Forex Trading Guide « PlanetForex.com
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Forex trading entails the exchange of currencies. Alternatively, it can be defined as the act of buying and selling currencies. This is an apt definition, considering what goes on in a Forex market. Online Forex trading is not an exclusive reserve of individuals alone. That’s a misconception. Corporations, banks, individual traders, and institutional investors are some of the active participants in the Forex market.
It is an open market for individuals and organizations that are passionate about turning their interest in Forex into a money-making venture. To start with, it is imperative that you have a comprehensive understanding of what a Forex market it, why you should consider trading Forex, as well as other vital pieces of information that will be invaluable to your success as a Forex trader.
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Experts consider the Forex market as the largest financial market in the world. The daily transaction in the market is estimated to be in the region of $5 trillion. That’s some daily transactions, you will agree with me.
Investopedia, an online source of information about investment, defines the Forex market as “the market in which participants can buy, sell, exchange, and speculate on currencies.” Need I say more? This definition captures the essence of the Forex market. The major components of this market are investment management firms, commercial companies, hedge funds, banks, investors, central banks, and retail forex brokers.
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Why should I start with Forex Trading today?
If you are apprehensive of trading Forex, your apprehension is justified. The avalanche of businesses that promises to be rewarding but that is not may fuel your skepticism about Forex trading. However, here are some reasons why you should include Forex trading in your to-do investment list:
Volatility is one of the basic principles behind online Forex trading. This volatility defines the fluctuation in the value of a currency pair, a currency, or the entire market. In essence, the price of a currency pair may change suddenly, giving traders a golden opportunity to make some profits from their investments
Your ability to make as much profit as you can is highly dependent on the volatility level of the market. The more volatile it is, the higher your chances to make it big, and vice versa.
It is legitimate/regulated
Forex trading is not an investment opportunity that gives room to traders to trade as they want. Instead, the market is controlled by several authorized regulatory bodies whose mission is to ensure that the market is not left at the mercy of some individuals.
Its regulation by more than one regulatory body is proof of the safety of investment promised by the market. Your investment is safe as a trader.
Abundant opportunities to grow
Starting as a new trader may be a bit challenging. Once you overcome the initial challenges, doors of ample opportunities to grow in the market will be opened to you. With persistence and dedication to success, you may gradually grow until you become an account manager. Once you hit that target, several avenues to make more profit will also be opened. In addition to the profit you get from your investment, you will receive a substantial commission from the accounts you manage.
Social networking opportunities
With each passing day, the popularity and usefulness of social networks become increasingly pronounced. Social networking offers people a wide range of opportunities that can be leveraged for business connections.
The Forex market is arguably the largest trading market with its plethora of trading networks and forums. When you participate in such forums, you have an excellent opportunity to interact with newbie and veteran investors, contributors, experts, critics, and a host of others whose years of experience and training may rub off on you.
Maximize the opportunity offered by these forums to become a better trader by asking questions and participating in discussions regularly. The knowledge you will acquire from such discussion will make it a worthwhile experience. More so, you wouldn’t want to miss out on the opportunity to grow your trading knowledge, will you?
You can start forex trading with a demo account
If you are scared of losing your investment, perhaps, due to your zero knowledge of Forex trading, that isn’t enough to make you lose out on an opportunity to improve your financial status.
Most beginners don’t head straight into trading with real money. No, there is a better way than that. The platform offers a demo account where you can gradually but steadily learn the ropes of the game. You can start with the demo account and increase your winning chances when you eventually decide to take the bull by the horns and start trading with real money.
There is an inexhaustible list of reasons why you should include online Forex trading in your investment plans. However, the few that are discussed in this article should be sufficient to move you to action.
Understanding Currency Pairs (Base Currency, Quote Currency, Bid/Ask)
In Forex trading, two currencies are traded together as a pair. The relationship between the two currencies is commonly referred to as a currency pair. The relationship is defined as the relative value of the coin against the relative value of the other currency.
When writing a currency pair, the abbreviations of the two currencies are written, followed by the values of these currencies.
The currency that is listed first is otherwise known as the base currency while the other currency that forms a pair with it is regarded as the quote currency. Let’s take a case study:
If a pair of money is written as GBP/USD 1.3, this means that the GBP (British pound) is the base currency and £1 is worth $1.3 where USD (US Dollar) is the counter or quote currency.
Other currencies that are mostly traded in pairs are:
- EUR/USD (Euro-US Dollar)
- GBP/USD (British Pounds – US Dollar)
- USD/CAD (US Dollar – Canadian Dollar)
- USD/CHF (US Dollar – Swiss Franc)
- USD/JPY (US Dollar – Japanese Yen)
- AUS/USD (Australian Dollar – US Dollar)
You may be wondering while these are the most traded pairs of currencies. Well, there are some criteria for pairing currencies. The financial power of the countries using the currencies and the volume of the trade such countries conduct globally form the basis for the pairing. The goal is to ensure that traders trade in currencies with high potential for profit without tying their investment down to some currencies from countries with low financial power.
A fundamental concept that will be crucial to your trading success is bid/ask. In Forex trading, a quotation consists of two prices: the asking price and the bid price. The bid price refers to the price that a dealer is willing to pay for a currency in the Forex market. The asking price, on the other hand, refers to how much the dealer is ready to sell a currency pair.
The difference between the two prices is referred to as “spread.” This is the seller’s profit from the transaction. For instance, if a dealer is willing to buy EUR 1 for USD 1.3 and sells the same EUR 1 for $1.4, the bid price is the $1.3 while the $1.4 represents the ask price.
The difference between the two, $1.4-$1.3 = $0.1 is the spread, the dealers’ profit. This explains how forex traders earn a profit from each transaction they make.
Understanding a trade
Understanding a trade is an essential key for successful Forex trading. For a start, unlike the stock market with the same closing and opening time, the market offers different trading times or sessions. These sessions are:
- Tokyo: The Tokyo session represents the Asian trading session.
- Sidney: Sidney represents the Australian trading session. Currencies traded during this session are the NZD and the AUD.
- London: The EUR, GBP, and CHF are traded in the European trading session.
- New York: This session is for trading CAD and USD in what is known as the American trading session.
These are the four trading sessions in online Forex trading. What’s the significance of these sessions to a trader?
Before you choose a currency pair to trade, it is crucial that you understand that currencies perform better when they are traded during their trading session. For instance, the AUD/USD pair will perform creditably well during the New York (USD) and the Australian (AUD) sessions. If you want to trade a currency pair outside their trading session, you may not get the desired result.
Note, however, that the most active and best trading session is the overlap between the American and the European trading session when you can trade several pairs that are supported by these sessions.
Most traders jump into trading without doing due diligence about the investment opportunity. Some mistook Forex trading for a get-rich-quick scheme and are disappointed when things don’t pan out according to their high expectations. The result? Your guess is as good as mine. Poor performance in the business, and loss of investment. That’s pathetic.
Before you trade, look for currencies that have higher chances of appreciating against other currencies. If you feel that the USD may drop in value in comparison to the Euro, you may purchase more of the EUR/USD and wait patiently for the pair to rise in value. On the other hand, if you speculated that it is going to drop in value compared with the Euro, don’t purchase much of the EUR/USD pair. A forex broker will assist you with this.
A Forex broker functions as an intermediary between you as a trader and the network of banks that engage in interbank trading, known as the interbank system. Most of these brokers compare prices from multiple banks to enable them to offer you the best prices that will assist you in making more profit.
While at it, wait for the right time to purchase such currencies and hold on for a time before you sell it off for a profit. If you follow the market trend religiously, you will have a clue of the best time to dispose of your currencies. Your chances of making a profit from the sale are higher than when you make a blind purchase and sell them off in a hurry.
Forex trading offers an excellent opportunity to make money. However, your success depends on patience and a good knowledge of the market.
With the right training, patience, and understanding, you will make a good profit from your investment.
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Beginners Tip: Best Currency Pairs to trade with (Major, Minor)
Forex traders won’t run out of currency pairs to trade. This is due to the plethora of currency pairs that are traded on Forex platforms. Previously, I listed eight different pairs you can trade in. That’s just a tip of the iceberg because there are dozens more.
There are two divisions of currency pairs. These are:
Major pairs are currency pairs that are traded more than the other class. They are the recommended trading pairs for beginner traders because they are the best and most liquid trading pairs in the Forex trading industry.
The best currency pairs in this category are:
If you are a newbie trader, concentrate on trading these pairs. They are the best for you and offer fantastic trading experience and rewards.
Some set of currency pairs are regarded as minor pairs. Otherwise known as exotics, the minor Forex pairs are currency below the major currencies in terms of the trading volume.
In this category are currencies such as the Turkish TRY, the Norwegian NOK, the Swedish SEK, Singapore’s SGD, and a host of other currencies.
Understanding the Forex Trading Order types
Managing your trades is a great way to trade like a pro. The term “order” in this context, is a reference to the manner you exit or enter a trade. Entering and exiting a trade at the right time is a powerful tool that will enhance your ability to trade with better potential for making a considerable profit.
There are several Forex orders. The different Forex orders types you need to succeed as a Forex trader are discussed below:
This order is one of the most basic order types and is usually the first order you will come across as a trader. The order implies that you want to enter the market at the current price right now. It is also the most commonly used order type for day traders and scalpers who use real-time analyses to trade currencies with the primary goal of making a small profit through each trade.
The entry order is unarguably the most frequent order type after the market orders. There are two types of entry orders. These are:
- Stop entry order: You place this order to enable you to sell below the existing market at a specific price to buy above the current market at a certain rate. For instance, if EUR/USD currently trades at 1.4000 with the potential to head upward until it hits 1.4500, you may set this order to buy when the price hits 1.4500, although the current price is 1.4000.
- Stop loss order: Sometimes, the price may drop beyond your expectation. The sudden price drop may lead to a loss if you don’t manage it without delay. With this type of order, you can prevent yourself from losing more than necessary by activating the stop-loss order. It is an exit order that serves as a defensive mechanism against market collapse. It is a great strategy that allows you to trade another day without losing all your investment in a single swoop.
Limit entry order
This order enables you to enter a trade if the market is favorable to you. With the order, you can sell above the current market at a specific price of your choice or buy below the prevailing market at a price.
For instance, if the market is currently trading higher, you may decide not to enter the market right now until it drops a bit. You can set this order and wait until the price drops to the specific price you are comfortable with. Once the price reaches the target price, the order is activated.
Placing an order is pretty simple. The guideline below shows how to place an order effortlessly:
- Click the “Order” tab after opening a deal ticket.
- Choose Buy/Sell.
- Specify your preferred price level which may be below or above the current market price.
- Place limits or stops
- Submit the order.
Although the guidelines above should be cross-platform, it is imperative that you understand your trading platform before trading. The knowledge will assist you to minimize potential errors while managing or executing a trade.
Understanding Forex Trading Charts (Candle, Bar, Line)
Forex charts are some of the most critical tools for Forex traders who are passionate about using technical analysis of the market to determine the best place to invest. The technical analysis is a reference to the review of technical indicators and previous market prices to enable you to predict what the market will be.
Line, bar, and candle are some of the tools that are designed for reading Forex charts. Although they have different methods of operation, they serve a common goal: read the market and make trading predictions.
The candlestick charts are regarded as the most commonly used chart type. It is a suitable display method for showing users the prices on a chart. Therefore, the tool can be used for price prediction.
A candlestick has a body and a wick or tail. The body shows open and close prices at a time to enable traders to understand the difference between the two. The open price represents the first transaction price for that specific time while the close price represents the last transaction price for the same period.
A candlestick has a colored body which is usually green and red or white and black, depending on the platform.
A green or white candle is an indication that the within that time, the close price performed better than the close price. Thus, the open price is below the close price. For the period in question, the body has a closed top while the bottom is open.
On the other hand, if the body is red or black, the close price drops below the open price. Thus, the open price is at the top of the body while the bottom represents the closing price.
Bar charts are one of the essential types of trading charts. They provide tons of information that can assist a trader in making informed trading decisions.
A bar chart has a vertical line that represents the opening foot facing right while the closing foot faces right.
A bar represents different variables such as high (H), open (O), close (C), or low (L) within a specific period or interval. The trader will personally set the interval he or she wants to view on the chart.
For instance, if a trader set a 5-minute bar chart, every five minutes, a new bar with the high, open, close, and low prices will be formed. The chart can also display some vital information such as the direction of the price, downward or upward, and the price movement during the specific bar.
The open is represented by the bottom of the horizontal bar and is the first price that is traded during that specific bar. On the other hand, the highest price traded at the same time is represented by the vertical bar’s top. The low and close represent the smallest and last prices sold during the period in question respectively.
While candlesticks and bar charts provide useful information about different parts of trading, a line chart offers information about the closing price only. However, you can still specify a time frame such as a 10-minute interval. The line will show the closing price for the interval. A single continuous line is used to connect each closing price to the next. This gives you a clue into the price history during the specified interval.
10 FAQ on Forex Trading
As a newbie in the trading market, you probably need honest and useful answers to some questions that may have a massive impact on your trading. Consider the following questions and their answers:
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