Seven beginner tips to start forex trading
In this post, we’re going to explore and explain some key terms and fundamental theories surrounding the forex market.
Before you dive headfirst into the world of forex trading, you should familiarise yourself with the concepts involved in foreign exchange. Of course, if you’ve ever had to travel somewhere and exchange currency, you’ve already done a bit of forex trading yourself.
Below, we’re going to answer some necessary questions first, then offer you everything you’ll need to know to start forex trading with seven beginner tips!
Where do you trade forex?
Millions of people trade trillions of dollars’ worth of currency every day on the global forex market, but forex doesn’t trade in centralised marketplaces like the New York Stock Exchange or London Stock Exchange.
Forex trades are conducted internationally, 24 hours a day, five days a week through electronic communication networks and phone networks via the internet.
Round-the-clock trading in different time zones makes forex a relatively straightforward market to access, but that also means losing money by forex trading is not difficult.
How do you trade forex?
Anyone can trade currencies on the forex market. You’re essentially buying a certain amount of currency and holding on to it while the exchange rates fluctuate over time, around the globe. When you feel it is the right time, you trade back the currency you were holding on to, hopefully at a profit.
The international currency you have purchased will either appreciate or depreciate in value, because currency is always changing hands between people, companies and businesses, thus tipping the supply and demand balance in one way or another. This ‘tipping of the scale’ is what you’re speculating on. Depending on the type of trader you are, you will trade-in and trade-out over a short or long term.
Careful study of your favoured currency is beneficial. News headlines, trade deals and geopolitics can all greatly impact currency exchange rates and values.
1. Know the difference between forex and stocks
One of the key differences between forex trading and stock trading is market size. In the stock market, the ability for an investor to impact the stock market by buying or selling shares increases depending on how much heavy purchasing power they possess.
In the forex market, currency prices cannot be impacted as easily due to the sheer volume of trade – trillions of dollars are traded each day! In essence, major institutions and their associated analysts cannot sway the forex market in the same way as they can in stock exchange.
Next, the forex market allows you to trade nearly every day, wherever you have an internet connection. In contrast, stock exchanges are famous for their rigid opening and closing hours.
2. Know your basic forex terminology
These are some good terms to know, so you can start wrapping your head around forex trading. As you read through this post, you can return to this section if you need to refresh.
- Ask price: the price at which you buy a currency from the market or your broker. You pay what your broker ‘asks’. This is also known as the ‘offer’ price.
- Bid price: the price at which the market or your broker will buy a particular currency from you. You sell back the currency you bought at a price determined by your broker’s ‘bid’.
- Cross rate: when speaking about two foreign currencies and their exchange rate, you use the term ‘cross rate’. If you were talking about your own currency’s exchange rate with another currency, that’s when you’d use ‘exchange rate.’
- Forex: foreign exchange market. Also known as FX.
- Forex pair: a pair of two individual currencies, for example: ‘GBP/USD 1.3948’. The first currency shown (GBP) is called ‘the base’ currency while the second (USD), is known as ‘the quote’ currency. The number at the end is how much it costs in USD to purchase one unit of GBP.
- Pip: the smallest movement in a currency’s value or exchange rate. The number of pips’ movement will determine your profit or loss on your forex trade. By speculating on the movement of the pips, you’re making an investment, banking on one of the currencies either strengthening or weakening. So, if GBP/USD moves from 1.4019 to 1.4020, it means that the USD decreased in value by one pip. The pip is commonly referring to the last decimal point. In this example, it is the fourth decimal point, and the cost went up one decimal for GBP.
- Liquidity: market liquidity determines how greatly a particular forex pair can be bought or sold without significant impact to its original exchange rate. If there are high levels of liquidity for a forex pair, it means it can easily be bought or sold at higher rates than pairs with lower levels of liquidity. As an example: purchasing large sums of foreign currency from a developed country will have less of an impact on their particular exchange rate than it would on an under-developed and/or impoverished country’s currency. Therefore, currencies from more developed countries tend to have higher levels of liquidity.
The above terms are a great starting point as you begin your time as a forex trader.
3. Know the details of your forex pairs
As a beginner, you should first decide which currencies actually interest you in the first place. Next, do some research on the countries that concern both sides of the forex pair, so you can create a focus. To explain the details of a forex pair, we’ll use a common example:
EUR/USD, 1.3011. This is a major forex pair.
The second currency in this forex pair is the US dollar, which costs $1.3011 to purchase €1. All pairs will look like this and follow this same rule: the second currency is buying the first currency at the price listed by the number. In addition, the first currency is always valued at one unit (e.g. $1) while the second will be priced or quoted above or below that.
Next, there are three categories that forex pairings can fall into:
- A major currency pair includes USD and one of the other most heavily traded currencies: EUR, JPY, GBP or CHF. These major pairs are some of the most popular in the forex market and take up a large portion of total exchange. Because majors are traded more, the spreads are typically tighter and the ability to get transactions filled (either via entrance or exit) increases.
- Minor pairs or ‘crosses’ are still heavily traded, they just won’t have USD involved. These include pairs such as EUR/GBP or GBP/JPY. The most widely traded minors include the euro, British pound or Japanese yen.
- Exotic pairs take up a smaller portion of forex market exchange, and involve a major or minor currency traded for the currency of a developing country. They are not as liquid as some of the more widely traded pairs. Examples include USD/MXN (Mexican peso) or EUR/TRY (Turkish lira).
It takes experience in forex trading to dive into the exotic currency exchanges, and therefore this is not recommended for beginners, but is rather something to look into as you build your market knowledge. The risk is greater due to the volatility of exotic currencies, but if it’s something you’re interested in, talk to your forex broker about including exotics in your trading plan.
4. Know market/sector liquidity
Liquidity is important for considering your trade positions in a particular currency and your ability to exit them. Depth and breadth are two variables that determine the liquidity of a currency or forex pair.
- Depth: the volume of trading in that particular currency and how big the trades are. The US dollar is the most traded currency, and therefore has great depth. The greater a currency’s depth, the larger your trade quantities can be.
- Breadth: the width of interest in that marketplace. Is it widely traded or sparsely traded? Some exotics may not have great breadth.
If both of these categories are good, then there is good liquidity in the market. You should always be able to exit or enter your position. As you slide down the scale from major pairs to minors and exotics, the more volatile and illiquid the cross rates get.
Whereas with a major currency pair you may only see an adjustment of a few pips, an exotic pair could see fluctuations of hundreds of pips in any given day based on elements such as the political climate and trade conditions in that particular developing country.
Here are some of the most traded, and therefore most liquid, currencies:
- USD = US dollar
- EUR = euro
- JPY = Japanese yen
- GBP = British pound
- CHF = Swiss franc
- CAD = Canadian dollar
- AUD = Australian dollar
- NZD = New Zealand dollar
5. Know how to get involved with a broker
To trade forex, you can do so through a forex broker on their trading platform.
Beware: anywhere you’re dealing with money and currency exchange you need to watch out for disreputable brokers. You should only trust forex brokers that are regulated and registered with institutions such as the UK’s Financial Conduct Authority (FCA).
Some brokers try to bet against you, and can make a greater profit from your losing positions. As Intertrader mirrors all your trades in the underlying market, we only make money from the dealing charge incorporated in the spread. So we never stand to gain if you lose.
6. Start practising with a demo account
Ideally, you’d want to buy low, and sell high. But you need to do your homework first by studying the currencies that interest you. By looking at what makes certain currencies fluctuate, you’ll begin to understand exactly how to make money using a particular pair.
Once you’ve done a little digging, you should start to practise your trading. You can try a risk-free forex practice account here, and graduate to the real thing once you’ve got the hang of the demo.
7. Lastly, know your targets
Finally, you should really understand how much you want to spend, and how much you’re prepared to lose if things do not go in your favour in the forex market. This will help you understand when to exit a particular investment without getting over your head. Remember, it’ll be easier to try another forex pair if you still have some eggs in your basket. Start low and slow, and you’ll be well on your way to a well-rounded forex knowledge base.
Published: 12 June 2018
You should under no circumstances consider the information and comments provided as an offer or solicitation to invest. This is not investment advice. The information provided is believed to be accurate at the date the information is produced.