Forex trading can be extremely profitable but it’s also a very competitive space. There are thousands of people who are trying to make money from foreign exchange trading, and it can be very intimidating for a beginner. Thankfully, there are some simple strategies that can make it easier to succeed. This blog will look at some ways you can Start Forex Trading as a Beginner and make good money.
Forex trading is a process of buying and selling foreign currencies and making money from price fluctuation. The forex market is a global marketplace where currency exchange happens, and people can participate in this business without any country barriers.
As a result, many people are interested in learning forex trading and making money online, but the main drawback is the absence of proper guidelines. You cannot buy an asset without understanding the logic behind the price movement.
If you do, it may cost you all your investment. Therefore, beginner forex traders should follow a guideline to remain on the right track from the very beginning. In the following section, we will discuss the nuts and bolts to start trading forex for beginners, including the proper guideline that a novice should follow.
What Is The Forex Market?
Let’s start with the basics!
If you live in the US and travel to the UK, there is no doubt that you will exchange the USD for Pounds to spend in the UK. When you exchange money from the airport or any money exchange medium, you will face a change in rates.
For example, if the dollar to Pound rate on 1 January is 1.2, it might increase to 1.3 on 30 January. Therefore, you might have to pay less/higher after a month.
Now the real question is, how does the value change?
The value of a currency changes with supply and demand, economic policy, and central bank decisions. As a result, it offers an opportunity to make money from the currency rate fluctuation following the simple concept of buying from low and selling from high.
The global forex market is a decentralized marketplace where this buying and selling activity happens. Places, where these transactions occur are known as the forex market hub or over-the-counter market.
Participants Of The Forex Market
The over-the-counter market is the main place where big financial institutes, banks, insurance companies, and multinational companies buy and sell currencies to meet their business requirements. Continuous business worldwide needs currencies to pay from one country to another, making the forex market alive.
But what can a retail trader do?
The over-the-counter market is the wholesale market of currencies where retail traders have no significant presence. Instead, retail traders can join the market through a broker that connects general people to the forex market to benefit from the price change.
How to Start Forex Trading a Step By Step Guide
If you are keen to build a career in currency trading, there is no alternative to following a systematic approach instead of roaming online aimlessly. We have made the beginner’s approach into three stages to make the trading journey comfortable for retailers.
Stage 1: Know Your Limits
In forex trading for beginners, it is imperative to understand the market and its limits. For example, if you buy a currency at a lower price with a hope for future price appreciation, there is no guarantee that you will gain.
Therefore, the first thing a trader should consider is that foreign exchange markets are risky businesses with the possibility of losing all of your investment in a day!
If you invest $10,000 in retail investor accounts for trading, having insufficient knowledge can eat all of your investment within a day, even within an hour. More than 7 trillion dollars have been transferred daily, making it an even bigger market than the New York stock exchange.
Don’t get worried about numbers!
We are here to guide you.
The main participants in the forex market or financial market are central banks, where any change in the monetary policy decisions will affect the currency value of the country.
Moreover, international banks, financial institutes, insurance companies, etc. are the main participants in the FX market. In that case, retail traders should understand institutions’ performance to remain profitable in the market.
Stage 2: Forex Trading Knowledge
It covers everything forex traders should know to start trading from the very beginning. At first, investors should open retail investor accounts in online Forex brokers that follow the regulation strictly.
Best forex trading platforms have minimum slippage issues, higher regulation, lower spread, and instant customer support. There are some processes to open retail investor accounts in an online Forex broker and verify it before allowing you to trade.
After that, you have to invest in your forex trading medium from where you can buy and sell your desired currency pair. Most forex brokers provide MetaTrader 4 platform, where numerous trading indicators and tools are available. Nowadays, MetaTrader 5, cTrader, and NinjaTrader have become popular in the foreign exchange market where trading with complex algorithms is possible.
The detailed use of indicators and trading tools will be covered in the next section.
Stage 3: How To Choose The Best Brokers
Choosing a forex broker is not an easy task because there are many to choose from. The first step to take is to make a list of necessary requirements that the broker must meet.
There are a lot of brokers in the forex trading market, and this has seen a lot of investors flock to them. The only problem with this is that these investors may not know the best brokers to go for.
This gives rise to the need of creating a checklist that can be used to choose the Best Forex Brokers.
Stage 4: Beginner Forex Trading Strategies
The trading currencies strategy is a systematic approach to buying and selling currency pairs and making money online. The first requirement to build a trading strategy is to use an analysis method- like the technical and fundamental analysis.
Technical analysis is the process of anticipating the price of a trading instrument by utilizing its past price performance. There are an enormous number of trading strategies in the world based on technical tools which come from the world’s famous economists and mathematicians.
On the other hand, another method is to utilize economic events and fundamental releases to anticipate the future price of a currency.
For example, if the interest of the US dollar increases, the value of the USD will be stronger against other currencies which will make it stronger. On the other hand, keeping the interest rate down will indicate that the country’s economic performance is getting weaker, which will weaken the currency.
Stage 5: Make A Plan And Stick To It
In forex trading, there is no holy grail to make you a millionaire overnight. The ultimate success comes from following a plan and sticking to it. Therefore, follow these rules every time you open your trading chart:
- Do not take more than 2% risk per trade.
- Every forex trader uses stop loss and takes profits in every trade.
- While trading on financial markets, avoid using higher leverage.
- Monitor economic calendars for upcoming news and events.
The forex market is decentralized, where money from naive people’s pockets is transferred to smart traders’ pockets. Therefore, if you want to be successful in this industry, there is no alternative to thinking like a pro.
Types Of Foreign Exchange Markets
It is mandatory to know the market as you can not step into all sectors in the forex market. Retail traders are a small part of the ocean, connected through forex brokers, where most of the retail trading volume goes to the spot market.
Forex Spot Market
A spot market is a place where currencies are exchanged instantly without any prior date. Most retail forex traders operate their activity in the spot market as it is convenient and instant.
Forwards And Futures Markets
Forward and futures markets refer to derivatives arrangements where two parties agree to exchange assets at a specific price by a certain date in the future. In this way, buyers and sellers mitigate their losses by locking up price movements from the initial stage.
Forex Currency Pair
When you open the currency trading software, you will see the list of currency pairs instead of a single currency. It is a crucial term that a beginner trader should know regarding how the currency pairs form and how to benefit from them.
The currency pair is the combination of two currencies where the first currency is known as the base currency and the second currency is the quote currency. For example, in the EURUSD pair, EUR is the base currency, and USD is the quote currency.
The use of currency pairs allows investors to make money from both buying and selling. In trading currency pairs, the idea is to compare base and quote currencies to find which one is stronger than the other. The price of currency pairs will fluctuate once these conditions meet:
- If the first currency is stronger than the second currency- the price will move up
- If the second currency is weaker than the first currency- the price will move up
- If the first currency is weaker than the second currency- the price will move down
- If the second currency is stronger than the first currency- the price will move down
Let’s have a look at an example:
Major Forex Currency Pairs
Major forex pairs consist of the world’s major economies. There are 6 major currency pairs in the forex market that have the maximum number of traders to provide liquidity.
Let’s see the list of forex major currency pairs beginner traders should focus on-
Forex Cross Currency Pairs
Cross-currency pairs come from major economies, by eliminating the US Dollar. In major currency pairs, forex traders can see that all 6 pairs have US dollars as base or quote currencies but in cross pairs, we will see all currencies from majors except the USD.
For example, EUR/USD and GBP/USD are major pairs and if we eliminate the USD from them, we will find EUR/GBP, which is a cross pair. Examples of other cross pairs are- EUR/AUD, EUR/CAD, GBP/AUD, GBP/JPY, EUR/CHF, GBP/CAD, etc.
Forex Exotic Currency Pairs
Exotic pairs come from currencies beyond majors. These currency pairs are less famous due to a low number of trading activities. However, understanding the basics of these pairs by following a good trading method might provide enough profits.
Some examples of exotic pairs are- USD/CLP, EUR/NOK, GBP/NZD, USD/SGD, USD/CNH, etc.
*** Please be noted that exotic pairs have higher volatility which might make trading difficult for beginners trader.
Common Forex Terminologies
There are many tools and terminologies that a retail forex trader should know, as you will see these names multiple times in learning forex trading. Let’s see our picks on the top forex terminologies-
- Bid and ask price- The bidding price is the highest price that you have to pay while buying a currency pair. On the other hand, the asking price is the lowest price that sellers need to offer while selling a currency pair.
- Spread- In trading forex CFDs, the spread is the difference between the bid and ask price. In forex trading, sellers are interested in the lower part of the spread, and buyers are interested in the higher limit of the spread.
- Base & Quote currency– Base is the first currency, and a quote is the second currency of a pair. In the EUR/USD pair, EUR is the base currency, and USD is the quote currency. The valuation of the forex pair happens with the quote currency.
- Pips: Pips are the smallest fraction of the price change. It is usually the fourth digit of the price. For example, the EURUSD price change from 1.1040 to 1.1070 will represent 30 pips of movement.
- Long and short- Long represents a buy and short represents a sell. Buying EUR/USD will often be known as long EURUSD. On the other hand, selling USD/JPY might represent a short USD/JPY.
- Leverage- Leverage is the money provided by online brokers to traders so that traders can take larger orders. Using higher leverage allows traders to take larger trading positions.
- Lot size- Lot size is the size of a position you will open in the trading platform. The smallest part of the lot size is 0.01.
- Bullish and bearish- Bullish represents a buy market where the price makes consecutive highs. On the other hand, bearishness is the selling market where the price makes consecutive lows.
- Indicators- Indicators are forex trading tools used in anticipating the future price of a currency pair.
- Economic calendar- It shows the list of events affecting the foreign exchange market so that traders can monitor them to find the price direction of an asset.
Best Forex Trading Platform
Forex trading platforms or mediums are a company that allows investors to connect to the market through a process where retailers don’t have to bother with the massive investment requirement.
For new forex traders, it is often hard to find the best forex trading platform as they may mislead you by providing excessive benefits and offers.
Make sure that a good broker doesn’t want to give benefits beyond the trading facilities as their major benefits come from lower trading costs, minimum slippage, low transaction cost, low commission fee, direct allowance to inter-market liquidity, and many more.
When choosing the best forex trading platform make sure to find these conditions-
- The broker should be regulated by international or local regulatory bodies like FCA, Cysec, ASIC, etc.
- The broker uses ECN or STP model where clients’ orders are directly transferred to the inter-bank forex market.
- There is no slippage or limited slippage issues in the forex trade.
- Best forex brokers offer a strong security system in clients’ funds using segregated accounts.
- There is no hidden charge or fees imposed by the broker.
- Deposit and withdrawal methods are convenient with a demo account facility.
Forex Trading Software
The forex trading software is a free program provided by the forex broker where investors implement all their trading activity. One of the popular forex trading platforms is the MetaTrader 4, where the list of tradable pairs, indicators, and drawing tools are present and easily visible to traders.
The above image shows the basic interface of the MT4 platform, where the list of trading tools and indicators are shown in the tools menu. While trading forex, the investment and trading information is available at the bottom where the middle section has trading charts and prices.
However, the modern financial market has become sophisticated where complex automated trading strategies are used. Therefore, investors focused their sentiment on trading at the platform where algorithm-based trading is possible.
Although MT4 has its own MQL4 language and users can easily build their own EA and automated strategies but the advanced version of this software is MT5. The MT5 interface is almost the same as the MT4 but it has more options in timeframe indicators and tools.
Besides, the MetaQuotes website provides thousands of free and paid software and trading indicators that can make your trading journey fruitful.
Another popular chart provider is TradingView, which is free to trade currency pairs. In TradingView, traders can have the most accurate and sophisticated interface where charts of forex, stocks, indices, cryptocurrencies, and commodities are available.
Charts Used In Forex Trading
The price of a currency pair changes every second, which is shown in the trading software in different ways. Moreover, the trading chart shows the price action of a particular time. For example, the 15 minutes timeframe will offer what prices have been done every 15 minutes. Similarly, the daily chart shows the price change in a day.
In trading forex CFDs, the line chart is the simplest price presentation of a forex pair where it marks different price points of trading assets and connects them with a diagram.
Therefore, it shows the price change with a dynamic line, which is very easy to understand. On the other hand, the biggest drawback of this method is that it does not show the complex information line the highest/lowest price of a session.
Bar charts are a complex way to represent the price change of currency pairs that shows the detailed price every minute, hour, day, or week.
In this chart type, there are four prices- the top and bottom levels of the bar show the highest/ lowest price of the session, while the short vertical line on the left represents the opening price. Finally, the short vertical line on the right side is the closing price.
The bar chart is more complex than the line chart where the Open, High, Close and Low levels are shown in the bar chart.
Candlestick is the most popular way to show the price movement for a particular time frame and every people who want to trade forex should know it. This chart consists of two vertical lines known as a shadow, while the thick portion is called the body.
Usually, if the opening price is higher than the closing price, it is known as a bullish candle. On the other hand, if the closing price is higher than the opening price, it would be a bearish candle.
The above image shows how the bullish and bearish candlesticks, which is very important to trade forex. Investors should know how to read the chart using candlesticks and anticipate the price.
Now, look at the image below to see what a candlestick chart looks like:
There are several methods of using candlesticks in the financial market. The common approach is to use a set of candlesticks to define the market direction.
On the other hand, a single candlestick formation might provide the price direction. In this way, many candlesticks have appeared as Doji, Hammer, engulfing bar, etc. Moreover, when a set of candles appear at the suitable price zone it might provide a price direction by forming some patterns like a head and shoulder, triangle, flag, etc.
For beginners, it is important to learn single candlestick analysis, candlestick pattern, and chart reading techniques.
Common Forex Trading Indicators
Indicators are trading tools available to provide the current market outlook based on a calculation. In order to trade forex, Every trading indicator is unique and made with a logic where the primary aim is to find the future price direction.
The ideal approach if indicator-based trading is to use one or multiple indicators in the candlestick chart and determine where the price may head.
There are thousands of forex trading indicators, both paid and free, but in the MetaTrader 4 platform, investors can use 40+ free indicators that are still effective in the market. Among popular indicators Moving Average, RSI, MACD, Bollinger Bands, Ichimoku Cloud, etc., are useful.
Moving average shows the average price of a candle for a timeframe. For example, if you choose Moving average 20 in the 1-hour chart, it will move in a dynamic line showing the average price of the last 20 hours.
The ideal trading approach using the Moving average is to find where the current price is trading compared to the current MA. If the current price is higher than the MA, it is a sign that bulls on the duration are stronger than sellers.
In this scenario, it is safer to take a buy trade on the instrument. Professional traders combine moving averages with other trading tools to find the most accurate price direction for a currency pair.
Relative Strength Index (RSI)
RSI or relative strength index shows the momentum of a trend from a separate window. It moves from 0 to 100 level, where the RSI value above 70 represents an overbought situation.
On the other hand, if the RSI reaches 30 levels, it indicates an oversold condition from where the selling momentum may change to buy.
RSI is a common trading indicator to define the major reversal areas but the main drawback of this indicator is its lagging character. If the trend is very strong the price may continue moving even if the RSI reached the overbought/oversold zones.
MACD or moving average convergence divergence is also from the momentum class that runs from the separate window with a Histogram (vertical line). To trade forex, if the histogram is above the zero line, the market momentum is bullish. On the other hand, if the histogram moves below the zero line, the momentum changes to bearish.
There are several trading approaches with the MACD where the most common way is to look at the Histogram position and take trades. Another approach is to find divergence- if the price makes higher highs but the MACD line fails to follow it, we will call it divergence from where the price may reverse.
However, this approach needs further confirmation from the candlestick, trend, and support-resistances.
It is a sophisticated indicator with several tools like Tenkan Sen, Kijun Sen, Kumo Cloud, and Lagging Span, as marked in the image below-
The Kumo Cloud is the ultimate barrier to a trend where the bullish momentum is strong above the cloud, and below the cloud, it is the sellers’ territory. Moreover, traders use the Tenkan and Kijun Sen lines to find the short-term price direction.
Forex Risk Management Guide For Beginners
To trade forex, the biggest challenge for beginner traders is understanding the risk associated with the forex market. After learning basic trading tools and indicators, traders can generate buying and selling methods using a trading strategy.
However, they ignore that retail traders are a small part of the foreign exchange market, and any good trading setup might end up in a loss. In fact, the foreign exchange market is run by institutional traders where retailers work as a counterparty.
Forex trading or foreign exchange trading is a probability game. You can not win every trade even if you follow your method strictly. Moreover, there are fundamental events, central banks’ intervention, geopolitical uncertainties, and pandemics that could make the market volatile at any time.
In that case, investors should follow a systematic approach in taking trades where the challenging factor is to maintain the rule every time.
First, beginner traders should know that the foreign exchange market is uncertain and the price can change its direction at any time. In that case, the ideal approach is to take 1% to 2% risk per trade.
For example, if you have invested $10,000 in your trading account and want to buy EUR/USD, you should set the stop loss at a level where the trade will be closed with a $100 loss.
Another factor traders should understand is that the leverage provided by online brokers needs close attention. When you open retail investor accounts, the broker will ask you to set your desired leverage level as 1: 10 or 1:100.
Using 1:10 Leverage means the broker will allow you to utilize your money by 10X in buying and selling an asset. Therefore, you can use larger lot sizes to gain more, but it might incur a huge loss if the trade goes against you.
Beginner Forex Trading Strategies
In this section, we will correlate what we have seen in the above section by creating a trading strategy utilizing trading tools and indicators. Moreover, to trade forex, we will apply the trading chart by following a strict trade management system.
In this method, we will use support, resistance, and trends to find a simple continuation strategy. The support level is the lowest level where buyers are interested in buying. On the other hand, resistance is the highest level or zone from which sellers are keen to open their position.
Let’s have a look at an example of support and resistance to trade forex:
Now come to the trend.
A trend happens when the price of a trading instrument changes in the same direction. We can spot it by looking at swing points in the candlestick chart. In this strategy, we aim to buy/sell a currency pair toward the trend’s direction.
From indicators, the MACD Histogram will show traders’ sentiment where the positive Histogram above the neutral line is a buy signal and below the neutral line is a sell signal.
Beginner Forex Bullish Example
The perfect buy trade should come up with the following conditions:
- The trend is the up- price is creating new highs where the current low is not moving below the previous low.
- The price reached a support level from where a bullish candlestick appeared with a long wick.
- MACD Histogram is above the zero line.
Beginner Forex Bearish Example
The perfect sell trade should come up with the following conditions:
- The trend is the down-price is creating new lows where the current high is not moving above the previous high.
- The price reached a resistance level from where a bearish candlestick appeared with a long wick.
- MACD Histogram is below the zero line.
Trade Management Guide
Besides taking a buy or sell position, it is important to manage the trade properly. First, the lot size should not be higher beyond the 2% risk. Moreover, after taking the trade, you should make sure to move the stop loss to breakeven. The ideal time to set the break-even is when the price made any breakout from near-term swing areas.
Another important tip is regarding profit-taking. New traders usually don’t want to close the partial position as they believe the price will move in their desired direction. The hope and expectation have no value to the market. Therefore, professional traders close 50% of the position once it reaches a 1:1 risk vs. reward ratio.
5 Tips Of Forex Trading For Beginners
If you are new in this industry and want to build a stable career make sure to follow these tips from the very beginning:
- The forex market is very volatile and a deep understanding of leverage is needed. Otherwise, using excessive leverage may eat all your profits on a single trade.
- Smart money or institutional traders are key price drivers in this market where retail traders should follow their footprints.
- Before going with the real money, investors should build a trading strategy and make enough back-testing with the demo account.
- Make sure to calculate the risk and reward per trade while opening a position.
- After making some losses, make sure to calm yourself by doing meditation or yoga.
Pros And Cons Of Trading Forex
|24-hour market, open 5 days a week. So there is no time limit.||Needs proper knowledge or guidelines; otherwise, it would be hard to make money from here.|
|In trading forex CFDs, forex traders are their own bosses.||Trading forex needs to invest in your trading account.|
|Possible to make huge profits, which is often impossible in traditional business.||Taking excessive leverage and a poor risk management system might incur a huge loss.|
|Working from home, forex traders don’t need to go outside as all trading information is available online.||There is no guarantee that forex traders will make money from here.|
The Bottom Line
In the above section, we have discussed everything a forex trader should follow from the very beginning of their trading journey. Overall, the forex market is a mind game where taking a proper trading decision without any bias is the ultimate action.
Finally, it is just the beginning; the success of forex trading will come from enough study, practice, and self-improvement.
FREQUENTLY ASKED QUESTIONS (FAQ):
What Is The Forex Market And How Does It Work?
The forex market is a decentralized marketplace from which investors can buy, and sell currency pairs and make money. Retail traders, need to open an account with the best forex broker to participate in the market by following some steps.
Where Is Forex Traded?
Forex is a marketplace where financial instruments like currency pairs, commodities, indices, stocks, precious metals, & cryptocurrencies are traded.
Why Do People Trade Currencies?
The price of a currency does not remain the same, where making a profit is possible from the price fluctuation.
Are Forex Markets Volatile?
The FX or foreign exchange market is a leveraged market with very high price fluctuation. It is more volatile than the stock market but less volatile than cryptocurrencies.
Are Forex Markets Regulated?
The forex/ foreign exchange market does not need any regulation, but any online forex broker should be regulated by authorities like CySEC, FCA, CFTC, ASIC, CBUAE, FINMA, etc.
What Is The Best Way To Learn Forex?
The best way to learn forex is to find a profitable trading strategy, backtest it and implement it in a real account with a small deposit.
How To Get Started With Forex Trading?
Traders should open an account in a forex broker, and verify it by providing appropriate documents. Later on, invest in the forex account and start trading using the forex trading software.
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