Priciples of trading forex - forex trading guide for beginners

 article about Priciples of trading forex - forex trading guide for beginners
2019-07-25 14:19:00
Trading forex can be a great source of extra income if you know what you are doing and are able to stick to sensible money management rules. But what is forex exactly, and how does one trade forex? Let's dig right in in this long forex trading guide for beginners. There are probably not too many people out there who hasn't ever had to exchange currencies. But not everyone knows too much about forex trading in the internet for the purpose of making money. The term forex means foreign exchange or currency trading. Forex is the most liquid market in the world where every day more than $5 trillion worth of trades are being made.

What is forex trading


Forex trading means trading currencies. It's the process of using one currency to buy another currency in hopes to make money with it through the change in currency values. The currencies are traded in foreign exchange market which in by no means is a centralized marketplace, but rather the currencies are traded electronically by traders located around the world using computers. Forex market is open 24 hours a day and five and half days a week. Forex trading can be done 24 hours a day due to the fact that while the trading day might end in the United States, a new trading day starts in Tokyo. The price quotes change constantly, and currency prices can actually change every second. Depending on a currency pair sometimes the market can slow down and sometimes prices can change really, really fast. In general currency prices change based on supply and demand. Forex market can be very volatile and as such in order to make money with it you also need to be aware of the risks involved in trading forex.

Risks when trading forex


Trading in foreign exchange market involves huge risks as under the cover it can be very complex. While one can learn the basics of trading forex pretty fast, to actually become a trader who is consistently able to make money in the market can take lots of time. Additionally, different forex platforms often offer traders high amount of leverage, which in one hand means that you have the opportunity to win a lot of money with a relatively small initial investment by controlling large positions compared to their own money risked, but this also means that it is easy to lose money rather fast as well. Forex brokers often offer leverage anywhere from 50:1 to 500:1 and sometimes even higher. What this means is that as a trader who uses leverage of 100:1 and has deposited only $100 to his trading account can actually trade with $10 000 and earn from price movements from this amount. But the higher leverage you use, the faster you also stand to lose money in case of bad trades.

Losing your money can be especially fast if you haven't set yourself predetermined stop-losses in case the price movements are not going your way.

Forex can be traded easily


As forex markets are the largest markets in the world when it comes to trading volume, forex market offers the most liquidity. Which means that at least in case of any major currency pairs one can enter and exit a position, or on layman's terms buy or sell a currency in a matter of seconds without having to wait for a buyer or seller to show up. Forex can be traded even by amateurs at any time of day and often as many times a day as you want. You simply need to have an account with a forex broker, some money in there, know how to use the trading platform that can be used with the broker, and have at least some knowledge about forex trading. Depending on the broker you choose sometimes you can register a forex trading account just with your email and deposit money for trading with Bitcoin or Litecoin. Or you might have to go through an extensive KYC (Know Your Customer) verification process. While the latter is definitely better in long term, as those brokers are usually regulated and more trustworthy, it's actually easier to start trading, to learn trading forex with brokers that ask only for your email address and a Bitcoin deposit to get started. And in case of those brokers often the minimum deposit just around $2, which is perfect for amateur forex traders who want to learn the market, who want to learn trading, who want to test their trading skills. As long as there's the will,anyone can learn to trade forex.

Introduction to forex terms


When you are just starting to learn and trade forex, you'll be seeing a number of forex terms you might not understand at first. While the number of terms is in hundreds, as an individual forex broker who just wants to try his or her hand in trading, you just need to know a few things for starters.

Major currencies


Major currencies are currencies that are traded the most in foreign exchange market, they are the most popular. Major currencies are USD, EUR, GBP, CHF, JPY, and CAD. So US dollar, Euro, British Pound, Swiss franc, Japenese Yen, and also Canadian dollar.

Currency pairs


Currency pair is a pair of two currencies. And all currencies in foreign exchange are quoted in pairs. First currency is the base currency and second currency the quoted currency. What the price next to a currency pair shows is how much the base currency costs using the quote currency. So in case of USDEUR pair with quote of 0.9000 it would mean that you can buy 0.9 EUR for 1 USD.

Major currency pairs


Major currency pairs are mainly pairs that contain USD and some other major currency. There are also many different minor currencies and minor currency pairs, but even all together they make up only a very small volume. Trading minor currency pairs is often also more difficult because those currency pairs might not be offered by many forex brokers plus trades might also take more time.

Related currency pairs


There are a certain currency pairs that move in the same direction or the opposite direction. While the movements are never exactly one to one, there can be certain correlations. For example s GBPUSD/USDJPY and EURUSD/GBPUSD tend to move in the same direction while AUDUSD/USDJPY might be moving in opposite directions to each other.

Bid and Ask price


You may have seen bid and ask prices in your local currency exchange kiosk. Ask price is the price you need to pay for buying the currency and Bid price is what you can sell the currency for.

Pip


Pip is Percentage in Point and it shows the exchange rate movement. It's a numeric value that ultimately shows your profit or loss of a trade. One pip is usually equal to 0.0001, in case of some currency pairs 0.001. Forex traders measure their wins and losses usually in pips. Let's say you bought a certain amount of some currency for the price of 1.1000 and managed to sell it at 1.1100. This means that you made 100 pips profit from that trade. How much one pip is worth depends on the lot size that you bought.

Lot size


Imagine forex as apples in packages with certain sizes as that's how forex is traded - in set amounts. Most common lot size is 100,000 units. I.e. one lot can be 100 000 euros or dollars. But depending on the forex broker you can sometimes trade instead of 1 lot also smaller numbers, such as 0.1 lot or even 0.01 lot.

Stop-loss limit


A stop-loss is a future order you should set with every trade to make to make sure the position is sold before you lose too much money. When the price gets to the level of your stop-loss your position is closed automatically to avoid any further losses.

Trailing Stop


In most forex platforms you can also set an optional trailing stop. Trailing stop can be used together with your stop-loss limit. Imagine you bought USDEUR at the price of 0.9300 with the expectation that the price will go up. You have set your stop-loss limit at 0.9250 in case the trade is not going your way. You can now also set a trailing stop. Let's say you set your trailing stop at 50 pips. The market starts rising, and the trailing stop will be moving your stop loss higher up all the time by the trail amount. For example if the price should grow to 0.9390 your new trailing stop would be set to 0.9340. Note that while your initial stop loss will work even if you have turned off your trading platform, often trailing stop works only if you have the trading platform open.

Leverage and margin


Leverage is basically the money you can borrow from the broker. And margin is the money you can use for leveraging. So let's say a forex broker offers you a leverage of up to 500:1. If you have just $100 in your trading account, this means that you can control and trade with up to $50 000 (100x500). Leverage makes it easy to make bigger profits with your small investments than you normally could. But it also increases your potential losses. When using leverage, use comon sense. Good thing is that you don't have to worry about getting in debt with the broker - your maximum collateral is the amount of money on your trading account.

Spread / Transaction cost


A spread is the difference between ASK and BID prices in pips. It's basically the cost of the trade. In case of major currency pairs like USDEUR the the spreads can be as low as 1 pip and in case of some other pairs it can be tens or even hundreds of pips.

Commissions


Sometimes there can also be an additional commissions for making trades. For example Evolve Markets has a commission of $3.50 per lot per side for forex trading.

How to trade forex?


Before you can start trading there are a few things you need. Firstly of course, you need to find yourself the best forex broker for you. While generally good forex brokers have similar qualities, it really depends a lot on what you're looking for. Do you want to start trading right away or are you willing to wait to get your account verified first? How much do you want to or can afford to deposit into your trading account? In case of some brokers the minimum deposit can be $5000 while in case of others it can be as low as $2 and you can also deposit with cryptocurrencies. After you have found the forex broker you like, opened an account and made your first deposit, you need to decide on which forex platform to use.

What forex trading platform to use?


Forex brokers often support more than just one trading platform. Forex trading platform is the program you can use to make the actual trades. Some forex brokers have their own platform and they don't offer you the chance to trade using any other third party platform. But very often forex brokers also give you the chance to use either Metatrader 4 or Metatreader 5 forex trading platforms, which in my opinion are very good. Additionally some brokers might give you the chance to trade using their web trader or their own mobile forex trading platform. It's a good idea to check them all out and see what you like the most. But with most forex brokers you will probably want to go with Metatrader which is also the most popular trading platform out there.

Trading news


In general forex traders trade news, trade based on technical indicators, or use them both at the same time. How do you trade forex based on news? When it comes to movements in any market, economic data is an important factor that influences different prices, and same goes for forex, and actually espcially for forex. And while news about any currency or economic data from countries whose currencies you want to trade is important, U.S. economic releases have the tendency to have the most impact on the foreign exchange market. For any country the most important types of news when it comes to forex trading are related to inflation, interest rates, retail sales, unemployment, trade balance, industrial production and also consumer confidence surveys.

Technical analysis


Another way of trading is basing your trading decisions mainly on technical indicators and technical analysis. Instead of following the news for finding potential entry and exit points, you study the price movemens based on different technical indicators. Technical analysis helps you see the past data, discover patterns and trends that might help you make good trading decisions today. And something that has to be said is that there are loads of people who count on technical analysis as a way of helping them trade better, and because of the bare volume of those people sometimes the results of your technical analysis, the found price patterns might sort of be self-fulfilling prophesies. If everyone looks at a pattern and thinks the price is going to start going up now and makes a trade based on that, then because of everyone is doing the same kind of trades the price actually starts going up because of the new demand.

Reading the forex charts


There are three main types of forex charts - line chart, bar chart, and candlestick chart. These are the charts what you can see for example in Metatrader to follow price movements.

Line chart


This is the simplest kind of chart, yet simplest also means that this type of forex price charts gives you the least information. A line chart is a very simple chart that just draws a line from one closing price to another. While line chart doesn't give you as much information as bar chart or candlestick chart, it still gives you a good overview of price movements of some currency pair over a chosen period of time.

Bar chart


A bar chart is slightly move complicated and gives you more information than just closing prices. It shows you the opening and closing prices plus also the highest and lowest prices of the chosen time period. It consists of vertical lines one after another, each representing your price movements over your chosen timeframe. The top end of the vertical bar shows you the lowest traded price for that time period while the bottom end shows you the highest price. The vertical bar has a hash on the left side of the bar, this represents the opening price and the hash on the right side of the bar is the closing price.

Candlesticks chart




Japanese candlesticks chart shows you the same information as the bar chart, but in a visually better manner. When in case of a bar chart all information is shown to you with lines, candlestick chart consist of a body and a line in the bottom and top of the body. The body can be either empty or filled. Empty body means that the price rose during the time period (meaning closing price is higher than opening price), filled or white means the price closed lower than the opening price. The line on the top of the body shows the high of the time period and the line in the bottom of the body indicates the low of the period. The lines on top and in the bottom are actually called shadows - upper shadow and lower shadow. There are many benefits to candlesticks chart compared to the other trading chart types - they are easy to read and interpret and they form patterns which are not so difficult to spot.

Japanese candlesticks

The candlesticks chart consists of candlesticks that I just introduced. While I just mentioned that the bodies of the candlesticks can be empty or filled, their exact look can actually vary - they might as well be green and red. Whatever you prefer. Not all candlesticks look the same, some might have long body and no shadows, some can have almost no body and long shadows or anything else in between. Names for different looking candlesticks are Long Day candlestick, Short Day Candlestick, Paper Umbrella, Maribozu (and opening and closing maribozu). There are also Spinning tops candlesticks and stars. You can read more about all of them at the different candlesticks introduction article. Different candlesticks next to each other form patterns which can help you predict future price movements. As main things there are trend reversal patterns and trend continuation patterns - learn them all so that when you spot them you know what might happen with the price next.

Trading based on indicators


Indicator-based trading means basing your trading decisions on indicators that have been created to analyse the price and can suggest good trade alerts. No indicator can tell you for sure what's going to happen next, but in certain market conditions they can be of much help, technical indicators can help you see certain market tendencies and enter or exit trades based on them. There are literally hundreds if not thousands of different technical indicators that use different factors that might include opening and closing prices, high and low prices, volumes, averages, and much more.

Main indicators


The most common indicators in technical trading are moving averages, MACD (Moving Average Convergence Divergence), RSI (Relative Strength Index), and On-Balance Volume (OBV). Obviously these are just a few main ones, and you can learn more about these and other good technical indicators for trading forex here.

What are best forex trading indicators?


Everyone seems to be putting their trust in different indicators, and as trading styles are different, also different combinations of indicators can work for different people. I will just mention a few good technical indicators that I myself have found invaluable. These are Bollinger Bands, Parabolic Sar, Moving Average (14), SMI (13, 25, 2, 5), CCI (14), ADX Wilder (14), TRIX (14), ASO (9,2). Sometimes it's also good to use different moving averages on the same chart such as MA 14 and MA 35 or MA 50 and MA 100. Other indicators I like to keep an eye on are RSI (14), MACD (12,26,9) , Ichimoku Kinko Hyo, Stoch (5, 3, 3) and Alligator. Set them all up in 3-5 different chart windows in Metatrader and see what you feel works for you the best. I have introduced some of those indicators in the technical indicators introduction page.

Fees in forex trading


There can be different fees when trading forex and they depend a lot on the forex broker you choose. Some brokers might charge some sort of fee for deposits and/or withdrawals as well as inactivity fee should you not trade for a while. But generally the main fee you always need to pay when trading is spread. Spread is the difference between Bid and Ask price. And the size of the spreads vary from forex broker to forex broker. In case in major pairs they shouldn't be more than a few pips. Additionally some brokers also charge a commission for each trade and the size of the commission depends on the size of the trade. For example one forex broker charges $3.50 per traded lot (100 000 units), which comes down to around 10 pips per trade extra.

There are also overnight swaps. Overnight forex swap is interest you need to pay if you choose to hold a buy position overnight. The swaps are generally small, but the exact size of them depends on a broker.

Trading forex with cryptocurrencies


While with most forex brokers you need to deposit either with a credit card, some e-wallet, or a bank transfer, there are also forex brokers out there which give you the option to deposit with cyrptocurrencies, be it Bitcoin, Litecoin, Etherum or any other cryptocurrency. This doesn't change the way you trade. But while normally you'd have an X amount of dollars or euros on your trading account which you can use to trade, with cryptocurrencies you'd have X amount of BTC that you're using to trade forex. Bitcoin forex brokers usually also let you trade cryptocurrencies.

Forex brokers and their differences


There are thousands of forex brokers to choose from and it might initially seems like an intimidating task of finding the broker you like. But actually finding the right broker might not be as complicated as it might look at first glance. When choosing a forex broker you first need to decide what is important for you and what kind of amount are you willing to risk in trading forex. It's the same as buying a new laptop - some people value power and big screen while others just want a light fast enough laptop with great battery. Same goes for finding the right forex broker - are you looking for ease of registration and low minimum deposits or are you looking for the absolute best with the best spreads and dedicated customer support? Are you looking for a broker with a great mobile trading platform or just want to make sure they support Metatrader 5. Are you looking for very low forex trading fees or just a broker who offers very timely withdrawals. Are you looking for some specific currency pairs that you want to trade? Are you looking for anonymity and somewhat uncommon deposit options such as Bitcoin? These are all important questions to ask yourself when deciding to join one or another forex broker.

Spreads & commissions


Different forex brokers may have different spreads and/or commissions. In general, the lower the spreads the better. Note that while some forex brokers charge you both spreads and commission, that doesn't necessarily make them more expensive brokers than others. Some brokers who advertise themselves as no-commission brokers just add their commission directly to spreads, which means that they might have higher spreads than the brokers who do charge a commission.

There are also brokers that offer you fixed spreads and other brokers that offer you floating spreads based on current market conditions. They both have their positive and negative sides.

Fixed spreads


In case of fixed spreads the spreads are always the same independent of the market condition. Although in case of extremely high volatility or low liquidity situation the fixed spreads can be changed to new fixed spread levels but that doesn't happen too often. In general though fixed spreads can be less risky and more convenient and beneficial for you as a trader, as you always know what to expect.

Floating spreads


Floating spreads are generally lower in case of normal market conditions, but brokers with floating spreads often also charge a commission. By the end of the day it's up to you what you prefer as neither of these spread types is much better than the other.

Leverage


Your decision on which forex broker to choose can also come down to the leverage they offer. Some brokers can offer you leverage of only 5:1 while most commonly leverage of anywhere from 50:1 to 500:1 is offered. And seldom you can even find brokers thst offer you leverage of up to 3000:1.

Deposit options


You might also care about what deposit options the forex broker has available. The most common deposit options are paypal, bank transfer, e-wallets, credit cards. But some brokers offer in addition to those regular depositing options also a chance to deposit and withdraw your money with cryptocurrencies such as Bitcoin or Litecoin. And some forex brokers are offering only anonymous cryptocurrency deposit options.

Withdrawals times


Withdrawal times can vary depending on the broker. Some brokers might take days while some might offer anywhere from immediate withdrawals to just a few hour delays. If the speed of withdrawals is important for you, keep that in mind when choosing the forex broker for you.

Supported forex platforms


Not all forex brokers offer you the chance to trade on your favorite trading platform, be it Metatrader 4, Metatrader 5, or anything else less popular. So if you want to trade forex on Metatrader 5, make sure your chosen broker supports that. Some brokers may also offer extensive extra charting tools that might be very beneficial for trading.

Best mobile apps for forex trading


If you're looking for a broker that would have a great easy-to-use yet full of features mobile app for trading forex as well, your choices just got way smaller. But there are forex brokers out there with decent apps for mobile trading.

Speed of registration and minimum deposits


Forex traders who are just learning to trade don't want to go through the hassle of spending time to register a forex trading account, then spending days to get your account verified, making a huge minimum deposit, just to discover the next day that maybe forex trading is not for them. In these cases you want to find an anonymous forex broker who has low minimum deposits and, one-click registration and cryptocurrency deposit option. This way you can be trading in a matter of minutes.

Regulated vs unregulated forex brokers


The problem with those one-click registration forex brokers is that they are not regulated. Which means that there is no regulatory organization monitoring them, and as such they might not be the most trustworthy providers. Then again, based on experience, if you do enough research there are enough unregulated brokers out there that are also trustworthy enough to use them for learning to trade and make some money.

Currency pairs offered


This is seldom the case, but some of you might be looking to trade some specific minor currency pair that is not offered by too many forex brokers. If that's the case with you, make sure you see the currency pair you're looking for in their list of traded pairs before registering an account with them.

Preferred forex broker


For me personally, considering I am not a professional trader, but still learning trading myself, my preferred forex broker is Evolve Markets. Here are my reasons for that:

- one click registration (you just need to submit your email)
- anonymous and fast Bitcoin and Litecoin deposit option
- deposits and withdrawals are free
- there is pretty much no minimum deposit
- minimum withdrawal is 0.005 BTC
- spreads are good, commission is $3.50 per lot
- in addition to forex you can also trade cryptocurrencies
- they allow scalping (buying or selling currencies, and then holding the position only for a very short time period, hoping to make just a small profit)
- leverage offered is 500:1 for forex trading or 50:1 in case of cryptocurrency trading
- accepts US customers
- supported trading platforms are Metatrader 4 (Mt4), Metatrader 5 (Mt5), Web trader, mobile forex trader


If you like them too, you can read my Evolve Markets review here or create an account here.

Basics of Forex money management


Great money managment skills are a must for successful forex trading. A trader who gets 80% of the trades right might go broke in no time if no proper forex money management plan is used. And a trader with a success rate of just 50% migth be making money just because he's following the right forex money management rules.

The most important tip to keep in mind - cut the losses short and let the profits run. Meaning don't let your losses get bigger, close the position and try again. And in case of prices going your way, don't close your positions too soon, try to make the most of them.

The main thing when it comes to proper forex money management - your risk-per-trade. The golden rules for money management, independent of whether you're gambling in a casino with free spins or trading forex, your risk per any one trade should not be higher than 2-3% of your trading account balance. Better yet, make it 1%. And to make sure you won't go over that, always set a stop loss limit and the maximum stop loss limit should be set according to your risk-per-trade.

With every trade the stop loss should also be set based on potential gains. If your potential gain in your opinion is 100 pips, it wouldn't make sense to set your stop loss at 120 pips even if your risk-per-trade would theoretically allow it. And this case if you continued doing that over the course of 10 trades, 5 of which you'd win and 5 of which you'd get wrong, you'd still end up losing money. Your risk-per-trade ratio should always be above 1. Meaning if your potential estimated gain is 100 pips, the maximum acceptable loss from that trade should be 30 pips or 80 pips the most.

And one thing to repeat just once more - ALWAYS USE STOP-LOSSES.

The biggest currency price swing in forex


In January 2015 EURCHF fell 41% in just one day. People were able to make and lose fortunes during that day. And many did. Mainly lost fortunes. Even a number of small brokers had to close down their shops. So keep in mind that while it's possible to make money with forex, it's also extremely easy to lose money and go broke.

Trade responsibly


Trading forex involves financial risks and should be done responsibly. Even professional traders are able to lose money in this money market. If you trade, only trade with money that you can afford to lose. If you trade, always use proper money management plan. If you trade, set yourself a sensible risk-per-trade ratio. If you want to trade and actually earn money trading forex, you need to practice a lot and learn something new about forex trading every day.




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