Do you want to learn how to trade in Forex trading, but do not understand where to start? In this post I will analyse the basic principles of this, what should be understood in order to understand the basics of trading in Forex (FX) trading. From considering Forex trading as well as reading quotes all the way to step-by-step management according to the origins of Forex trading. I will cover all of this and much more so that you can start your own approach to Forex trading. I recommend spot prices as well as forward contracts in 330+ key, side and also outlandish monetary forces in Forex trading.
Trading in foreign exchange markets involves buying or selling one currency in exchange for another. The purpose of trading is to profit from changes in the exchange rates of two currencies. To trade on the Forex market, you need to open a trading account with a broker that provides access to the foreign exchange market. After opening an account, it is necessary to deposit funds to it that will be used for trading.
After the funds are in the account, you can start trading by placing orders to buy or sell currency pairs. These orders can be placed through the broker’s trading platform, which provides access to real-time price information and charts. For successful Forex trading, it is necessary to develop a trading strategy that takes into account factors such as market conditions, news events and chart analysis. Transactions are concluded in lots, and the standard lot is 100,000 units of the base currency (the first pair). For example, if you place an order to buy USD / CAD, then you bet on the growth of the US dollar against the Canadian dollar, and this is considered a long position. If you place an order to sell USD/CAD, then you bet that the Canadian dollar will grow against the US dollar, and this is a short position.
Currency traders usually use technical analysis in their trading, and many also use fundamental analysis to assess the relative strength of the global economy. It is also important to manage risk using stop loss orders and the correct position size. Before making a deal, it is necessary to know the entry level and exit points to fix profits or minimize losses. Forex trading can be difficult, but with the necessary knowledge and discipline, it can bring a lot of benefits and profits.
Analysing the forex market
To understand how to trade on the Forex market, you need to understand its history. The Forex market is the largest and most liquid in the world. A significant part of the activity in the Forex market is accounted for by the exchange of currencies between major international banks. However, a small part of the market is used by traders who are trying to take advantage of fluctuations in currency prices in the hope of making a profit. Currency trading on the Forex market is carried out in the same way as trading in any other asset classes, such as commodities, stocks, indices and cryptocurrencies. To get started, read the recommendations on the most traded currency pairs on the market in our article.
There are two types of analysis that traders use when analyzing the Forex market: technical and fundamental. Technical analysis is the study of past prices and patterns to determine future price movements. While fundamental analysis is the study of cost-determining factors, such as economic and political trends.
When learning to trade on the Forex market, it is necessary to understand both fundamental and technical analysis. Both of these disciplines, in addition to the trading plan, are key to learning how to trade in the foreign exchange market.
Forex fundamental signals
- Forecasting interest rates. Changes in interest rates are one of the most important factors determining the short-term dynamics of exchange rates. All other things being equal, a currency with a high interest rate will tend to increase in exchange rate against a currency with a low interest rate. This is due to the fact that currency pairs with a higher interest rate attract more capital investments compared to pairs with a lower interest rate.
- Economic statistics. The market knows in advance when various statistics will be published, and economists make considerable efforts to predict them. When the data is published, dealers are ready to attack. If the figures differ significantly from forecasts, then the currency can change significantly in a short period of time.
- Intervention by central banks. Central banks are prominent players in the currency markets. From time to time, they enter the market to change the exchange rate in a certain direction. Central bank interventions are most successful when they are carried out on a coordinated basis. For example, if the US Federal Reserve, the European Central Bank and the Bank of England buy US dollars, it is unlikely that traders will open short positions on the US dollar. Although in the long run, it is difficult and expensive for central banks to stand in the way of secular trends.
Forex technical indicators
- Simple Moving Average (SMA). SMA is one of the oldest and most common trading indicators. Traders often use SMA to get an idea of price trends or to signal changes in price behaviour.
- Relative Strength Index (RSI). Traders use the RSI to determine the direction of market movement depending on whether the momentum is accelerating or slowing down. In addition, it can be used to assess the overbought or oversold currency, which can be a signal for a market reversal.
- Fibonacci retraces. Fibonacci trends can help traders determine future support and resistance levels based on past price actions.
- Stochastic indicator. A stochastic indicator focused on price momentum allows you to predict trend reversals by determining whether an asset is overbought or oversold.
- Divergence of convergence of moving averages (MACD). MACD helps to determine the strength and momentum of the trend. This can be very useful when trading currency trends.
- Bollinger bands. Bollinger bands use SMA with a span of two standard deviations above and below. The width of the bands reflects volatility, and the price of a currency can be defined as overbought or oversold as it moves towards the bands.
- Elliott Wave. Elliott wave theory does not provide any predictions, instead it provides probabilities of specific trading opportunities. The analysis of “Elliott waves” gives an idea of the dynamics of the price trend, helping to understand the movement of the currency price.
Many traders believe that using a combination of analysis methods is especially useful, because the more indicators indicate a potential deal, the higher the level of confidence.
How to start trading forex
- Choosing a currency pair
The first step to opening a deal on the Forex market is to choose the currency pair you want to trade. There are more than 80 pairs from which you can choose the right one.
Categories of currency pairs
There are three main categories of currency pairs: major, minor (or major crosses) and exotic.
- The main pairs consist of the world’s largest currencies against the US dollar and account for about 85% of the trading volume on the Forex market. The main currencies are EUR/USD, USD/JPY, GBP/USD, AUD/USD, USD/CHF and USD/CAD.
- Minors are all other combinations of the world’s largest currencies, such as EUR/GBP and AUD/JPY. They are also often referred to as basic cross-pairs.
- Exotics are pairs that include less tradable currencies, such as the Turkish lira (TRY) or the Mexican peso (MXN).
Most novice traders choose one or two main pairs for themselves, often starting with the euro-dollar (EUR/USD) pair. This is the most traded currency pair in the world, and, as a rule, it has the narrowest spreads.
2. Decide how you want to trade on the Forex market
There are two main ways to trade on the Forex market: derivatives, such as spread betting, or spot Forex trading. All of them allow you to make long and short transactions on currency pairs, but they work somewhat differently.
3. Make a decision about buying or selling currency
Now that you know which currency you want to trade and how you want to trade it, it’s time to decide which currency to trade – long or short.
All currency transactions are quoted in terms of one currency relative to another. As we have already said, each currency pair has a “base” currency and a “quote currency”. The base currency is the currency located to the left of the currency pair, and the quote currency is on the right. In fact, when trading foreign currencies, you:
You buy a currency pair if you think that the base currency will strengthen against the quote currency, or the quote currency will weaken against the base currency.
- This is a long position, so your profit will grow if the value of the currency pair increases.
- However, for each point the pair falls below the opening level, you will incur a loss.
SELL a currency pair if you think that the value of the currency pair will decrease – this means that the base currency will weaken against the quote currency or the quote currency will strengthen against the base currency.
- This is a short position, so your profit will increase if the price of the pair falls.
- However, for every point by which the pair rises above the opening level, you will incur a loss
Is forex trading profitable?
Forex trading can be profitable, but all traders lose money on some trades, and even the best and most experienced traders never win 100% of their trades. The success of a trader in the Forex market is not necessarily determined by a high percentage of winning trades. Even if you win 90% of the trades, if the remaining 10% are unprofitable trades that nullify most of your capital, you will be in a worse position. These losses may be caused by a lack of experience, planning, discipline, or failure to use appropriate risk management tools, such as stop loss orders.
When it comes to Forex trading, traders should not expect to win every trade or to make big profits with every win. Similarly, trading should not be considered as a “get-rich-quick” scheme – your trading strategy should be developed and improved in order to increase the overall efficiency of your work.
Can I learn Forex trading on my own?
You can learn the basics of Forex trading yourself by using our Forex Training section, which covers a wide range of topics, including margin and leverage, points, Forex market opening hours and Forex trading strategies. Open a demo Forex account to practice spread betting or Forex CFD trading using virtual funds.
How to start trading on the Forex market?
To start trading on the Forex market using spread bets and CFDs, you can open an account with us and get access to more than 330 currency pairs, including major, minor and exotic crosses. Visit our “Start Trading Forex” page for more information about prices and account types.
Can I trade on the Forex market with 10 pounds?
Yes, you can start trading spread bets and CFDs on forex with 10 pounds, and there is no minimum deposit when opening an account. However, since you are trading using leverage, your supporting margin must match the level required to maintain open positions.
What is the best forex strategy?
Choosing the optimal strategy in the Forex market depends on the duration and size of the position, as well as on the specific currency pair that you want to trade. For example, some traders prefer a medium-term swing trading strategy, while others may prefer to use a shorter-term Forex scalping strategy.
Since the Forex market is not centralised, it is open 24 hours, so you can trade on it day and night, starting on Sunday evening and ending on Friday evening, using spread bets and CFDs. This is due to the time difference in different regions where markets are open, including Europe, America and Asia. Learn about trading during the opening hours of the Forex market.