Skip to main content

Forex trading strategies for beginners

Forex trading strategies for beginners. How to trade forex for beginners?


Introduction to the forex market

On the Forex market, the basic financial instrument is a currency pair, which is the value of one currency (base currency) against another (quoted currency). For example, the EUR/USD pair shows how many dollars (USD) we have to spend to buy one euro (1 EUR). In this case, the euro is the base currency and the dollar is the quoted currency. The same is true for the USD/JPG pair, which shows how many Japanese yen (JPY) we have to spend to buy one dollar (1 USD).

These two pairs belong to the so-called main currency pairs (major pairs). Major pairs are the four currency pairs in the Forex market that are most frequently bought and sold by traders.

They are:

-EUR/USD (EUR vs. USD)
-US$/JPY (American dollar vs. Japanese yen)
-GBP/USD (British pound vs. US dollar)
-USD/CHF (American dollar vs. Swiss franc)

Other popular currency pairs are: 

Other popular currency pairs are USD/CAD (US dollar vs. Canadian dollar), AUD/USD (Australian dollar vs. US dollar) and NZD/USD (New Zealand dollar vs. US dollar).

You may have already noticed that in all the pairs, the US dollar is either the base currency or the quoted currency. This is no coincidence - 90% of all currency transactions in the world are made with the US dollar.

Trading hours on Forex


One of the most attractive features of the exchange market is its flexibility. Forex is global in scope and is traded 24 hours a day, from Monday to Friday. This 24-hour period is divided into four partially overlapping trading sessions: Australia (Sydney), Japan (Tokyo), London and New York.  The vast majority of currency transactions are concentrated in these financial centers.

How do I start trading on the Forex market?


Now that you know a little more about what the Forex market is, it's time to open a trading account. The simplest and most advantageous way to do this is to join one of the hundreds of online brokers. A currency broker is usually a company that provides access to a trading platform, allowing you to buy and sell currencies in real time. Since brokers can vary greatly in terms of quality and scope of service, it is important to learn as much as possible about them before opening an account.

Generally speaking, it is important to work only with a broker who is registered and supervised by an independent financial or government institution. Choose from among brokers who have extensive experience on the market, i.e. more than 10 years - this will allow you to narrow down your search and limit yourself to those whose services are really high quality.

Once you have selected your broker and registered with him, before you deposit money, think about trying a demo trading account. A demo account is used to learn how to trade and allows you to get acquainted with all the features of a real platform before real money is played.

In a demo account everything is as it is in the real market, the real conditions are presented, and the trader has the ability to conduct simulated transactions using virtual, fake money. This is a great way not only to get used to the new tools, but also to test your trading strategies in a real market environment.

After you have tested your strength in your demo account, it will finally be time to deposit real money and start trading. Some brokers offer different bonuses on their first deposit.

Opening a position on Forex


Currency pairs, just like other goods sold and bought on the open market, are subject to investment, speculation or exchange. For this reason, currency rates are rising or falling - the basic law of supply and demand works here. For example, the value of the EUR/USD pair increases when demand for the euro increases and/or supply decreases. Similarly, the value of the EUR/USD pair decreases when demand for the euro decreases and/or supply decreases.  No matter what role other factors play here, the strength of supply and demand ultimately determines the direction of the exchange rate.

In order to open a position you need to specify whether you want to buy or sell a currency pair.  When you decide to buy, you buy the base currency and sell the quoted currency.  For example, buying EUR/USD means that you are buying EUR and selling USD. Buying a currency pair is called a "long position". When you open a long position, it is beneficial for you to increase the value of the currency pair as this will allow you to sell it for a higher amount in the future.

On the other side there is a currency pair sale transaction. It means selling the base currency and buying the quoted currency. There is a so-called "short position". If you open a short position, it is beneficial for you to decrease its value, because in the future you will be able to buy the currency cheaper.

What's spread on Forex?


On every financial market you have to bear some costs.  The same is true for Forex.  The absolute standard spread in all financial markets can be defined as the difference between the bid price and the ask price of a currency pair. Simply put, a bid is the price at which a trader wants to buy a currency and a ask is the price at which someone wants to sell it. 

On the currency market it is called a bid-ask spread.  In other words, it is the difference between the highest price the buyer wants to pay for the currency and the lowest price offered by the seller.  So when buying a currency, the trader will quote (quote) two prices - the bid price and the ask price.  The difference between them is the spread. And that is where the broker earns his money.

For example, if you want to buy USD/CAD for 1.3530, your broker will quote two prices - 1.3530 and 1.3533. In this case you will open a long position for 1.3533. In this case the broker will charge you 3 pips of spread. If you want to sell USD/CAD for 1.3530, the broker will trade at that level, but will still charge you with the spread when you want to buy back your position.

The spread is influenced by many factors, such as supply, demand and the activity of the currency pair in the market. If you use a broker, the spread usually occurs in two forms: a fixed spread and a variable spread. As the name suggests, the variable spread is subject to change throughout the day due to changes in market conditions and general liquidity. However, the fixed spread remains the same regardless of the market.

Many brokers like to promise "tight". (i.e. small) spreads, but rarely the final amount of spreads is in line with the trader's expectations. This is why it is usually better to choose a system with a fixed spread. This way you will be able to predict the cost of the transaction, which will help you to develop a profitable strategy.

What's a pip on Forex? 


The price difference we talked about in the previous chapter is divided into pips - the smallest unit of measure in the forex market, usually calculated to four decimal places (0.0001). A pip is the smallest value by which the price of a currency can change.

For example, if  GBP/USD was 1.5450 at the opening and 1.5400 at the closing, it means that it lost 50 pips (1.5450 - 1.5400 = 50) in one day.

Calculating pips is not difficult in most cases because it is simply a subtraction and subtraction, and the least amount of movement in most major currency pairs is one base point (pips).  However, this is not always the case. For example, for all Japanese yen (JPY) pairs, the smallest pip is calculated to two decimal places (0.01) rather than four as for the rest.

Calculation of pips and profit

Take the example of a few EUR/USDs. If the price rises from 1.2853 to 1.2873, it will increase by 20 pips. If it falls from 1.2853 to 1.279, it has lost 61 pips. Pips are a very easy way to calculate the profit or loss (or Z/S) from a trade.

To convert pip movements into profit or loss, you need to know the size of your trade. For a position of 100,000 EUR/USD, a 20 pip movement means $20 (€100,000 × 0.0020 = $200). For a position of 50,000 EUR/USD, movement of 61 pips translates into $305 (€50,000 × 0.0061 = $305). Depending on whether you decide to buy or sell, you will either lose or gain a calculated amount.

Leverage and margin on Forex


One of the characteristics of the Forex market is the ability to manage large amounts with a small share of equity. On the foreign exchange market this is called "leverage". Means a loan of a certain amount of money needed to buy a currency. For example, if a broker offers a leverage of 100:1, a trader can open a position worth 100,000 USD by depositing only his own 1000 USD. It's easy to conclude that this is a great way to earn a lot of money - if the value of your position has risen to 101,000 USD, it means a return of 1000 USD (that's what you get when you invest 1000 USD). Sounds great, doesn't it? Unfortunately, it also works the other way around. Leverage can cause huge losses. If a position worth $100,000 USD drops to $1,000 USD, the deposit will evaporate and you will have nothing left.

The $1000 deposit described above, which allowed you to manage a position worth as much as $100,000, is a margin. It is necessary if you want to use a tool such as leverage. The problem is that some brokers sometimes have quite "crazy" offers, such as 500:1 leverage and sometimes even higher. So remember that a leverage is a double-edged sword or a stick with two ends - call it what you want, just remember this rule forever. New traders are always advised to stay away from the leverage or use it very sparingly so that they first learn how to pull all the strings correctly.

Technical analysis uses historical market data, such as prices and trading volumes, to predict future movements.  This type of analysis is one of the most powerful tools for assessing exchange rates and is used by the vast majority of traders. It is worth remembering that technical analysis is not used to assess the intrinsic value of the (real) currency. It helps to identify a certain pattern of future price movements and thus increase the value of the opening and closing points of a position.

Honestly, there are so many methods of technical analysis that it is impossible to list them all, let alone explain them in detail.  Certainly, however, you need to know that technical analysis is used primarily to identify the trend, its continuation or reversal.  When you start playing with charts, you will certainly notice elements such as trend lines, oscillators, moving averages, etc. and learn to appreciate technical analysis and especially zigzag charts.  The currency exchange market is actually a club of charting enthusiasts.

Fundamental analysis, in turn, is an attempt to determine the value of the internal currency. This requires a thorough understanding of the economic, financial and other quantitative and qualitative indicators that affect the exchange rate. Traders who have no background in economics or monetary policy often do not like fundamental analysis and simply ignore it. However, this is not a very good idea.

Issues such as central bank statements, interest rates, economic growth rates and knowledge of future government policies all have a direct impact on exchange rates. Traders have to take them into account if they want to succeed. After all, trade does not take place in a vacuum, but in a dynamic market that is influenced by a great many factors.

10 tips for beginners in the Forex market


Now that you've learned the basics of the Forex market, these 10 tips will help you to get your first steps right.

1. Define your goals

Identify the reasons why you want to trade and what you want to achieve by doing so. Most people trading on the financial markets do this for some reason.  Trading is not an end in itself, but a way to achieve what a trader has set himself up. Specify exactly what you want from the Forex market. Not only will it help you not to lose motivation, but it will also ensure that you choose the right trading approach for your personality.

2. Select a top-notch broker

The importance of choosing the right broker should be repeated over and over again and should be at the beginning of the task list. To narrow down the search circle, make sure that the broker 1) is registered and supervised by a financial institution; 2) has been on the market for over 10 years; 3) offers good risk management options; 4) offers a wide range of products. Thanks to this you will always have support in it, even if you will be in the market for a very long time.

3. Start slowly

Most new traders make the mistake of opening too many positions at once, which makes it difficult for them to follow all of them, but also exposes them to unnecessary risk. A new trader should first focus on a small number of transactions and spend more time searching for and analyzing the best position for himself. As in life, a calm and slow approach is the best at the beginning.

4. Carefully examine each transaction

Success requires patience, hard work and learning. Before you take a position in a currency, make sure you have thoroughly checked the market. There is absolutely no point in throwing money down the drain and carrying out a trade that is not supported by technical and fundamental analysis.

5. Identify trends

Traders in the currency exchange market spend a lot of time analyzing charts that allow them to identify trends. This is especially important because it helps to predict future exchange rate behavior. Analyzing the exchange rates will also allow you to see the continuation and reversal of the trend, which brings with it a good chance for profit. A good broker should offer you free trading signals and technical analysis that should accompany each of your trades.

6. Secure your capital

Your strategy should include not only making profits, but also securing them. After all, the money you can't keep is useless. So open profitable deals, avoid losses and use stop-loss and TP orders. 

7. Create and improve your trading strategy

There is a reason why there are so many trading strategies - each one only works to a certain extent. The success of any system depends on the trader's ability, the amount of time he can devote to trading and his ability to react to changing market conditions. Traders often improve and adapt their strategies to changing situations. You should do exactly the same, because it will give you more experience in the market.

8. Don't overreact to the loss.

On the market, losses are completely normal and you should be prepared for them. Don't let anyone tell you otherwise. That's why clever traders spend only 2% of their capital on one trade. If you follow this strategy, you will be able to afford small losses. Loss should not make you feel less confident and you will immediately start looking for another strategy, especially if you have already thought about it carefully.  You can afford to give up your strategy only if you start making big losses within a week or a month. 

9. Keep up to date with the economic calendar

One of the things you should do at the beginning of the week is to review your economic calendar for key market events. Economic data or central bank meetings can have a big impact on exchange rates.  Browse the Economic Calendar to plan your transactions accordingly. 

10. Monitor your actions 

It is extremely important to monitor your financial ability over time, preferably with a pencil in hand and on a piece of paper.  Not only will it help you to check whether you are heading towards achieving your goals. It will also help you identify gaps, which in turn will help you improve your strategy or decide on a new one. Forex trading is a long-term business. Monitoring your own performance is one of the best ways to make progress.

Comments

Popular posts from this blog

How to open an online store step by step?

How to open an online store step by step? Internet store as an investment idea! Have you ever wondered how online business works? How are online stores created and is the way to the success of e-commerce easy? In this article I will try to evade the secrets of online sales. Of course, the topic is as wide as the river and filled with various exceptions. The main routes leading to an online career are almost unchanged. Idea for an online store Of course, the basis and specific seed of every business that is to germinate nicely for us is an idea. It seems like a cliché, but most of them stop there. If you read this article, I understand that you are interested in how sales on the Internet works or you are even interested in opening some kind of online business. Tower me you are special. Most of the society does not search, does not try.