Does forex trading seem lucrative but intimidating at the same time?
Many investors may feel reluctant to enter forex markets due to their high liquidity and complex nature. But if you’re interested in forex trading, here’s an overview of forex trading and how you can start trading.
Forex trading, also called FX trading, foreign exchange trading or currency trading, refers to the process of converting one currency into another.
It is the process of speculating the price movements of international currencies with the motive of making profits. While there are many individual traders and businesses, the major players in forex markets are governments, financial institutions, hedge funds and major corporations.
Here’s a list of basic forex terms you must understand before starting trading:
Pip stands for Price Interest Point or Percentage in Point. A pip is the lowest and the smallest increment in the price of the currency pair. It is approximately 0.0001 of the quote price.
Pips help measure the price movements in a forex pair. For instance, if the bid price of EUR/USD changes from 1.16667 to 1.16677, it represents the difference of one pip.
It is the capital provided by a broker to amplify the volume of trades their clients can make. Leverage allows traders to trade larger values far higher than the amount of capital they have. Using leverage, you can significantly increase your profits, but it also puts you at risk of increasing your losses.
For example, a leverage of 1:50 means you can use 200 Euros in your trading account to trade a currency pair with a position size of 10,000 Euros. If the trade is successful, leverage will increase your profits by a factor of 50.
Spread is the difference between the buy and sell prices of a currency pair offered on the trading platform. When the spread prices are lower, traders enjoy a smaller buy and sell price difference of the forex trading pair. The spread is often as low as a pip for popularly traded currency pairs. For those that don’t trade as often their spread is generally much higher.
The price at which traders/brokers or the market is willing to buy the currency pair is known as the bid. The bid price is affected by the value of the underlying currency pair and set against the ask price — the price at which sellers are willing to sell their shares. It represents the price a trader can sell their base currency at.
For instance, in USD/CHF 1.5722/32, the bid price is 1.5722, and the base currency is USD. This means you can sell one USD for 1.5722 Swiss Franc.
It usually describes the stock market or a market when it’s moving in a downward trend, meaning the prices are falling. Bearish traders favor a declining market. If a stock price falls fast and deep, it is considered very bearish.
For instance, when traders say they are bearish for KWD/USD, it means that they think Kuwaiti Dinar will weaken against the US dollar. A bearish market indicates there is going to be more short selling.
A bull market is the opposite of a bear market as it describes a market that is experiencing rising prices or moving in an upward trend. Bullish traders favor rising prices and a strengthening market. A bull market means an increasing number of long trading activities or going long.
For example, when traders say we are bullish for KWD/USD, it means that they think Kuwaiti Dinar will strengthen against the US dollar.
It is when traders open and close trades within a day. It is a common trading strategy used by traders to buy and sell the same currency pairs in a day.
Traders place a number of forex trades each day and close them at the end of the day rather than holding them overnight.
Starting forex trading can be a daunting process. So, here are a few tips and tricks to help you in your trading journey:
You can become a successful forex trader when you dedicate time to understanding and learning about the markets. Educating yourself about the forex market is a crucial step. Take time to gain knowledge about the currency pairs, forex markets and the factors affecting them. Investing your time and effort in learning will help you in trading.
Just like learning any other skill, trading requires starting from the basics and then going forward. Starting gradually and taking small steps at a time will help you go a long way in forex trading. Many people are tempted to jump straight into big money trades to make massive profits in lesser time. But, starting with smaller trades and going upward will help you become a successful trader. Learn from each step and increase your position sizes only when you’re comfortable with it. Take your time to adjust to the markets.
Before starting trading, you must create a clear trading plan. Many people are too eager to trade without setting out a comprehensive plan, which lands them in trouble. Your forex trading plan will act as a set of rules for you to follow and lay the strategy you’ll use to implement them. These rules will help you stay on track while trading. Your forex trading plan should contain information about:
Developing your trading plan can prevent you from overtrading, which results in reckless trades, and revenge trading and ultimately takes you off track. While creating your trading plan, set a limit on the maximum number of trades you’ll be making daily or weekly.
While trading, it’s essential to keep your emotions under control. When you have a losing trade, trying to make it back all in one shot will hardly end well. Even if the market’s not going your way, keeping a clear head and rational thinking is crucial to getting the results you want. Keep your calm and reduce your stress levels. It will help you better assess your next trading move and stick with your trading plan.
The key to forex trading is to be patient. Many beginners in the trading world have an unrealistic expectation of becoming rich and making exponential profits within a few days. However, the reality is different. You require consistency, dedication, effort and lots of time to become a successful trader. If you maintain a positive edge and remain patient while testing your plan, you’ll have a better chance of coming to the top. So, take your time and be patient to enjoy your trading journey.
It’s crucial to select the right trading partner, especially if you have little experience in trading. Don’t just opt for the first forex broker you see online. Conduct some research and learn about different brokers, their reviews and strategies. Factors like trading style, trading instruments, quality of customer service, reliability, pricing and execution will affect your decision of selecting a forex broker. Also, you must ensure that you choose a broker that is regulated and authorized by an internationally recognized authority.
You can start trading forex with these easy steps:
Forex trading is always done through an authorized and regulated middleman or forex broker. Before starting your forex trading journey, you must research and find a reliable forex broker worthy of handling your funds. Your broker will assist you to open a forex trading account and add funds to your account.
You can either open a live or demo account on a trading platform to experience the real-time prices of different currency pairs. Researching in-depth about the price movements will help you find a currency pair that you’ll like to trade.
Based on your research and trading strategy, you can start trading. If your research indicates that the price of your base currency will strengthen, go long and buy. Whereas, if your research and market trend suggests that it will weaken, go short and sell.
You should follow your trading strategy, which will govern your next steps and stay in the market. Place your forex trades with well-defined entry and exit points. Sticking to your trading plan and having patience are crucial in forex trading.
You can explore the market and apply some new strategies for different trades. Many traders learn new strategies during forex tutorials and use them in the real environment to see their effect on various currency pairs.
Your trading plan will guide you when it’s time to leave the market at its forecasted limits. Evaluate how you performed and how you could have improved the results. This way, you can learn from your mistakes and keep growing.
Ready to start forex trading? Open a demo or live account with Baxia Markets today and get expert trading help.
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