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How to Trade Forex for Beginners
Oct 21 2024
The forex market is the biggest and most liquid trading market on the planet, with trillions of dollars traded daily, creating immense opportunities for those who know what they are doing. Forex trading is the buying of one currency against the value of another, with currencies capable of rising and falling in value based on a host of economic and geopolitical factors.
With so much smart money lurking in the forex market, it’s important to go into forex trading with your eyes wide open. This guide will equip you with the basics on how to do forex trading properly from day one.
What is Forex Trading?
What is trading forex all about? In simple terms, it’s the exchange of one currency for another, intending to profit from changes in real-time exchange rates. Each leading foreign currency is traded in “pairs” against other currencies. For instance, the GBP/USD pair displays the exchange rate of how many US dollars you can buy per pound.
The role of a forex broker is to facilitate these trades, giving you market access to buy and sell these currency pairs when you believe one will rise or fall against another. The best forex brokers make it as quick and easy as possible to react to economic or geopolitical events that may strengthen or weaken a country’s currency.
Why Trade Forex?
As a high-liquidity market, forex trading usually offers fast entry and exit from positions. There’s flexibility too, with the ability to go long (buy) and short (sell) a currency pair, creating profitable trading opportunities if you can anticipate when its value is likely to rise or fall.
Nevertheless, high liquidity and high volatility bring inherent risks to forex trading. Sustainability and profitability demand expert knowledge and an effective trading plan.
How Does Forex Trading Work?
As a forex trader, you’ll look to speculate on the price movements of certain currency pairs by buying one and selling another. All trades are handled by a reputable, licensed forex broker, often via compatible forex trading software.
Once you’ve chosen your currency pair, you must decide whether to take a long (buy) or short (sell) position using your market analysis. A forex pair includes a base currency and a quote currency. Using GBP/USD as an example, the pound sterling is the base currency and U.S. dollar is the quote currency. If you go long on GBP/USD, you’re buying the pound and selling the U.S. dollar. If you go short on GBP/USD, you’re selling the pound and buying the U.S. dollar.
Forex can be traded in two types of markets – the spot market and the derivatives market. The spot market is the real-time market, requiring you to buy and store the currency you trade. The derivatives market features contracts for difference (CFDs) which allow you to speculate on price movements without owning the underlying asset.
Most forex brokers also offer leverage, giving you the option to control larger positions in the market with a small upfront investment, magnifying your potential profits as well as your risk. Margin must also be factored in – it’s the amount of money needed to open a leveraged position. For instance, with 1:100 leverage, you can trade positions worth $100,000 with only $1,000 in your account.
Swaps are another important consideration – they are fees charged for keeping a forex order open overnight, reflecting the interest rate differentials between the two currencies you’re trading.
How to Start Trading Forex for Beginners
Understanding the Basics
Forex trading revolves around the buying and selling of currencies in the global forex markets. The markets are the marketplace where buyers and sellers execute their trades on currency pairs at the latest exchange rates. Exchange rates determine the value of one currency against another.
Profit and losses in forex trades are typically measured in pips. A “pip” stands for percentage in point. It’s the smallest price movement, usually the last decimal place of a quote currency. Forex trading is the speculation of short-term price changes in currency pairs, while forex investing is the holding of currencies for the long term to benefit from eventual appreciation.
Choosing a Forex Broker
When selecting a forex broker, consider their reliability first and foremost. Make sure they are regulated and licensed by relevant jurisdictions, offer competitive trading fees, and compatibility with state-of-the-art trading platforms.
Opening a forex real account involves trading with actual money, unlike a demo account, which uses a virtual bank for practice. Make sure your broker offers end-to-end encryption for your connections to safeguard your sensitive data.
Opening a Forex Account
If you’re researching how to become a forex trader, you’ll need to open a forex account first and foremost. Do your research and register with your preferred forex broker by providing personal details and completing identity verification, usually by uploading copies of passports, driving licences, and bank statements.
Brokers usually offer different trading account types, like standard, micro, or ECN accounts, catering to specific trading needs. Pick an account based on your experience and trading goals.
Learning to Trade
To start trading forex as a novice, learn to place trades on a trading platform, manage your risk using tools like stop-loss and take-profit orders, and work to understand market analysis such as support and resistance.
Practice with a demo account to build your skills before trading with real money. Continuous learning through market research and wider reading is key to your long-term success as a forex trader.
Forex Trading Strategies for Beginners
At the heart of any successful forex trading strategy should be a watertight trading plan. It should define the conditions to enter and exit the market, as well as your risk-reward ratio. As a starting point, focus on a 1:1 risk-reward ratio. You only need to get 50% of your trades right to break even.
Master technical analysis to spot price patterns, often surrounding areas of support and resistance. Get to grips with fundamental analysis too to act fast on any economic or geopolitical events which may affect a specific currency.
Every penny counts when it comes to building a forex trading bank. That’s why we urge you to take advantage of cashback bonuses from our partnered brokers to help you keep more of what you stake.
How Does Forex Trading Work in South Africa?
If you’re wondering how to trade forex in South Africa, you’ll be pleased to know the industry is popular and regulated by the Financial Sector Conduct Authority (FSCA). Local brokers must be FSCA-licensed, ensuring peace of mind for clients.
It’s also possible to trade with forex brokers who aren’t FSCA-licensed. It comes with increased risk, since they may not be subjected to the same level of regulatory oversight as FSCA-approved brokers.
Common Challenges for Forex Beginners
1. Emotional Trading
Don’t let emotions like greed and fear influence your forex trades. Stick to your trading plan, no matter what the market noise is suggesting – and never chase your losses.Common Challenges for Forex Beginners
2. Over-Leveraging
Don’t use excessive leverage, even if it’s available to you. It can amplify losses just as fast as profits, risking a huge percentage of your trading bank and more.
3. Poor Risk Management
Failure to set stop-loss or take-profit orders means you let human emotion control your exit from the market, which can lead to unexpected losses.
4. Lack of Knowledge
Some novice forex traders will trade currencies they have little to no knowledge about. Take some time to understand the economic and geopolitical picture of any forex pair first.
Beginner-Friendly Forex Brokers: Our Picks
If you’re looking to open a forex real account to trade, at STIC Cashback we’ve hand-picked some of the best forex brokers in the industry, ideally suited to beginner forex traders. With so many operators in the market, it can be hard to know which broker to pick. That’s why we’ve carefully selected the best sites based on their intuitive trading platforms, educational resources, and general support for first-time forex traders.
Below, you’ll find our top 4 picks and links to our in-depth reviews on each broker, including how to join forex trading services, the forex pairs available, the supported currencies, trading platforms, maximum leverage, and much more.
1. Land Prime
Land Prime is regulated in the UK and St. Vincent & The Grenadines, offering three types of forex trading accounts. Minimum lot sizes start from just 0.01, while the maximum leverage offered is 1:2000.
2. FinPros
FinPros is a fully licensed and regulated forex broker in Cyprus and the Seychelles. This broker specializes in ultra-fast order execution, with a capacity for handling up to 10,000 trades per second. FinPros offers access to all Major, Minor, and Exotic forex pairs to trade too.
3. FxPro
FxPro is a multi-award-winning forex broker, licensed in the UK and Cyprus. Its services are fully compatible with both MetaTrader 4 and 5, as well as cTrader. It also offers a proprietary mobile and browser app ideal for checking forex positions on the go.
4. AvaTrade
AvaTrade is a particularly useful forex broker for first-time traders. Its minimum lot size begins from just 0.001, which makes trades more accessible to those with smaller trading banks. It’s licensed by the Australian ASIC, as well as the Cypriot CySEC.
Other Beginner-Friendly Forex Guides
Keen to deepen your knowledge of forex trading and how to start forex trading as a novice? Check out this trio of beginner guides next:
FAQs About Trading Forex
Can You Trade Forex 24/7?
No, the forex market is accessible only five days a week. You can trade forex from Sunday evening (5 pm) through to Friday afternoon (4 pm). Essentially, it’s available 24/5 rather than 24/7.
How Many Forex Markets Can I Trade?
Most of the leading online forex brokers will offer up to 70-80 forex pairs to trade. These pairs are usually grouped into three categories – “major”, “minor”, and “exotic” currency pairs. Major forex pairs always include the U.S. dollar, while minor pairs don’t involve the USD. Exotic currency pairs usually feature one “major” currency against a currency from an emerging economy like Indonesia, Brazil, or Chile.
Is it Easy to Place a Forex Trade?
Yes, so long as you pick a forex trading platform that’s intuitive and user-friendly. We’re talking about the likes of MetaTrader 4 and 5 (MT4 and MT5), which set the standard for most retail forex traders and are compatible with almost all of our partnered brokers.