covers a diverse number of areas and cannot be simply learned by reading an article or two. Below we have covered some of the most basic questions beginners may have about forex trading.
What Is Forex?
Forex is short for ‘Foreign Exchange’, it is the practice of trading currencies against one another. For example, the British Pound (GBP) against the US Dollar (USD).
Forex traders speculate on whether that price will go up or down, attempting to make a profit on the difference.
Sounds simple, right? Well, actually there’s a lot more to it than that and it can get quite complicated at points.
Why Do People Trade Forex?
People trade in the forex market because it has a high degree of liquidity. What this means is there is a lot of movement in the market which presents traders with plenty of opportunities to buy or sell.
The forex market is open 24 hours a day from Sunday 5 pm Eastern Standard Time (UTC -5) until Friday 4 pm, the following week. It doesn’t have a daily opening and closing time like some market instruments do. This means you’ll always be able to trade currencies against one another during the week.
How Do People Trade Forex?
Most people trade forex via a broker in the form of a CFD. CFD stands for ‘Contract For Difference’ is a great way to trade a product without technically owning the underlying asset.
Once signed up with a broker, forex traders can use a variety of different platforms to trade currencies. These can include but are not limited to web traders, mobile trading apps, desktop applications, MT4 (MetaTrader 4) - the most popular trading platform - and MT5 (MetaTrader 5). Using a trading platform, a trader can open a position on a forex pair they think will increase in value and sell when they are able to make a profit.
Most CFD brokers also provide traders the opportunity to trade stocks, futures, commodities, and some even allow cryptocurrency trading, among other things.
Why Is Trading Forex More Popular Now?
Forex trading started to become more popular among individuals with the advent of the internet. It allowed normal people to trade currencies online, in what is often referred to as ‘retail trading’. Forex trading has actually been around for a long time but was primarily practiced by large financial corporations up until recently.
What Affects The Forex Market?
The forex market is always moving throughout the day and throughout the night. Because of this, it can be affected by many, many things.
Some of these can include:
- A country’s poor economic outlook or performance. This can be when a country’s economic output appears to be declining, is predicted to decline.
- Political uncertainty. This is related to the decisions politicians make, such as implementing policies that may be economically unfavourable. A good example from recent times could Brexit.
- Natural disasters. Perhaps the most unpredictable and devastating.
Traders need to keep informed on these events.
What Do I Need to Trade Forex?
There are a number of things an individual needs before trading forex. Here are a few:
- A strong mentality. Ideally, you should be a person who can put their emotions to one side. Someone who is able to keep their cool when situations look bad.
- The ability to set reasonable goals. You shouldn’t expect to become a millionaire overnight and you shouldn’t rule out the possibility of losing money. You should set yourself accomplishable goals and adapt them at a steady rate.
- An understanding of the markets. It’s strongly advised that you have this before trading!
- Disposable income. Ideally, when you start trading forex, you shouldn’t be using the money you need to live off.
What Are The Risks Involved In Trading Forex?
Trading forex comes with a considerably high level of risk. It is highly possible for individuals to lose all of their funds trading forex. While we don’t intend to scare you away from forex trading - in fact, that’s the last thing we want to do - these are still important things to bear in mind.
Most EU-based forex brokers will display at the bottom of their website how many retail traders lose money trading with them.
The riskiest forex brokers to trade with are those that are unregulated. This is because if you lose your funds in a suspicious manner, there is no way you can claim any form of compensation. On top of that, unregulated brokers may be difficult to withdraw your funds from and may provide unfair trading conditions.
Another risk to consider is trading with leverage. This is where a trader is able to open a larger position than the funds they have. Most EU brokers offer leverage of up to 1:30, while some international brokers can offer up to 1:3000. For experienced traders, this can be a useful tool, but for inexperienced traders, it can cause a world of trouble.
Is It Possible To Make A Living Trading Forex?
Yes, it is completely possible. However, it’s not easy and takes a lot of time to learn how to trade. In fact, beginners can lose a lot of money diving straight into trading without any knowledge of how the markets work.
What we advise are baby steps. Take your time, educate yourself, and by no means quit your day job!
Where Can I Learn How To Trade Forex?
Right here, with Trading Education. Our courses are developed by market experts with years of experience trading forex.
While most educational sites will charge large fees for their service, we’re offering our Forex Course The Ultimate Guide To Forex Trading Completely Free.
Our free trading course covers topics including the foundations of forex trading, setting up charting software, the mechanics of forex trading, and advanced analytics.
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