FOREX TRADING FOR BEGINNERS
A 10-step Guide to the Basics of Forex Trading for Beginners.
1. Know the Forex market you are dealing with
The most direct form of Forex trading for beginners is one-on-one trading, also called Spot Forex Market. You make a trade and exchange currency at the same time. As a FX trader, you can also choose from the Forward Forex Market or the Futures Forex Market. In these markets, you set a deal for a specific date with a specified number of trades at a specific rate. When your predictions are correct on that date, you can buy the actual currency for a much better rate, which results in great profit.
2. Be aware of micro and macro-economic developments
Forex trading is not gambling, at least not for real Forex traders. Forex traders do not blindly close a deal without considering market fluctuations. Most of the time, economic patterns can be foreseen with analysis. As one would imagine, the rate of a currency is dependent on millions of factors, so the primary challenge is to consider the applicable economic developments in order to be able to make accurate predictions of rate fluctuations.
Many traders use the news as a source, but also announcements of central banks, forecasts of banks and other financial institutions, governmental actions, and developments in health and other macro-economic changes. All have an impact on currency rates.
3. Define your trading profile
Your trading profile defines what kind of trader you become. How much risk are you willing to take? This factor also depends on your capital. Rational, controlled trades are possible when you are trading with other people’s money with zero risk.
You should decide how much time and effort you want to put in Forex trading. Do you want to follow all economic developments, making a trade every 2-3 minutes, or do you prefer to make a thought-out investment that will pay off in a few months?
Will you focus on the three major currencies (USD, EUR and GBP) with major currency exchange pairs and minor currency exchange pairs? Or do you want to become an expert in regional currency exchange pairs or exotics currency exchange pairs?
4. Choose your Forex trading strategy
Your trading strategy defines if you work with a one-minute chart or with a Weekly Chart (or anything in-between). The strategy of your trading has influence on what types of deals you seek. Are you looking for deals of a couple of minutes or deals that last a few months? Do you make one large deal or several simultaneous trading deals to spread the risk? And last but not least, what is the risk you are willing to take?
These factors determine if you are considered a Scalper (making numerous short termed deals of low value), a Day Trader (making and closing deals on a daily base, focusing on a limited amount of deals) or a Position Trader (making just a few deals per year and focusing on larger currency rate changes over a timespan of several months)
5. Use your leverage
Spot Forex trading is not too common in the Forex trading market, as most Forex traders prefer to use their leverage in order to make far larger trades based on a small initial payment to settle a trade. A typical initial payment to close a trading deal (also referred to as margin) is 2%. That means with a budget of £100,000, you could close a deal of no less than £5,000,000.
This gives you far more possibilities in terms of profits. On the other hand, you should also realise that the risks also increase tremendously. You might pay just £100,000, but you are committed to a deal of £5,000,000, so risk management is essential as well, especially when you don’t have the funds to cover the amount of the entire deal.
6. Define your profit target
Each trader sets a certain profit margin for themselves. Typically, a trader has a goal profit they are looking to achieve from trading activities, often a set sum per month. To achieve this goal, a trader must make profitable deals. This is often referred to in terms of a percentage. You can set a profit percentage, for example 10% or 20% on your entire trading account.
When we look at the profitability of a deal, this is often expressed in terms of pips. A pip is the unit of measurement of the movement of a certain Forex pair in the fourth decimal place of a currency pair. If a GBP/EUR currency pair moves from £1.40000 to £1.40010, then it has moved 1 pip.
Your profit target in terms of pips depends primarily on your trading strategy. A scalper often aims for a profit of just 5 pips (£0.0001), a day trader often is content with a profit of 50 pips (£0.001), while a position trader is likely not satisfied when their profit is less than 500 pips (£0.01).
7. Limit your risk
Managing your risks and limiting your risks is necessary to not overplay your hand, especially when you are using your leverage to the maximum (for example on a ratio of 1:50). In order to control your risks, it is important to set a maximum acceptable loss for every deal, even in your day trading results.
Depending on your trading profile, you could set a loss cap of 1% to 5%. When this target is reached, you leave your position, taking your loss, and get a position in another, new trade.
You can do the same with your daily results, to protect you when it is just not your day. In that way you protect your account and capital, and continue the next day with a fresh start.
8. Learn from your mistakes
Learning from your mistakes is crucial to optimize your own trading strategy. As most traders often trade in the same markets, certain patterns can be distinguished in time. In the beginning, it might be harder to find these patterns, but when you are in the game for a longer period of time, you will see the repetitive patterns most economic developments display.
Many traders have a log with all trades, decisions, doubts and patterns they have discovered. Analysing this log could be highly beneficial, revealing new patterns and leading to more effective trades.
9. Choose a Forex broker
A Forex broker is a financial institution that provides you, as a beginning trader, with a platform to access the market of buying and selling currencies. Make a wise decision in choosing the right Forex broker for you.
A Forex broker, of course, charges you for their services. Some might charge a monthly fee, and most charge a certain commission per trade or managed capital. Look into all conditions of your broker to see what costs and limitations they have.
10. Trade with the right amount of capital
What sum of money can you earn with Forex trading as a beginner? Considering that currencies do not fluctuate enormously, the answer is nickels and dimes. The only way to earn substantial sums of money is to trade with large amounts of capital, making large amounts of nickels and dimes a substantial income.
When you trade your own money, a way to grow your account is to leave all profits in your account. In this way your account can grow exponentially, but it will typically take a substantial amount of time to achieve this exponential growth.
With a solution like Forex Trading UK, you can achieve Accelerated Growth. At every milestone you reach, you double the capital of your account. In this way, every period, your account gets an enormous capital boost, doubling your exposure, and more than doubling your profits.
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