How to Trade Forex.
Many want to make money in the forex market, but few who begin to trade forex want to do the prep work needed to become successful traders. While trading forex has become easier now than ever before because you can trade online via the internet, most novice traders still lose money.
A combination of factors that include unfamiliarity with the market, insufficient trading capital, not trading according to a plan and failing to practice sound money management techniques to preserve trading capital contribute to the loss. But, once these inhibitory factors are overcome, just about anyone has a chance at becoming a successful forex trader.
Common Forex Market Terms.
The forex market is a world unto itself and has some substantial differences to other financial markets, such as the stock or commodity markets. As a case in point, forex traders have even developed their own set of jargon terms unique to the forex market.
If you’re serious about learning how to trade forex, you should start to get a handle on forex terminology by reviewing the definitions for common terms used in the forex market below.
Currency pair: Two currencies in which the first, known as the base currency, is quoted in terms of the second, known as the counter currency. An example of a currency pair is EUR/USD that represents the EU’s euro quoted versus the U.S. dollar. CFD : A Contract for Difference is a tool disallowed in the U.S. but offered in certain overseas markets. In essence, if you used a CFD to buy currency for $10 and sold the position for $11, you would get $1. If you sold short on that position, you would pay $1. This method of investing helps you invest in futures without owning the product. Commodity currencies : Currencies from countries where the economy relies heavily on commodity exports. Examples include: New Zealand, Russia, Canada, Australia, etc. Derivative : A financial tool that derives its value from another asset, like a currency. Forex derivatives are popular because they can combine the values of two or more currencies and trade shares based on that value. Position: The net amount of a currency pair that provides exposure to movements in that pair’s exchange rate. Forex traders take positions to speculate on exchange rate movements. Long/short: A position in which one has net purchased/sold the base currency in a currency pair. Long positions are taken when you think the pair’s exchange rate will rise, while short positions are taken when you think the exchange rate will fall. Pip: An acronym for “point in percentage” that represents the smallest change in a currency pair’s exchange rate. The size of a pip for most currency pairs is 0.0001. Leverage/margin: Leverage is the size of a trading position you can control with a given amount of “margin” or money placed on deposit in your trading account to be held by your broker as collateral against trading losses. The maximum leverage ratio varies considerably among online brokers — ranging from 20:1 to 1,000:1 or more — and can depend on what jurisdiction you reside in. Exchange rate: The amount of the counter currency required in exchange for one unit of the base currency in a foreign exchange transaction. For example, if the EUR/USD exchange rate is 1.1700, it would cost $1.17 to buy 1 euro. Risk/reward ratio: An estimated measure of the profit potential per amount risked. For example, a trader might use a 1:3 risk/reward ratio meaning that they are willing to risk $1 to make $3. Broker: An intermediary firm that executes transactions in financial markets on your behalf. Retail forex traders open trading accounts with online brokers to trade currency pairs on margin. Order: An instruction given to your broker to execute a transaction for you. You might place an order to buy 100,000 euros versus the U.S. dollar at the prevailing market via your online broker’s trading platform.
5 Easy Steps to Trade Forex.
You can take the following steps to prepare yourself to start trading forex:
Connect a device to the internet.
To trade forex, you’ll need access to a reliable Internet connection with minimal service interruptions to trade through an online broker. You’ll also need to obtain a smartphone, tablet or computer to run a trading platform on. If your internet drops while you’re trading, that can result in undesirable losses if the market moves against you.
You can probably open an account with an online forex broker no matter where you live. Just look for one that meets your requirements as a trader and will accept you as a client. At a minimum, the broker you choose should keep your money segregated from its own and operate in a well-regulated jurisdiction under the oversight of a reputable regulator, such as the UK’s Financial Conduct Authority (FCA) or the U.S. Commodity Futures Trading Commission (CFTC).
After you’ve decided on a broker, you can deposit funds into a trading account. Most online forex brokers accept a number of ways to fund an account, including bank wire transfers, debit card payments or transfers from electronic payment providers like Skrill or PayPal.
You will need to download or get access to an online forex trading platform supported by your broker. Most forex brokers either offer a proprietary trading platform or support a popular 3rd-party platform like MetaTrader4 and 5 (MT4/5) from MetaQuotes.com or NinjaTrader.
After completing all of the previous steps, you now have a funded forex account and are ready to trade. You can also usually open a demo account funded with virtual money to test out the broker’s forex platforms and services before going live. Demo accounts are also beneficial for testing trading strategies and to practice trading without risking any funds.
Forex Trading Example.
The most actively traded currency pair in the forex market is EUR/USD, which consists of the EU’s euro quoted with the U.S. dollar. If you thought the EUR/USD exchange rate was going to rise from its current 1.1700 level, then you might purchase €100,000 against the dollar today at that rate. If the EUR/USD rate then rose to 1.2000, you could use this calculation to compute your trading profit:
€100,000 x (1.2000-1.1700) = $3,000.
To then convert that amount of U.S. dollar profit into euros at the current 1.2000 exchange rate, you would use this calculation:
$3,000 ÷ 1.2000 = €2,500.
Alternatively, if the EUR/USD exchange rate instead fell to 1.1400, then your trading loss would be:
€100,000 x (1.1700-1.1400) = -$3,000.
That loss converted into euros at the prevailing 1.1400 exchange rate would be:
-$3,000 ÷ 1.1400 = -€2,631.58.
Best Online Forex Brokers.
Your local retail forex regulatory environment will often determine whether international online brokers will accept clients from your country. Check with a broker directly to find out whether they will accept you as a client and make sure they provide all the services and tools you require. Also, make sure the broker is well regulated in their local jurisdiction by a major regulatory authority and segregates clients’ money from its own.
Once you have narrowed your selection down to a few suitable brokers, look over their online reviews and see if they have a relatively satisfied customer base. If you don’t recognize the firm, then see how they compare to a well-known and regulated online broker by checking out this FOREX.com Review. Also, consider opening a demo account to try out its trading platform and services before you fund a live account.
To begin finding a suitable broker, some of the best and most reputable online forex brokers are listed in the table below that all offer excellent services to retail forex traders.
Billing itself as the world’s 1st eco-friendly broker, CedarFX makes it easy to trade and give back to the planet. You can choose a 0% Commission Account or an Eco Account — or open multiple accounts to meet all your needs.
CedarFX offers access to a wide range of tradable securities, including stocks, futures, major and exotic forex pairs, cryptocurrencies and more. Though CedarFX could introduce a few additional educational resources, the broker remains a unique option for traders invested in giving back.
Forex investors Investors interested in 0% commission or eco conscious trading Investors looking for 24/7 customer service.
Allows users to offset their carbon footprint 0% commission investing Offers demo account access 24/7 customer service available through live chat Eco Account Option (10 trees planted for each lot traded) Fast deposits/withdrawls with Bitcoin.
Limited number of educational resources for new investors.
IG is a comprehensive forex broker that offers full access to the currency market and support for over 80 currency pairs. The broker only offers forex trading to its U.S.-based customers, the brokerage does it spectacularly well. Novice traders will love IG’s intuitive mobile and desktop platforms, while advanced traders will revel in the platform’s selection of indicators and charting tools. Though IG could work on its customer service and fees, the broker is an asset to new forex traders and those who prefer a more streamlined interface.
New forex traders who are still learning the ropes Traders who prefer a simple, clean interface Forex traders who trade primarily on a tablet.
Easy-to-navigate platform is easy for beginners to master Mobile and tablet platforms offer full functionality of the desktop version Margin rates are easy to understand and affordable Access to over 80 currency pairs.
U.S. traders can currently only trade forex Customer service options are lacking No 2-factor authentication on mobile.
FOREX.com is a one-stop shop for forex traders. With a massive range of tradable currencies, low account minimums and an impressive trading platform, FOREX.com is an excellent choice for brokers searching for a home base for their currency trading. New traders and seasoned veterans alike will love FOREX.com’s extensive education and research center that provides free, informative forex trading courses at multiple skill levels. While FOREX.com is impressive, remember that it isn’t a standard broker.
MetaTrader 4 users Beginner forex traders Active forex traders.
Impressive, easy-to-navigate platform Wide range of education and research tools Access to over 80 currencies to buy and sell Leverage available up to 50:1.
Cannot buy and sell other securities (like stocks and bonds)
Forex Trading Strategy Types.
Now that you have a live trading account at a reputable online broker, you should plan on developing a trading strategy to boost your chances of success in the market. One or more strategies could suit your personality and level of market expertise, and the general strategy types discussed below are in common use among retail forex traders.
A very active strategy in which the scalper aims to profit from very short-term market moves. They enter and exit the market quickly to capture a few pips of profit at a time.
A strategy in which positions are entered and exited throughout the day but closed out by the end of the single trading session. Day traders generally avoid taking the extra risk involved in holding positions overnight.
A “buy low, sell high” type of trading strategy, swing or momentum trading involves getting into and out of the market usually based on signals from momentum technical indicators like the RSI. Swing traders often take overnight positions.
A longer-term trading strategy that involves estimating intrinsic value and looking for established directional movements known as trends. These traders establish and hold positions to profit from the trend until it ends.
Forex Market Analysis.
Experienced traders have typically learned how to analyze the forex market to make better trading decisions. They generally use one or both of the well-established market analysis methods described below.
Technical analysis is a form of detailed market examination used by traders to forecast future market moves and identify trading opportunities based on patterns seen on charts and computed indicators. Technical analysts generally think that past trading activity can indicate an asset’s future value. This form of analysis tends to be more useful for predicting short-term market moves.
A 15-minute candlestick chart of the exchange rate of the EUR/USD currency pair showing the 10-period moving average and 14-period relative strength index (RSI) indicators that can help technical traders identify opportunities. Source: MetaTrader .
Fundamental analysis is a method of valuing an asset by attempting to determine its intrinsic value. Fundamental analysts often examine relevant economic and financial factors, as well as other qualitative and quantitative information. Fundamental forex traders might be especially interested in economic calendars, such as the one shown below.
An economic calendar showing high impact events for the forex market occurring during the week of October 4-10, 2020. The calendar shows forecasts and previous results whenever possible and actual results for events that have already occurred. Source: ForexFactory.
Forex Trading Tutorial.
We’ve got top forex trader Ezekiel Chew, who makes 6 figures a trade and trains the bank traders behind the scenes, to share with us how to trade forex and what exactly it takes to be successful in forex trading.
Ezekiel believes there are three key aspects to successful trading:
1. You’ve first got to learn how to read the charts. And one of the best ways to learn this is through price action; the technique that the majority of professional traders use. Once you have learned how to read the charts, you will know why the market is going up, down or sideways and then will you recognize which strategy to put into play in that direction.
2. Trade with a proven forex trading strategy or a combination of strategies. A proven strategy is one that is comprehensively back-tested and has been shown to work consistently. It is only in this way that you will have the confidence to stick with it during the lull periods.
3. Have a solid trading system. One that is defined not only by the technical aspects but also the business behind trading; a proper structured trade that is in line with the overall trading plan that has been proven to work. In contrast to what most new traders think, trading is not just about strategies, but the system itself also contributes greatly to becoming a successful trader.
Most of all, Ezekiel has a famous trading mantra – “Win big, lose small” that he and his students abide by.
“Forex trading is all about having an edge in the game and knowing the mathematical probability behind each trade”. By winning big and losing small, a single win can potentially cover 3 or more losses. If you apply this methodology in the long run, you will be a winning trader.
To learn more about Ezekiel’s method of trading backed by mathematical probability, you can check out his one core program.
How to Develop a Forex Trade Plan.
Trading without a plan is like sailing without a compass — if you don’t know where you’re going, you’ll be lost battling the waves. So, aim to put together a forex trading plan that incorporates a trading strategy you have tested and found generally successful and easy to stick to.
A very important part of your trade plan should consist of your money management and risk assessment techniques. Appropriately sizing your trades in relation to the amount of money in your trading account can favorably affect your trading performance and help manage your risk, as can choosing trades with attractive risk/reward ratios.
Taking necessary losses promptly and bouncing back emotionally from trading losses are other aspects of trading you’ll need to master. Remember that a trader’s biggest enemies are hope and fear: Poor traders tend to fear getting out of a trade at a loss and hope the trade will return to profitability. They should instead be ignoring such hopes and reacting to the far more rational fear of having to take an even greater loss if they don’t take action.
To prevent a losing trade from exceeding your predetermined threshold of pain, either a stop-loss order should be in place or you should plan to cut your losses at the market if you’re watching it closely.
While developing a trading plan might take some effort, you can instead choose to join a social trading platform and copy the transactions of another trader in your account who has a well-established and profitable track record.
Is Forex Trading Right for You?
No matter where you live, getting started as a retail forex trader is relatively easy if you have some risk capital, but trading currencies successfully requires considerably more than that. You’ll need to develop considerable market knowledge, a viable trading strategy within an overall trade plan, the discipline to stick to your strategy and the emotional resilience to bounce back from losing trades.
If you plan on meeting those requirements, then you have a decent shot at being profitable as a forex trader. If you don’t, then you can still participate by opening an account at an online broker that supports social trading and copying a successful trader’s transactions.
How to Trade Forex.