Forex Trading: The Ultimate Beginner’s Guide
As far as the economy is concerned, there will always be good and bad times. On October 28, 2019, the New York Stock Exchange, recorded the best single-day performance since 1950 and the best year-till-date (YTD) performance of the year. For the day, the S&P 500, the most tracked market index, inched up by an average return of 0.54%.
That sterling performance rode on the back of the United States hinting that it would be keeping the peace with China. And, 78% of the 202 companies of the index component companies that had declared their financial results at that time, had posted solid earnings result to beat analysts’ expectations.
Conversely, with the S&P 500 shedding 0.51% on the average, the same stock market had earlier recorded its worst performance of the year on October 19. Following from this, it can be inferred that although the stock market has, overall, been doing impressively well over the years, its swinging yearly performance means that it has not always been able to deliver the 10% annual average return.
In fact, for some years, investors can expect to lose up to 2-3% of their purchasing power as a result of inflation. What is even serious is that the effects of the wild up and downswings of the market can be even more disastrous for beginner investors. Therefore, this category of investors might want to look for alternative financial markets for greater returns.
Yes, experts have invented many stock market-based products over the years to help investors diversify their risks. For example, there are equity-based mutual funds, exchange-traded funds (ETFs), and options designed.
to help them take advantage of both the ups and downs of the stock market. You could choose to devote time to understand all these, but, really, do you have enough time for that?
But there is Forex. The Forex market can help you take advantage of both the upward and downward movements of the economy. Besides, it has the highest potential, of all financial markets, to beat inflation. And as you read ahead, you will discover that the Forex market, in fact, can even be the ultimate solution to all your financial woes.
What is the Forex Market?
The Forex market, short for Foreign Exchange Market, is the largest financial market in the world. It is a global marketplace where currencies are exchanged for one another. In its entirety, it has over $5 trillion changing hands in it every day.
However, in comparison, the New York Stock Exchange (the NYSE), the largest stock market in the world, clears just $22.4 billion worth of transactions every day. Evidently, the Forex market is indeed huge!
And here is how it works. If you live in the United States, your currency in which all your transactions are conducted is the USD. However, if you are going to Europe, Germany specifically, you will have to change your currency for that being spent in your country of destination.
At airports, you would notice a currency exchange desk. There, you can give up your dollars for euros, the currency of Germany. In that case, you will be said to sell your dollars and buy euros. This transaction is essentially a Forex one as you are giving up your dollars to get some euros!
Exchange rates are not static. Depending on the interaction of a wild range of economic and geopolitical factors, currencies gain or lose in value against one another from time to time. At the time of your exchange, you could get more euros for your dollars. Other times, you could get less.
Then, after spending time in Berlin and you want to return home, you will have to go through a similar process to change your remaining euros to dollars at the airport. Depending on the same factors earlier mentioned, you could be getting more or fewer dollars for your remaining euros.
However, it is important to note that the Forex market is most famous for its speculative segment, even though the segment accounts for only 6% or approximately $400 billion of the overall market trades. Participants of this segment are known as the retail Forex traders, and they seek to largely profit from the intraday fluctuations in exchange rates.
In addition to its size, the Forex market is also known for its notorious trait of “never sleeping.” Closing only on weekends, it is open 24 hours a day and 5 days a week!
The Genesis of the Forex Market
Currency trading is almost as old as man. The Greeks and Egyptians are known to have transacted goods using silver and gold coins over 2,000 years ago. However, currencies were not freely traded for the first time until roughly 1500 years after in Amsterdam.
In 1900, to guarantee the value of its currency, the United States decided to fix it to a gold standard. Then World War II came and devastated the economies of Europe and Japan. Consequently, the members of the global economy saw the need to establish a common ground. So, through the Bretton Woods Accord, they decided to peg the values of their currencies to the value of the U.S dollar which had been pegged to the value of gold.
Soon, however, continuing with the gold system became impossible. The U.S. had been printing money at an alarming rate to finance its debt and a serious inflationary problem was setting in. To protect the value and integrity of their currencies by avoiding the impending inflationary crisis, the foreign governments attacked the peg, when, on August 15, 1971, President Richard Nixon moved the U.S dollar off the gold standard. Nixon’s step culminated in currencies eventually floating freely. And the resulting free-floating system gave them the ability to rise or fall in value-based purely on the interactions of the economic forces of demand and supply.
Consequently, the modern Forex market, with its abundant opportunities to profit, was birthed. Although it is still clear that the market can be erratic, its participants have been able to devise two effective ways — fundamental and technical analyses — to approach it. Fundamental analysis is the study of those factors that move it by influencing the supply and demand of currencies. These factors include inflation and interest rates, the balance of payments, government debt, and political stability, among others.
On the other hand, technical analysts seek to interpret the action of price on charts and predict its movement. As a result, they use tools such as candlestick chart patterns, technical indicators such as Simple Moving Average, Moving Average Convergence/Divergence (MACD), and Relative Strength Index.
Despite being a controversial practice, there are traders that combine both methods of analyzing the Forex market in the hope of making more informed trading decisions.
Understanding the Basic Lingo of the Forex Market
Like every other human endeavor, the Forex market has its terminologies. As a beginner trader, an understanding of this basic lingo will go a long way in helping you become successful in the long run.
- Currency Pairs
What is traded in the Forex market? Money in the form of currencies. In fact, there would not have been the Forex market if currencies were static against one another. It is the fluctuations in the values of currencies against one another that create opportunities to trade.
Every Forex transaction is quoted in pairs. That is, there must be two currencies before any Forex transaction can occur. When you buy a currency in anticipation of a rise in its value, you must simultaneously sell another. Based on this arrangement, every Forex transaction is made up of the base and quote currencies.
The base currency is the first currency in the pair. It represents the currency gaining or losing in strength against the other, the quote/counter currency. Consequently, it is the “basis” for every order — buy or sell — that you place. That is, for example, if the GBP is gaining against the USD, you buy the GBP/USD pair.
On the other hand, the quote currency is important because it is the currency in which the exchange rate is quoted. For example, when you say that the exchange rate of GBP/USD is 1.32471, you are saying it costs 1.32471 dollars to buy 1 GBP. Based on the volumes of transactions they record, currency pairs have been categorized into majors, minors, and exotics.
- Major Currency Pairs
The most liquid and widely traded in the world, the major currency pairs are those pairs that have the USD in them. They constitute the largest share of the Forex market, accounting for close to 85% of all its trades. They are;
Those currency pairs that do not contain the USD are known as the minors, crosses, or cross-currency pairs. The most frequently traded cross-currency pairs are derivatives of the three currencies, EUR, GBP, and JPY. Hence, there are EUR crosses, GBP crosses, and JPY crosses.
|EUR Crosses||GBP Crosses||JPY Crosses|
For clarification, the SEK and NOK symbols represent the Swedish Krona and Norwegian Krone respectively.
Finally, there are the exotic pairs. These currency pairs are made up of one major currency and the currency of an emerging economy such as Brazil, Mexico, Russia, India, Indonesia, or South Africa. The problem with exotic pairs is that because they are not widely traded, the transaction charges on them are high.
USD/BRL (USD/Brazilian Real)
USD/MXN (USD/Mexican Peso)
USD/SAR (USD/Saudi Arabia Riyal)
From those examples, you should have noticed that there is a convention by which currencies are written. The first two of the three letters represent the country while only the last stand for the currency itself.
The pip is the unit of measurement in the Forex market. It is the smallest amount by which the exchange rate of any currency pair can change. Since you will be measuring your profits and losses in it, the pip is a concept you must grasp.
This is how it works. Imagine you buy an item for $1.5000 (since in the Forex market, currencies are quoted up to 4 decimal places). The last number of the decimal place represents the pip, and, depending on the direction of your trade, you either make or lose money when the price moves.
When the price moves from 1.5000 to 1.5005, for instance, it will be said to move 5 pips. Except for Japanese pairs which are quoted only in two decimal places, every other exchange rate is carried to four decimal points.
- Bid and Ask Price
Forex brokers always have two prices for each currency pair. These are the bid and ask prices. The bid price represents the price at which the broker/market maker is willing to buy from traders; on the other hand, the broker/market maker seeks to sell at the asking price, also known as the offer price.
For example, in the EUR/USD quotes, 1.1051/1.1053, the bid price is 1.1051 while the ask price is 1.1053. What this means is that to sell 1 euro to the broker/market maker, you will need $1.1051 while to buy 1 euro from the broker/market maker, you will need $1.1053.
- Bid-Ask Spread
Forex brokers make money on each completed trade principally through the two ways: bid-ask spread/commission and market-making. When it is through the bid-ask spread, the broker profits by taking the difference between the bid price and the asking price. For example, in the earlier EUR/USD quote, 1.1051/1.1053, the difference between the bid price and the asking price is 2. This is the spread.
The major currency pairs, being the most traded, often have the lowest spreads. Exotic pairs have the largest. Then, the relationship between spread and commission is that brokers that charge commissions usually have lower spreads. Conversely, spreads are higher with brokers that do not operate a commission-based fee structure.
Market making is a controversial practice. This is so because Forex brokers who use it take the opposite end of their clients’ trades. That is, clients must lose before market-making Forex brokers can earn.
- Lot Size
Stock trading is straightforward: you like Amazon shares? You place an order for a thousand units of it. However, it is not as simple for Forex trading. In fact, when you trade in the Forex market, you are buying contracts, also known as lot sizes, of each country’s currency.
A lot size is simply the number of quote currency units you buy or sell. And there are four types to choose from. They are:
The standard and mini lot sizes, respectively, are made up of 100,000 units and 10,000 units of the quote currency. On the other hand, micro and nano account sizes consist of 1,000 and 100 units respectively. On a standard lot account, a move of 1 pip equals $10. For a mini lot, it is $1.00. For micro and nano accounts, it is 10 and 0.1 cents respectively.
So, how do you decide the lot size to trade? That decision will depend on your investment style, the size of your trading capital, and your expected return. Nevertheless, for beginners, the micro lot account type, because of its low risk, is best advised.
- Margin Trading
Forex trading has a low barrier to entry mainly because of margin. Margin is a provision that enables Forex market participants to deposit only small amounts when opening trading accounts with brokers. As a result, the margin is the minimum amount that a Forex trader must deposit with his broker.
A certain percentage of the deposited amount in your account is set aside as the initial margin requirement for each trade your place. The percentage size is a function of the currency pair being traded, the lot size, and the market price. Margin requirements can be as low as $50 and as high as $100,000 depending on the broker.
Margin and leverage are highly correlated. The latter is the ratio of the amount you are using on a transaction to the required deposited amount, the margin. The advantage of leverage is that it helps Forex traders to control large positions with small monetary requirements.
Different brokers offer different leverage ratios. However, many provide up to 1:1000.
Cons and Pros of Forex Trading
Forex trading has its pros and cons. While it is recommended for even traders of other markets to try out, some cautions are warranted based on the peculiarities of the Forex market. Hence, as a beginner trader, here are the benefits of Forex trading that you should watch out for.
- Low barriers to entry
Perhaps, the greatest benefit of the Forex market is its low barriers to entry. In fact, nowadays, you do not have to be rich to start participating in it. While a large trading capital will boost your returns, you can, however, start Forex trading with as low as $100.
Hence, do not be afraid to start trading Forex. You need far less in the capital that you probably think.
The Forex market is the most profitable financial market in the world. It is the only financial market from which you can easily profit irrespective of the direction of the economy of your country or that of the world at large.
You think the US economy is weakening against that of Europe? Buy the euro, sell the dollar. While you can also profit from a falling stock market through short, it must be noted that this process is never as straightforward as it is in the Forex market.
The Forex market offers more flexibility in terms of trading due to its long active hours. It is open 24 hours a day from Sunday afternoon to the following Friday evening. As a result, you can technically buy and sell any time of the day.
However, the same cannot be said for any other financial market. The stock market, for example, is closed at weekends and is only open for some specified hours during the weekdays.
- Less analysis
Analyses are essential irrespective of any financial market you decide to trade-in. In fact, the rule is that you must be an analyst first before you become a trader. However, financial markets have different analysis requirements.
Stock traders have a higher chance of suffering from analysis overload compared to their Forex counterparts. Over 2,000 companies are listed on the New York Stock Exchange (NYSE) alone. Add to these the thousands of mutual funds and ETFs, too, and you will agree it can be a hell lot of work.
Diversification decreases risk. While most financial planners often recommend only the triad of mutual funds, cash, and bonds, currencies, surprisingly, too, are one more viable vehicle for investment portfolio diversification.
So, when you engage in Forex, you can see it as a diversification tool. Whenever growth in the other instruments that make up your portfolio stalls, currencies will be there to pick up the slack.
Nevertheless, too, the following are the risks of Forex that you should work to guard against:
Scams are as prevalent in the Forex industry as opportunities are abundant in it. The alarming fact is that Forex scams come in different shapes and sizes, in different forms! Still, however, you can be aware of the crucial ones to easily avoid.
First, there are scam brokers. These are brokers with shady regulatory claims. They present a safe and well-regulated facade while, in fact, they are a fraud. Through intensive promotions and campaigns, they secure undiscerning folks to sign up for accounts with them.
Often, they are discovered by their unsuspecting victims after they have deposited their funds. Sometimes, those fraudulent brokers can take their well-orchestrated shady operations further by allowing their victims to trade. But when it now comes to withdrawing their gains, they show them who they are.
In addition to broker scams, there are also the scams of self-acclaimed Forex gurus and Forex courses. While there are genuine Forex teachers and highly effective Forex courses, you should still be careful in the considerations of your options.
- Leverage Risk
The Forex market is so lucrative because, among other things, its participants can leverage their trades. As explained earlier, margin trading is the most powerful tool that makes Forex easy to start and more probable to profit with.
With a small amount, you can start trading Forex. And with leverage, you can boost your gains. However, margin trading and leverage, the major reasons for the huge profit potential of Forex trading, paradoxically, is its greatest undoing.
Irresponsible use of leverage can result in substantial losses. In fact, it is not uncommon for reckless, highly leveraged Forex traders to have their accounts completely wiped out during highly volatile market moves. So, what’s the way out of this risk? Use leverage reasonably.
- Country Risk
The Forex market is highly prone to country risks. Most countries, especially the developing ones, indirectly peg the values of their currencies to the USD. Consequently, to maintain exchange rates, they need to have substantial foreign reserves denominated in it.
So, whenever there is devaluation, because of, for example, the balance of trade deficits, investors can catch a negative whiff about the country, resulting in massive selloffs of its currency. Considering this risk, you should, therefore, be involved only in countries whose currencies are stable and well-structured.
Tips to Succeed in the Forex Market
As risky as the Forex market is, there are some tips that, if well applied, can boost your chances of succeeding in it. Some are discussed here.
Know yourself and understand your needs.
“Know thyself” is a popular maxim. It has gained usefulness across diverse spheres of human endeavor. Interestingly, it finds application in Forex trading, too. In fact, any trader seeking to succeed in the Forex market must first abide by it.
Know thyself, dear Forex trader. What are your trading goals? Why do you want to trade Forex? To diversify your portfolio? To create an alternative stream of income. Or, as a desperate, unemployed individual? Perhaps, you are attracted to Forex trading because of its promise of financial freedom and location independence.
Also, what is your risk profile? That is, how much do you tolerate risk? Answering those questions is important in helping you formulate a sound trading strategy and style that will be peculiar to your needs.
Get Coached by Experts
Forex trading requires knowledge. There is so much to learn and the learning curve is very steep. As a beginner Forex trader, you must be committed to mastering the approaches to analyzing the market. These are fundamental and technical analyses. Also, you should learn risk and money management and the psychology of trading.
Diversit-e Smart Trading College helps to shorten the learning curve for beginner traders, making it less steep. Registration with us gives you the privilege to learn and be mentored by expert Forex traders who have been in the business for years. Besides, we will protect you from falling victim to the schemes of scam brokers via our partnership with an FSCA-registered and regulated broker.
Evolve a comprehensive trading plan
Having identified your trading needs and goals, you should then use the knowledge gained about yourself to develop a comprehensive trading plan. Often it is said that he who fails to plan plans to fail. In Forex trading, that is no less true.
The plan should contain your goals and expectations and should highlight your strategy for approaching the market. Will you be a fundamental-based trader? Do you want to be basing your trading decisions mainly on technical analysis, or a combination of both?
Importantly, how do you intend to be managing risks? For every pip you want to gain, how many are you willing to risk?
Use a safe and secure Broker
Newbie, beware. The greatest undoing of most beginner traders (and even a few established ones) is their brokers. That is why trustworthiness is such an important factor you must consider when you want to choose a broker. And the good news is you can find out the credibility of any broker through diligent research.
However, you do not have to go through the tiresome process yourself because we have done the selection for you. We have partnered with a broker that provides our clients with top-tier security systems and real state-of-the-art trading terminals and platforms, effective Forex trading signals, and much more!
In fact, our preferred broker has been awarded the prestigious NASDAQ “Best Financial Broker in Africa” for 3 consecutive years and nominated as a finalist in the “National Business 2019” awards. These awards recognize the important social and environmental contributions made by organizations through the excellence of service, commitment to their clients, ethical behavior, and environmental sustainability.
Our preferred broker is registered with the Financial Sector Conduct Authority (FSCA), the only regulatory body for financial institutions in South Africa. The agency regulates financial institutions such as banks, retirement funds, insurers, administrators, and market infrastructures.
Initially established in 1991 as the Financial Services Board (FSB), the FSCA is a respected authority in Africa, with the primary aim of ensuring clients’ safety. Due to its strict guidelines, only 81 brokers have been able to obtain its prestigious license. One of its requirements for licensure is that a broker keeps its clients’ deposits in segregated accounts, that is, separately from its operational funds. Now imagine: our preferred broker is fully licensed by it!
Therefore, overall, the broker you use must be safe. A safe broker, for instance, will allow you to oversee your deposits and withdrawals. It is your hard-earned money and profits after all! Hence, no broker should rob you of them. Finally, you must ensure that the broker you settle for uses an award-winning and reliable Real Trading Terminal and Platform.
Diversit-e Smart Trade College’s Real Trading Terminal and Platform is the world’s most popular of its kind. With 30 technical indicators and nine-time frames, it has a highly user-friendly interface supporting an environment of powerful analytical and trading tools. The Real Trading Terminal and Platform has a dynamic security system and pioneered the automated trading arrangement known as Expert Advisors (EA). What is more: the Real Trading Terminal and Platform are available in mobile form, thereby enabling our clients to monitor the market on the go.
There you have it, the Ultimate Guide to Forex Trading for beginners. At this stage of your trading career, those are the essential details you need to know. Your aim should be internalizing them so that you will become better for it.
DISCLAIMER & NOTICE
The information is for educational purposes only and not financial- and or investment advice. Trading can be very risky. Never trade with money you cannot afford to lose. Always seek the advice of our preferred regulated FSCA Broker and or a regulated FSCA Financial Advisor.