Forex Trading for Beginners | Must Read for New Traders.

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For a beginner, Forex trading can seem difficult and frustrating.

That might be so because Forex uses terms that newbies may not understand at first. 

Then there are the Forex charts, whoa!

Not to worry though, in this post, I will walk you through important terms and concepts you must understand before you begin trading Forex.

I will also show you other Forex stuff relevant to beginners.

So saddle up and let’s start.

Forex Trading.

This is the act of exchanging one currency for another.

Forex is the short form of foreign exchange.

Traders can carry out Foreign exchange as either Spot Forex or Contracts for Difference (CFDs).

Spot Forex.

Spot Forex is the buying and selling of real currencies.

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Traditionally, people used to buy one currency using another and waited for the exchange value to rise so that they could sell such currencies.

By selling the currencies at higher exchange values, they made profits.

Contracts for Difference (CFDs).

Contracts for Difference means that instead of buying and selling assets physically, you profit from their price movements without possessing them.

It is the common practice today, and actually, the manner in which traders perform the Forex online.

Other assets such as stocks, indices, commodities, metals, ETFs, and cryptocurrencies are also traded as CFDs.

With CFDs, you are allowed to trade the price movements of an asset without buying the asset physically.

Price Interest Point (PIP).

What is a PIP or a Pipette?

The smallest value increment of a currency pair is called a Pip.

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As a currency trader, you can read the pip value by observing the price of a currency pair.

Most currency pairs represent the Pip value in the 4th decimal place of their price.

Currency pairs with the Japanese Yen in them have their pip value in the 2nd decimal place of their price though.

Price and Quote.

Prices of currency pairs and other assets are quoted as Bid and Ask prices.

If you have been keen on those charts then you must have noticed that prices move in two lines.

These are an upper line which reads a higher value and a lower line which reads a lesser value.

The higher line represents the Ask price while the lower line represents the Bid price.

The Ask price is the price at which you can buy the asset or currency pair right away.

The Bid price, on the other hand, is the price at which you can sell the currency pair right away.

Spread.

This is the difference between the ask price and the bid price, which are the buy and sell prices respectively.

Spread is what your broker gains from you when you place a trade.

Margin.

Margin is ideally the money that should remain in a trading account after entering a trade.

However, because most retail traders do not have enough margin to trade high volumes to make huge profits, the broker offers them leverage.

Leverage.

Leverage is in simple terms the capital provided by brokers to traders to increase the volume of trades the traders can take.

For example, say the lot value of a contract is 100,000 units and you use a 1:100 leverage.

Having only $10,000 in your trading account enables you to trade a position size of up to $1,000,000.

If that position is successful, leverage amplifies your profits by a factor of 100.

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On the contrary, if the trade goes against you, leverage also amplifies your loss by a factor of 100.

Meaning, you should rationalize your use of leverage, because it is a double-edged sword.

In cases where the trade goes completely against you and you applied huge leverage, your account balance may even fall below zero.

In that case, if your broker doesn’t offer a negative balance protection policy, you will be indebted to the broker. 

Meaning the next time you make a deposit, you must include the amount your account balance owes you in form of a negative balance.

Long Trade.

A long trade is one that involves buying a currency pair or other asset, expecting its value to increase.

When you go long on a trade, you anticipate making a profit from the difference between the buy price and the current higher price.

Short Trade.

A short trade involves selling a currency pair or other asset, expecting its value to fall.

In that case, you anticipate making a profit from the difference between the selling price and the current lower price.

Reading Forex Prices.

Look at the following examples of Forex pair prices:

  • EUR/USD at 1.1912
  • USD/JPY at 114.68

If EUR/USD reads 1.1912, it means that 1 Euro is worth 1.1912 US Dollars at that moment.

Similarly, if USD/JPY reads 114.68, it means that 1 US Dollar is worth 114.68 Japanese Yen at that moment.

It is the same thing for any other currency pair.

The price means that one value of the base currency is worth the current price value of the other currency in the pair.

Forex Trading Sessions.

Currencies are traded in Forex sessions.

Each Forex session has a pool of currency pairs related to it.

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During the time when a certain Forex session is open, the currency pairs related to it have the highest volatility.

High volatility presents so many profitable trading opportunities.

Here are major Forex sessions and when they are open:

  • Sydney – 21:00 to 06:00 GMT.
  • Tokyo – 23:00 to 08:00 GMT.
  • London – 07:00 to 16:00 GMT.
  • New York – 12:00 to 21:00 GMT.

Here is the order of the sessions from the most to the least volatile:

  • London session.
  • New York session.
  • Asian session (Tokyo and Sydney).

You should therefore trade when the London and New York sessions are open to taking advantage of the highest volatility of the day.

Trade currency pairs related to the open sessions only.

Forex Trading Techniques.

Here are major Forex trading techniques:

  • Scalping – is a trading technique that involves fast analysis and trade execution within lower timeframes. You place so many trades and close them after seconds or minutes.
  • Day trading – it involves trading within a day and closing all the trades before the trading day ends. Traders use 30 minutes to 1-hour timeframes in making trading decisions.
  • Swing trading – it involves holding positions for several days to profit from major price swings. Traders use 4 hours of daily timeframes to make trading decisions.
  • Position trading – it involves holding positions for weeks to months to profit from huge price moves. Traders use daily and weekly timeframes to make trading decisions.

From the list, a trader chooses which trading technique suits them best. They can then use it to trade Forex and make profits.

Conclusion.

You now understand the basic terms and concepts of Forex trading. All you need to do next is build on that knowledge using our other guides and you will become a better Forex trader.


*Risk warning:

The information provided does not constitute a recommendation to carry out transactions. When using this information, you are solely responsible for your decisions and assume all risks associated with the financial result of such transactions.
 

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