How to trade forex for beginners
Learn how to unlock the forex market’s potential in just a few steps with this short tutorial on how to trade forex for beginners.
The forex market
The forex market is a decentralized network comprised of national and commercial banks, financial institutions and individual traders where currencies are traded every day around the clock.
There is such a massive trading volume on the forex market that the forex market is undoubtedly the largest financial market in the world, much larger than the stock market and this immense liquidity offers incredible opportunities for currency traders.
What is forex trading?
Trading forex refers to trading all these currencies available on the forex market. However, there’s a clear distinction between forex trading and actually exchanging one currency for another.
In forex, trading mainly involves Contracts for Difference (CFDs). CFDs are contracts which represent the movement of the exchange between currencies. Therefore, forex traders trade these contracts and they don’t need to physically buy the currencies themselves.
Another important difference is that forex trading revolves trading currency pairs and not individual currencies. If you want to learn how to trade forex for beginners, you should know that each currency is linked to another and the strength of a currency can only be gauged when comparing it to that of another currency. For example, the most popular currency pair which is the EUR/USD, indicates how much USD you can buy with one euro.
So, a currency pair consists of two currencies where the first currency is referred to as the base currency and the second as the counter or quote currency.
A forex pair, such as the EUR/USD can be traded with a buy or sell position which means that you can buy or sell the currency pair according to the direction you believe its exchange rate is going to move.
Remember that when trading forex, you are always buying or selling the base currency against the counter currency. Therefore, when trading EUR/USD, you should buy this pair if you think the EUR will rise against the U.S dollar. If you think that the EUR price will drop, you should open a sell position instead.
This is also one of the best advantages of trading forex. You can buy or sell a currency pair which allows you to make a profit even if the currency is losing value. Therefore, you don’t have to limit your trading and only buy the currencies that are gaining value – as long as the price is moving (regardless of direction), there is profit potential for forex traders.
Finance technical analysis
Finance technical analysis studies price movements and indicators to identify trading opportunities and is essential to forex trading. Technical analysis involves analyzing charts, identifying patterns that indicate a potential price movement, and then entering into a trade to take advantage of that movement. By using technical analysis, traders can make informed decisions about when to enter or exit a trade.
One of the technical analysis tools that traders use is called the Moving Average. This tool is a trend-following indicator that smooths out price data by calculating a constantly updated average price. This helps you to identify market trends and make informed trading decisions based on them.
What does forex trading cost?
Another great advantage for forex beginners, stems from the fact that it’s one of the most accessible markets and when it comes to trading costs it’s also a highly cost-effective investment.
Normally, there are no fees or commissions and the only thing you need to worry about as a trader is the spread. The spread is the difference between the bid and ask prices on the market.
As we have already mentioned, forex revolves around currency pairs which are traded as a single unit – you either buy or sell the currency pair according to the direction you believe it will move and close the position after you are satisfied with the trade. However, the price at which you buy, or sell is always different.
The bid price is actually the price you pay when you buy a currency pair and the asking price is the one you get quoted when you sell. For example, consider the following forex quote:
EUR/USD = 1.0920 / 1.0925
The price quoted on the left is the bid (1.0920) and the one the right is the ask (1.0925). If you speculate that the EUR will strengthen against the dollar, you would buy the EUR/USD pair at the current ask price which is 1.0925 and the spread for making this trade is 0.0005 or 5 pips (the difference between the bid and ask prices).
Each currency pair has a different spread, with some being cheaper to trade than others. However, you should note that each broker will have a variable spread offering, and some can be much more competitive than others as well.
Since spreads are the main cost of doing business in the forex market, traders always favor a broker that has the most favorable trading conditions. This is especially true for high frequency traders because not only do spread ramp up the more you trade, but higher spreads mean that the currency pair needs to make greater movements to cover the cost of the spread.
Going back to our previous example, if you entered the buy trade in EUR/USD at 1.0925, the pair should move by at least 5 points in order for you to break even and start making any profit. If you close the position at 1.0928 or 1.0929, you will still be losing money despite the fact that the currency gained some points as you predicted.
Currency trading options
Currency trading options allow traders to buy or sell currency pairs at a predetermined price and time, but they are not obligated to do so. Foreign exchange options are useful for hedging currency fluctuations, generating income, or speculating on currency pairs.
There are two types of currency trading options:
• Call options: allow you to buy a currency pair at a predetermined price
• Put options: allow you to sell a currency pair at a predetermined price
Currency options can be complex financial instruments, and you should have a good understanding of how they work before trading them.
How to trade forex for beginners
Start trading today by following these simple steps:
- Find and choose a trustworthy and regulated forex broker
- Open your trading account
- Download the trading platform
- Monitor the charts for opportunities
- Open your first trading position
CM Trading is a first-class forex broker and one of the best-performing brokers in South Africa. If you are interested in learning more about the opportunities available in forex, you’ve come to the right place.
Open your trading account now and start trading!