- 24 Nov 2021
- Reading time
- 6 minutes
The forex market does not have a central exchange or a physical location in contrast to other financial markets. It carries out 24 hours a day through a global network of banks, businesses and individual traders. This means, currency exchange rates swing in value against one another around the clock, offering numerous trading opportunities to capitalize on.
Start trading forex in 6 steps
1. Pick out your currency pair
As a forex trader you will have to choose currency pairs first to start trading. New traders will tend to start with currencies they are familiar with rather than moving on to finding opportunities in currencies for which they have less revelation.
2. Decide the type of forex trade to perform
There are different ways to trade available including CFDs or spread betting. Select a platform that suits your needs.
CFD trading - You can trade a specific number of CFD contracts in base currency units like If you opt to trade GBP/USD, for example, your investment is in GBP. On the other hand, if you are trading USD/EUR, it is in US dollars.
Spread betting – You should trade currency pairs for every point movement that is typically the fourth decimal point.
3. Determine whether to buy or sell
After choosing your market, you have to explore the current trading price and the direction in which you think the market is going to change. In Forex trade, pairs are quoted as one currency (base currency) against another currency (quote currency), therefore:
- If you think the base currency will rise against the quote currency or the quote currency will down versus the base, you buy the pair.
- If you think the base currency will swing low against the quote or the quote will swing high versus the base, you sell.
Each currency pair has two prices. The first is the selling price, while the second is the buying price and the difference between the two quoted prices is the spread that is your trading cost.
4. Add orders
An order is commanded to trade automatically at a future time when exchange rates meet a particular preplanned level. Stop-loss and limit orders are set to make sure that profits are locked in and losses are minimized.
5. Monitor your trading position
Your profit and loss (P&L) would fluctuate with each market price movement in an open position. That’s why it’s crucial to observe your P&L in real time. This way, you can easily add or close trading positions accordingly.
6. Close your trading position
Closing a trade is the same as opening a position. If you initially bought 5 currency units, you need to sell the same units upon closing. And when you finish a trade, your profits and losses are revealed right away in your trading account.
Forex trading strategies
To trade forex profitably, it's better to know about the set of reliable trading strategies, also known as trading plan and solid risk management strategy. Whether you are a beginner or a professional trader, here are the 5 steps to build and test the profitability of your forex trading strategy.
1. Understanding technical analysis
Technical analysis consists of using price charts and indicators to analyze market position. Technical analysis improves your ability to identify possible entry and exit points for your trading positions.
Technical analysis generally focuses on market positions and prices as opposed to fundamental analysis. On the other hand, fundamental analysis consists of factors that determine the market prices. These two analytical methods can be applied independently or combined.
Technical analysis targets the timing and price patterns, which is why it is often expressed as a neutral tool. To determine forex trading opportunities based on technical analysis, you need to analyze the current market price and identify possible target levels. Though technical analysis does not guarantee outcomes, it provides methodology to calculate the possibilities for different market moves.
2. Understanding fundamental analysis
Previously you learned that technical analysis is concentrated mainly on trends and price swings. Fundamental analysis has a different point of view to assessing the markets, offering a holistic picture of market weaknesses and strengths.
A fundamental analyst takes a glance at key circumstances that could affect a specific currency’s strength or weakness. These cover political and economic data as well as natural disasters.
In short, a fundamental analyst exploits all available information in evaluating a currency’s strength. In this approach, attention should be given on key economic reports and data, including GDP and unemployment data, production data and announcements of interest rates.
3. Fundamental factors which can affect forex prices
• Natural disasters
Natural disasters like hurricanes, tsunamis and floods can extremely influence a currency's fundamental strengths and weaknesses.
• International trade
As it's obvious when demand for products and services from a country increases, the demand for that country’s currency also increases.
• Economic output and growth
The country’s GDP is the most important indicator of economic growth. It summarizes the production of goods and services in the country, providing information about the country's performance and economic growth.
• Inflation – That has two key indicators:
Consumer Price Index – This calculates the change in average cost of goods and services available to consumers.
Producer Price Index – This calculates the change in cost to produce goods and services for producers.
• Interest rates
Interest rates are possibly one of the key elements that determine the value of a country's currency, because they determine the movement of global capital in and out of a country or economic region.
• Political conditions
Political instability usually impacts the demand for the country’s currency adversely. Investors prefer to avoid investing in countries with political turmoil.
• Fiscal policies
A country’s fiscal policies, government spending, budget planning and taxation system can have an effect on investors' decision on whether to invest or not.
• Monetary policy
monetary policies adopted by central banks can have a significant impact on short term currency demands.
4. Determine your entry and exit points
Forex traders are exposed to trading risks, whatever the approach they adopt. That’s the reason to understand price swings is the key to determine when you should place your trades and when you should exit a position.
5. Managing the trading risk
So far, you should be well aware that forex trading may involve risks. The market can be quite unstable and the bigger your potential gain, the higher the risk. Here are some tips how control the risk:
• Avoid over-trading
Though volatile markets can be attractive, it's good to avoid risking more than 3% of your trading account balance on any single trade. Trading more than that may expose you to losses that are hard to recuperate.
• Set up stop loss orders to minimize losses
Winning trades is not the key to success in trading forex, in fact success is the aggregate of winning and losing trades. When it comes to profitability stop-losses will be the key factor to sustain without losses. Placing stop-loss orders will also help to eliminate the need to constantly monitor your position.