Guide to the Basics and Secrets of Forex Trading
Even though Forex offers excellent profit opportunities, it’s not easy to deal with and isn’t for anyone impatient. A Forex trader must have enough knowledge about trading in the industry and how to trade under various circumstances in the market. In line with this, this guide will help new traders learn and understand all essential details about Forex and trading.
The Basics of Forex
Dealing with Forex trading can be overwhelming. That’s why you should work with brokers that give you all the necessary tools to learn. Also, the platform you use should offer high-speed trading and built-in tools for chart analysis.
In essence, Forex is just about entering and exiting trades. But in reality, there are many aspects you’ll need to understand first before the trades become favorable. Find more information about keeping an open position in trading on LiteForex.
Next up, here are some basic terminologies you need to understand.
Forex market is an international currency market where you can exchange various currencies’ rates. In Forex, these currencies are referred to as “currency pairs.” Currency pairs are official currencies from two countries that are paired for trading on the foreign exchange market.
Although almost all currencies worldwide can be exchanged, some are traded more often than others. The most-traded currencies include the following, in no particular order:
US Dollars (USD)
British Pound (GBP)
Japanese Yen (JPY)
Chinese Yuan (CNY)
Canadian Dollar (CAD)
Swiss Franc (CHF)
Australian Dollar (AUD)
The most traded and major pairs almost always revolve around these currencies. You must also know how to read these currency pairs.
For example, you may encounter USD/JPY. The first currency, USD, is called the base currency, while the second one, JPY, is the quote currency. This currency pair indicates how much JPY you need to buy one unit of USD.
Lots and Pips
All currencies are traded in terms of lots. There are three general sizes of lots:
Micro-lot = 1,000 units of a currency
Mini lot = 10,000 units
Standard lot = 100,000 units
Currencies are traded with exchange rates and quoted in decimal places. These decimal places include pips. A pip is a standard unit and represents the smallest amount a currency quote can change. It’s the fourth unit in the decimal place and is a basic unit of measurement in Forex trading.
For example, if EUR/USD is equal to 1.2556, this means that one euro can be exchanged for US$1.2556. If there’s a sudden pip increase, from 1.2556 to 1.2557, it will significantly affect traders' potential losses and profits.
In Forex trading, the use of leverage is critical. Leverage is when you use borrowed money to increase your trading positions beyond what your current balance can afford. Leverage can essentially be considered a loan, so it has its pros and cons. Before using leverage, you need to be sure about your financial plan and how you can mitigate the risks that come with it.
Trading positions are amounts of currency a trader owns. They are exposed to the price movements of the currency relative to other currencies in the market. A position can also be long or short.
When you buy a currency, keep it, and wait for its value to increase before selling it, you’re taking a long position. But when you want to buy a quote currency with your base currency and wait for the base price to drop so it’ll be cheaper to buy back, you’re taking a short position.
Have a Successful Start in Forex Trading
For a higher chance of a successful trading start, take note of these tips:
Take it slow. Don’t be aggressive and start opening many positions at the same time. Focus first on a few positions and weigh them carefully.
Don’t risk all of your money. Although it may seem tempting, it’s best to risk only 1/6 of your free capital, especially when you’re still not confident with trading.
Maintain a plan. Develop a plan and stick to it. These plans can help in keeping everything steady and on the right track.
Trade on trading hours. The Forex market might be open all the time, but it’s not always at its peak. Certain hours are best for trading and occur when many traders are active.
Choose your trading platform wisely. There are many platforms out there, but they don’t work the same. Select one that has a good interface and good service. But above all, choose one that’s reliable and trustworthy.
Don’t be too skeptical. Many beginners immediately stop and close their trading transactions before they even reach their full profit potential. Some trends last longer, so don’t be afraid to keep your positions when there’s still a great chance for more profit.
Avoid holding on to losing positions. Having unsuccessful positions is inevitable. Remember to close them early to avoid further risks and losses.
There are many more things you need to learn about Forex trading. But once you’ve learned and understood these basics, you can start trading slowly while learning more about it through further studies and experiences. There aren’t any magical secrets when it comes to trading, they’re more like valuable lessons and tips traders gain when trading.
This article does not necessarily reflect the opinions of the editors or the management of EconoTimes