Forex trading guide for beginners

Forex trading guide for beginners

You may not know it, but forex is currently one of the most important markets in the world, averaging over $4 trillion in trading volume every day.

On average, the total volume of world stock markets is no more than 84 billion dollars a day.

Every time you travel to another country and exchange currency, you are making a deal in the foreign exchange market.

Every time you buy something made in another country in a store, you are making a currency transaction. You paid in your own currency, but the manufacturer was paid in another currency.

The volume of the Forex market is 4 trillion dollars a day. Many of the world's major banks, hedge funds, and insurance companies actively trade foreign exchange to make money. Because they do this by investing very large sums, they record profits and losses of several million daily in the event of exchange rate fluctuations. Many people have not heard of the foreign exchange market because, historically, it was mainly reserved for professionals in the sector. The average citizen could buy stocks but could not trade currencies. Therefore, it remained only in the hands of big players.

Times have changed

Like the online stock trading revolution of the 1990s, the Internet has made foreign exchange trading accessible to the average person at home.

Thousands of individual traders around the world can now trade Forex from their living room with just a computer or mobile device, an internet connection and a small trading account.

Now you can make investment and trading decisions to buy or sell the British pound or Japanese yen at any time of the day or night (Sunday to Friday). This short guide will show you how to do it, but it's important to know why you should trade Forex.

Let's start by looking at what a basic forex trade looks like.

From ideas to action

Like any other commodity, the value of a currency fluctuates based on supply and demand.

The open market trades currencies such as stocks, bonds, computers, cars, and many other goods and services. The value of a currency fluctuates based on supply and demand, just like any other commodity. If something causes an increase in supply or a decrease in demand for a currency, that currency depreciates. For example, when Greece was on the verge of being unable to pay its debt, this default threatened the very existence of the euro, and investors around the world rushed to sell their euros.

With a sudden and sharp increase in the amount of euros on sale and a clear lack of demand for them, the euro fell sharply against the US dollar and other currencies.

The advantage of Forex is that you can buy or sell at any time and in any order. So, if you think the eurozone is about to collapse, you can sell the euro and buy the dollar. If you think the Federal Reserve is printing too much money, you can sell the dollar and buy the euro.

Bulls and Bears

Looking to the future, many traders have an opinion about where the price of an asset is heading. If a trader is optimistic and thinks that the exchange rate will rise, he is called bullish. If a trader is negative and expects the currency to fall, they are said to be bearish. Every day, bulls and bears collide, and the price moves in one direction or the other.

The job of a forex trader is to look at the currencies available to us and buy the strongest ones while selling the weaker ones. So, after reading the news, if you have renewed pessimism about the euro, you can turn that sentiment into a trade by selling euros and buying dollars.

Since you are always comparing one currency with another, forex always comes in pairs. It may seem a little confusing at first, but it's actually quite simple. On the right you will find an example of a EUR/USD quote. It tells you the value of one euro (EUR) in US dollars (USD).

Pips, Profits, Leverage and Losses

Over the years, professional Forex traders have come up with shorthand expressions to make currency trading easier, so you can make quick decisions about your trades without resorting to a calculator every time.

What is "pip"?

A point is the unit in which you calculate your profit or loss. With the exception of the Japanese yen, most currency pairs are quoted using four decimal places. This fourth decimal fraction (one hundredth of a penny) is usually of interest to a forex trader when calculating his "pips". Each price movement is 1 pip. For example, if the EUR/USD pair rises from 1.4022 to 1.4027, the pair is said to have risen 5 pips.

“Stock indices have “points”, futures have “ticks”, and forex has “pips”

The monetary value of a pip may vary depending on the size of your trade and its currency. Demo accounts typically trade in increments or "lots" of 10,000. One pip on a standard EUR/USD demo account is worth $1 per lot. If you trade 3 lots and make a profit or loss of 3 pips, the EUR/USD pair fluctuates and therefore the loss or profit is $3.00.

Some currency pairs will have different pip values

FOR EXAMPLE: EUR/JPY pips are valued in Japanese Yen. USD/CAD pips are in Canadian dollars, etc. Again, your trading platform makes things easy by automatically doing the calculations for you.

Maximize your trading

As mentioned earlier, all transactions are carried out using borrowed funds. This allows you to use leverage. The 30:1 leverage on the major currency pairs allows you to trade the market with $10,000 and only have about $334 in margin deposit. This means you can take advantage of smaller currency movements by controlling more money in the market than you have in your account.

While leverage can be helpful and increase your profits, it can also greatly increase your trading losses, so you should use it with care. Start with small trades so you don't take too many risks.

The leverage effect is double-edged

“Just like with profit and loss, the trading platform tracks the margin for you.” Used Margin (M. Usd) is the amount of money you have set aside to secure your open trades. Usable margin (Usbl Mr) is the money left in your account to open new positions or cover losses. Always make sure you have enough usable margin. Otherwise, a margin call may be generated. If your Used Margin becomes too low, you should close some of your positions or deposit money into your account.