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A Step By Step Guide To Forex Trading
Forex Market is also known as Foreign Exchange Market or Currency Trading Market.
It is the largest market in the world, with almost a trade of 5 trillion dollars on an average trading day. Unlike the Stock market, where we trade in terms of stocks, we trade using currency pairs as a medium in forex trading. In the most simple words, it is the rate of exchange between any two currencies.
Why Currency Rates Fluctuate?
Companies use different types of currencies to buy goods from different countries. It is like the way we exchange our currency into the country’s currency whenever we go on a foreign trip. The difference is that these companies exchange huge amounts of currency. Due to all these currency exchanges ongoing in the entire world, the currency rate keeps on changing.
The exchange rate is determined by the law of supply and demand, i.e., the more the currency is being exchanged, the higher the rate of exchange is. Buying the currency when the exchange rate is less and converting it back at the higher rate of exchange is one of the ways how you can make a profit through Forex trading.
How To Trade Forex
Now that you have understood what Foreign Exchange Market is, let us discuss the step by step guide for how you can start trading in the Forex Market. This forex trading guide will help you gain methods and strategies to earn profits in the forex market.
Basic Terminologies related to Forex Trading
1.The very first step would be to familiarize yourself with the basic terms, especially the currency code. For instance, USD stands for the United States and the currency is Dollar, EUR stands for Eurozone, and the currency is Euro, and so on.
2. Understand what a currency pair is. For instance, consider the currency pair EUR/USD=1.0792, which is also the most popular currency pair. A currency pair consists of two currencies, the base currency and the quote currency, in our example, EUR is the base currency, and the USD is the quote currency. And the value ‘1.0792’ means that 1 EUR is equal to 1.0792 USD.
3. You need to learn what a PIP is. PIP is the smallest amount of movement that is noticeable in an exchange market. For any Non-JPY (YEN) currency pair, the 4th decimal value is considered as the PIP value, whereas the 2nd decimal value for any JPY currency pair. For example, consider the exchange rate of EUR/USD is 1.0976, here the value 6 is the PIP. If the value changes from 1.0976 to 1.0978, we will say that the value went up by 2 PIP and so on.
4. Next, what you need to understand is what “Lot” represents in Forex markets. Lots are the size in which you trade in Forex. There are four types of Lots, namely Standard Lot, which is equivalent to 100,000 units. Mini Lot is equivalent to 10,000 units, Micro Lot which is equivalent to 1,000 units, and Nano Lot is equivalent to 100 units. You will have to have a deeper knowledge of each of these Lots and how they function to trade effectively as they are your basic trading pieces.
5. You also need to focus on choosing the right forex broker and open a CFD or ‘Contracts for difference’ trading account to start trading. Now choosing the right trader is so important because mainly many of them could end up being a scammer and you might lose all your money. Also, please pay attention to their regulation policies for your account’s safety and make sure your broker has proper regulation. You can also consider an FCA regulated forex broker to be on the safe side.
Steps to Forex Trading
1. Now that you have common knowledge about basic terminology, go ahead and choose a certain currency pair you are interested in trading and start your research. Read news and analysis and stay up to date about any incident that might affect the exchange rate. Now according to your research, buy or sell currency. Make sure to stick to the strategy. Plan all about risk management before you make any trade.
2. After making the trade, exit the trading plan within the specific period and check on the strategy worked. It is okay to face losses but with proper risk management, like using stop loss and other useful tools. You can margin your losses and learn from your mistakes and trade better next time. You have to consider the things you have learned and implemented in your strategy.
3. Leverage can be very tempting. It is recommended that you stay away from it at least for the first 8-12 months of your trading career. It helps you avoid the chances of blowing up your account. Leverage is like using borrowed funds to increase your trading power and make huge profits using small capital investment. Leverages can also cause huge losses. The higher the leverage on your capital, the higher the rate of risk that you have to face. You might end up blowing up all of your money and making no profit.
4. Make sure to maintain a trading journal, where you record all your trading ideas and strategies. Alongside make a note of the main news and account of all the trades that you have made. It helps you understand a certain pattern and helps make fewer losses if not make you profits. Your Trading Journal is like a quick checklist. It makes sure you have considered every detail before and after making a trade for a successful trade.
5. Consider trading as a business, which means you will have to work for certain hours every day. Learn more about the market, trades. Reading and analyzing any news that is even slightly going to affect your currency pair value is important. It would be best if you also had a capital investment to start trading.
All these basic steps, alongside proper research, planning, strategies, risk management, make profits in no time. You must learn from losses too. Just understand this is like a job, so give it time, capital, and things will turn your way. We hope the best for your future. Trading career ahead in Foreign Exchange Market or Forex.