Forex Trading For Beginners: What you Need to Know
Forex trading is becoming increasingly popular with today’s generation of investors and entrepreneurs. For the past two decades, it has become relatively easier to trade in the forex market, thanks to the onset of new financial technologies, such as online brokers and charting tools. In addition, minimum capital requirements can be as low as $50 for new traders. That being said, trading one of the largest financial markets in the world can be as dangerous as it is rewarding. Here’s what you need to know:
Currency Pairs
In forex trading, you are buying units of currency and simultaneously selling units of another currency. Forex transactions are dealt with in currency pairs. From the investor’s standpoint, that means you should be aware of what could move both currencies involved in the transaction. Let’s say you are buying New Zealand dollars in exchange for US Dollars. You’ll want to know if there are any upcoming major economic events that could change the valuation of one or both currencies. Even if you are correct at buying New Zealand Dollar due to positive employment numbers, the US dollar may not be the right currency to sell for it as it might also be generating better-than-expected employment and GDP numbers.
Technical Analysis
Strategies in forex trading, or trading of any financial market, are usually derived from one of the two main approaches – technical analysis and fundamental or macroeconomic analysis. Technical analysis involves the use of historical price data to predict future price movements. Technical analysis, however, is simply an umbrella term for the group of indicators that use historical data. This includes Bollinger Bands, Stochastics, Relative Strenght Index, etc. These indicators are accessible in most broker platforms and can be added to a chart.
Fundamental Analysis
Forex traders who use fundamental analysis look at major news events to predict the future prices of currencies. For instance, worsening hostilities between neighboring countries, newfound trade deals, and partnerships between major economies, and rising or dropping unemployment numbers are some of the catalysts that this type of trading covers. Keep in mind that some strategies can use both technical and fundamental approaches to arrive at a conclusion.
Risk Management
Another broad yet unequivocally important term used in forex trading for beginners is risk management. The term refers to measures that are used to lower risk while growing your portfolio. In forex trading, risk management requires you to understand different terms, such as lot sizes, margin requirements, and daily volatility, leverage ratio, etcetera. Risk management is perhaps the most important principle in forex trading as it protects a trader from incurring serious losses.
Psychological Barriers to Trading
Trading as a business has a psychological component attached to it. There are many emotional responses that traders must be aware of and must subdue while initiating, holding, and liquidating trades. Greed, hope, and FOMO are three of the main emotions that traders experience on a daily basis. Inexperienced and undisciplined traders often become greedy when they are sitting on a winning position or are experiencing a winning streak. Hope, on the other hand, fuels traders who are sitting on losing trades. FOMO, or fear of missing out, forces traders to initiate positions that do not meet their predetermined technical or fundamental criteria.
The pace of Growth and Profits
Forex trading won’t transform you into a millionaire overnight nor should it be treated as your own personal ATM whenever you need some cash. Effective traders are consistent, and that consistency is built slowly and steadily over time. Acknowledging this important fact will help you avoid overtrading and set realistic and attainable target profits on your trades.
The Impact Your Broker Has on Your Trading Results
Choosing the right broker is often given little to no importance or consideration. However, it is critical to find a broker that has all the right tools and services you need to trade the forex market. Compare brokers based on available currency pairs to trade, accessible leverage, minimum capital deposit, customer service response times, trade execution fees and other surcharges, and available how-to guides and tutorials.
Trading forex profitably requires a combination of the elements aforementioned in this article. As a beginner, take your time to learn and master each facet. Use a demo account to familiarize yourself with what a trading environment would feel and look like without risking any real money.
