For a beginner trader, it is important to understand the basics of the forex market. These basics will help you understand the key aspects of the foreign exchange market and ultimately help you make informed decisions when trading currencies. In the article basics of investing in forex you can learn more about how forex works. Using a free demo account is also a useful way to familiarize yourself with the process of investing in the forex market.
Currency market
Forex, foreign exchange, or simply FX, is a market where companies, banks, individuals, and governments exchange currencies. It is the most actively traded market in the world, with an average of more than $6.6 trillion traded daily . Currency pairs in the forex market are often divided into major, minor, and exotic (or emerging).
The US dollar is considered the most popular currency in the world and accounts for about 60% of all central bank foreign exchange reserves. It is therefore not surprising that the US dollar is visible in many major currency pairs, which are responsible for 75% of all forex transactions. For beginners, it may be wise to invest in major currency pairs, as they are the most liquid and least volatile.
- Forex Leverage
When you trade forex using a CFD account, you are trading using leverage. This means that you only need to deposit a portion of the full value of the trade to open a position, which is called a margin trade. However, exposure to the market will be based on the full value of the position. It is important to understand that both profits and losses are amplified when trading with leverage. The maximum leverage that a beginner investor who wants to make money on forex can choose is usually 1:30. This means that when you invest a zloty physically, you invest as if it were PLN 30.
- Costs of Maintaining a Forex Position
When trading forex, you may incur holding costs that are credited to or deducted from your account, depending on the direction in which the transaction is being traded and the applicable holding rate. Holding costs are visible when you keep a position open after the end of each trading day (17:00 EST). The costs of maintaining a transaction depend on the direction of the transaction, but also on the interest rate of the currency in question. Brokers quote exact costs every day. Learn more about the cost of maintaining a CFD with the broker you have chosen.
4 Forex Trading Strategies for Beginners
Forex trading strategies are typically differentiated according to timeframes and market-specific variables. Strategies involve trading market movements lasting from a few minutes (called scalping) to several days (known as swing trading). As a beginner, you can test different forex strategies with a forex demo account and measure their relative effectiveness and usefulness. You can also try and choose your preferred technical indicators for your entry and exit points, as well as combine different aspects of several strategies. Some of the most popular forex strategies include:
- Scalping
Forex scalping is when traders place a lot of short-term trades and build profits based on small but often winning trades. This strategy may be most suitable for traders who can devote a large portion of their time to trading and are more focused on technical analysis.
- Day trading
Forex day trading is designed for traders who enter and close at least one trade per day, anticipating daily market movements and trying to avoid the cost of holding positions overnight. This trading method can be best for traders who are not comfortable with extremely fast trading methods in scalping but still prefer short-term trading methods.
- Swing trading
“Swing trading” on forex may be most suitable for traders who prefer a balance between fundamental and technical analysis. Positions are open for several days, and their purpose is to buy at the “lows” and sell at the “highs” or vice versa if you invest in the short term. With this method, less time is spent analyzing market trends than with other methods, and there are costs of holding positions overnight and a higher probability of a market gap.
- Position trading
Position trading involves holding positions for an extended period of time and ignoring short-term price fluctuations. A position trading strategy may be most suitable for traders who spend more time understanding market fundamentals and less time technical analysis or placing trades.
5 forex trading tips for beginners
It is essential to understand the markets of the currencies you are trading within a currency pair. Be aware of the major macroeconomic factors that can affect the markets you trade. For example, an unexpected increase in interest rates in one country may cause, at least temporarily, an increase in the exchange rate of this currency against others.
Sticking rigidly to your trading strategy will help you take the emotion out of your trades and determine when to enter and exit your position. Such an organized way of trading the markets can help you keep your trades consistent and keep your emotions at bay.
The forex game is all about evaluating after each trade to analyze what worked and what didn’t. However, the most important thing is the balance of many transactions from the strategy used. If you’re trading as a beginner, you’ll need time to understand that market and investor psychology are not easy things to master. You can test your trading strategies on the free XTB demo account, for example.
In your trading psychology, follow the classic mantra: “cut your losses and let your profits grow.” Don’t be tempted to take profits as soon as they arise or be afraid of making a loss. Follow your trading strategy and implement risk management methods to take emotion out of your trading.
Choose the best broker broker for you
A reliable and intuitive trading platform, professional customer service, and consistent, low spreads are some of the important factors that forex traders look out for. Once you understand the basics of the forex market, try to put your newfound knowledge into practice with a forex trading account. Test your investment strategies and consistently execute your investment plan. Once you have mastered the strategies using a demo account, including risk management, and are familiar with the forex platform, you can open a live account to trade forex for real.