A Beginner’s Guide to Trading Forex
It can often be daunting for new traders to enter the forex markets. Between pips, Japanese Candlesticks and Bollinger Bands it is easy for someone who is just getting started to feel overwhelmed.
This article provides an easy-to-understand guide to the markets and forex terminology to give forex newbies a helping hand. Have a look through our list of forex FAQs and if you want to know more, there are plenty of online educational resources to take you further.
What is forex?
The word ‘forex’ is short for foreign exchange. This means exchanging one currency for another – something that is common practise for anyone who travels to a country that uses a different currency.
Someone who exchanges their currency for another will notice that exchange rates drastically effect how much their money is worth in a different currency. A US dollar today may be worth 0.78 pounds, but a month ago it was 0.76. A US dollar might get you 361.91 Nigerian naira today, but just four days ago it might have been worth ₦364.00.
These fluctuations in exchange rates allow traders to make money buying and selling currencies. The basic principle of forex trading is to profit from these changes: buying a currency at one price and selling it at a higher price, or selling a currency at a high price and buying it at a lower price.
What is the forex market?
The buying, selling and exchanging of currencies is managed on the forex market. The forex market is the largest market in the world, with an average daily trading volume of over 5 trillion dollars. Forex market sessions open at different times all around the world, meaning that it’s possible to trade forex 24 hours a day, except on weekends.
The forex market is used by traders and investors as well as institutions and banks. It is decentralised and over-the-counter (OTC), meaning that it has no central authoritative location and is not under the supervision of an exchange.
Since forex trading involves the simultaneous buying and selling of two currencies, all forex trading is done in currency pairs. One of the most common exchanges is euros to US dollars, which translates on the forex market into the currency pair EUR/USD.
What does a forex broker do?
A forex broker provides people who want to trade on the forex markets with the tools to do so. By registering with a broker, traders have access to a 24-hour interbank and can download trading platforms.
Brokers usually offer a variety of account types for traders to choose from. Traders may choose different accounts based on what they want to trade and how much they want to deposit, alongside which trading conditions work best for them.
Brokers frequently also offer a Demo account, which allows traders to try out trading the forex markets before they open a live account. Most Demo accounts are completely free to open, and let traders try out their skills in real market conditions. Demo accounts are particularly useful for first-time traders, giving them the chance to try out the new trading platform and get used to the controls and tools.
What is actually traded in forex?
We now know that forex trading is very popular and that it’s about currencies, but what are traders actually exchanging when they buy and sell currencies?
When a trader buys a currency on the forex market, they are not physically obtaining that particular currency. They don’t buy Japanese yen to receive the physical currency, for example, but instead they buy yen because they think the price will increase over time, allowing them to make a profit. In this way, buying currency can be thought of as buying a share of a particular country – and believing that this country’s economy is in a good condition and may be in an even better condition in the future.
What is a position?
Once a trader has registered with a broker and downloaded a trading platform, they can make their first trade. This is called opening a position – a position refers to a trade which is in progress. There are two types of position a trader can open: a long position and a short position.
A long position means that the trader has bought the currency thinking that the price will increase over time. If a trader holds a short position, it means the opposite: the trader sells the currency expecting the value to decrease. If the trader who opens the short position buys the currency back, the position is considered ‘closed’.
What is a pip?
Pips come up in most forex discussions as they’re integral to understanding the markets and discussing price movements.
A pip is the unit which is used to express the difference in value between two currencies. It is the final decimal place of a figure from the markets. For example, if a pair moves from 1.2031 to 1.2032, the difference between the two values is one pip.
How do I choose a broker?
There are many brokers to choose from, but choosing the right one is essential to having a positive experience on the forex markets. The best approach might be to look at brokers who have the most experience and the best customer support.
A broker with excellent customer support will be able to help you with setting up an account, as well as answer any additional questions you may have about getting started with your trading platform. Most established brokers will be contactable over social media as well as through phone and email – the more options the better.
When choosing a broker it is also important to consider what kinds of educational support they can give you. Learning is a vital part of trading, and with the right broker, it’s possible to be continuously updating your trading skills, techniques and strategies.
What’s the best way to learn more?
This guide has covered a few basic questions – but there’s much more out there for you to learn before you enter the live markets!
Whether it’s opening a Demo account and trying out different techniques, or attending a seminar and learning with other traders, there are plenty of ways for you to expand your trading horizons. You can find a range of online educational resources including articles, E-books, and webinars as well as physical seminars and workshops.