Trading on the foreign exchange market is becoming more and more popular, and the number of users willing to make money on this is only increasing every year. However, it is important for the beginners to learn the basic principles of correct trading so that they won't immediately lose their money and could get the first profit.
What is Forex
To begin, one needs to figure out what the financial market is. The term Forex itself can be translated from English as FOReignEXchenge - an international currency exchanger. This is a global financial system, where each participant can exchange one currency for another, and also get the opportunity to make a profit on the difference in their rates.
It is worth noting that Forex is just one of several types of financial markets. Traders can also trade securities on stock exchanges, as well as crypto currencies, commodities, precious metals, energy resources and some other assets.
Who are forex brokers
According to Forex rules, a private actor cannot independently enter into purchase and sale transactions on the exchange. Therefore, contacting a broker is a mandatory procedure that every beginner will have to face.
Legal entities most often act as brokers. But sometimes private actors can also take on this role. They act as intermediaries between different parts in the global financial system.
The activity of each broker and dealing center is carried out on the basis of licenses and is controlled by the relevant regulators:
- government bodies
- public organizations.
To start trading, a novice trader must register on the broker's website and open a special account. Brokers, in turn, provide trading platforms opening access to the foreign exchange market and the entire range of financial assets, as well as providing the ability to conduct transactions.
What are lots
A Forex lot is a unit of measurement expressed in terms of the amount of funds that a trader uses to enter into a transaction. Usage of such a system significantly simplifies the calculation, and also allows to control risks when working with different assets.
There are several types of lots:
- Standard. In this case, 1 lot corresponds to 100 thousand units of the main currency.
- Mini lot. Ten times less than the standard one, represents 0.1 of the whole number of the standard one.
- Micro lot. Ten times less than a mini-lot, represents 0.01 of the first indicator.
In other words, if a foreign exchange market participant enters into a deal worth 1 micro-lot, he buys an asset for 1000 units of the base currency.
Forex analytics and business charts
Forex brokers, as well as specialized analytical services, provide traders with access to exchange rate charts. They display real-time price behaviour of different currencies in relation to each other.
There are several main types of business charts:
- Line charts. The easiest way to display price movement as a wiggly line. The main disadvantage - too low information content, not enough data to make a decision about the possibility of entering into a transaction.
- Bars. These business charts are also called bar charts. They are more informative, show the main indicators - the minimum and maximum price levels for a certain period of time. Also, a trader can learn from the bars about the closing and opening prices of the period.
- Candlestick charts. The most popular option, presenting the same data as in bars, but in a more understandable form.
- Point-and-figure charts. Also known as tick-tack-toe. The information is displayed in the form of bars of price changes, where zero is a drop in the level by a specified number of points, a cross is an increase by the same value. Allows to accurately trace the direction of movement of the quote, as well as to determine the size of the jump.
- Histograms. They are used as supplements to the main charts and contain information about the volume of trades performed.
Every beginner needs to learn how to "read" charts. This is a required base that will provide for successful and profitable trading.
Sources of profit
Of course, this question is of interest to almost every beginner. The trader's profit is formed as the difference between the purchase price and the selling price of the currency.
Consider the following example:
- You have USD 100 in your account.
- In the course of study of the charts, you made the decision to open a long position in the GBP / USD currency pair at 1.6100. That is, you bought the pound sterling in a pair against the dollar.
- Now, when the value of the dollar decreases, it will be possible to do the reverse repurchase operation - to sell pounds sterling for dollars. The resulting difference becomes a profit.
In the same way, forex trading transactions are carried out in pairs to any currencies. If necessary, you can borrow money.
What is margin funds
In a general definition, “margin” is the difference between the selling price of an asset and its cost.
In the field of trading, margin trading is executing leveraged transactions, provided by a broker or another market participant. If desired, margin trading can be carried out with credit leveraging. It allows you to trade the sum exceeding your total deposit.
- you have USD 100 in your account
- you used 1: 5 leverage
In this case, you will be able to open a trade in the amount of $ 500. At this time, your USD 100 serve as collateral security, which the broker blocks on the account at the time of opening of the trade.
Another advantage of margin trading is the ability to open bear transactions:
- you borrow currency
- sell it at the current price
- waiting for a drop in its value
- buy at a lower price
- return the earlier borrowed currency
The difference between selling and buying is your net profit.
In other markets, margin trading provides for the possibility of loan granting in the form of securities, crypto currencies and other assets.
How to start Forex trading
Before you start entering into transactions in the financial market, it is necessary to go through several mandatory stages.
Choosing a broker
First of all, a beginner should decide on a partner company that will act as an intermediary while entering into transactions.
When choosing a broker, it is recommended to consider the following parameters:
- Experience. It is better to choose companies that have been on the market for at least 5 years (and the longer the better). Younger organizations should be discarded immediately.
- Reliability. The company must have a license and be registered as a broker. The reliable companies publish the permits on their own website. Information about them can also be found on the websites of partners and regulators.
- Minimum deposit amount. Each broker has his own minimum balance for trading. In this case, the choice should be made based on the own financial capabilities.
- Spread. It is a difference between the current bid and offer rates. The lower this indicator, the more profitable the broker is.
- Support service. In the process of trading, beginners often have questions and problems that must be dealt with expeditiously. When choosing a company, it is therefore worth paying attention to the efficiency of the support service. Operators must be loyal to customers and provide the necessary information in a short time.
- Bonuses. Modern brokers often conduct promotions, offering customers favourable discounts or improved conditions. Such offers allow you to increase your total profit.
There are many more similar characteristics, and each trader has his own preferences, based on which he chooses a broker. It is worth assessing such factors together. The criteria should not cross each other out, on the contrary, they only complete the picture and help to choose a more reliable company.
Forex trading is carried out using a terminal – special software that can be installed on a PC or smartphone, as well as used via a browser. Today, MetaTrader 5 is considered the most advanced and popular terminal. It can be downloaded from the official website: https://www.metatrader5.com/.
Before you start making transactions, it is worth carefully studying and mastering the trading platform. You can also find the guide on the official website.
And we recommend all our readers to visit our trading school. It contains a lot of useful materials about Forex trading and in particular about using the MetaTrader 5 terminal.
If necessary, you can install additional applications in the terminal: advisors, indicators, scripts, etc. This is special software that allows you to improve and simplify trading.
- analyze charts more properly
- conduct automatic transactions
- receive notifications about appropriate situations for opening a transaction
We also invite you to visit our shop, which presents quality software: Advisors. If you want, you can download and test it for free.
After installing and studying the terminal, you can start trading on the foreign exchange market. Experienced traders recommend using a demo account for the first time. In this case, you get virtual money that you can spend on any transactions.
A demo account is a good opportunity to learn more about the characteristics of a currency platform and to develop an own strategy for earning money. The money is charged to it free, has no value and cannot be withdrawn.
Real account and deposit
In use of a demo account, a trader can get his hand in the market and start getting a stable result. After that, you can open a real account, enter a sum against it and start conducting transactions.
Some brokers provide the possibility for opening a cent account. Its advantages is that it makes it possible to work with small sums, so the loss of a deposit in the event of an unsuccessful transaction will not be a tragedy for a beginner. Subsequently, when the cent account also starts to bring in profits, a participants in the foreign-exchange market can open a dollar account.
As for the deposit, it should be increased gradually. It is not recommended to get carried away and to "fill" your account with money after the first successful transactions. The best option for a beginner would be to limit himself in time – no more than 2 hours a day on the stock exchange.
Becoming a stable income
The first task that a trader should for himself is break-even. You should not immediately stretch for large sums at the initial stages of trading.
Before you start trading for large sums, you need to master basic skills:
- learn to control your emotions
- clearly assess the risks
- correctly distribute the deposit
Only if the break-even is passed, the trader can think about how to increase his income. It is important to reach a trading level at which earning become stable. This can be done by closing a large number of transactions with a small profit. This option has less risks.
But this does not mean that there cannot be negative transactions in the trading process. Losses are an integral part of trading. And the main task of a successful trader is to make his profit higher that his losses.
Popular Forex strategies
In most cases, the currency chart defies expectations, but sometimes situations arise when the price begins to move in a specific range. In this case, we are talking about the formed support and resistance levels.
A Forex trading strategy is an integrated analytical system that increases the chances of earning income. Of course, there are no ideal schemes, and each is associated with certain risks. But there are a number of simple strategies that are good for beginners.
- RSI-6. The simplest scheme, which is based on the attitude that at least once a day, the currency time forms a massive jump in the quotation. Before concluding a transaction, a trader should choose the best currency pair and then – analyze it using special indicators. This strategy allows you to notice the appearance of large players in the market and follow them.
- Candle reversal. In this case, it is not necessary to use indicators, it is enough to identify the best candles and calculate the potential for trend changes. The scheme is popular both among the new market participants and among experienced traders.
- PricceAction-5. The strategy presents a complex of tactical methods in the from of 5 basic principles of trading by technical analysis, which minimizes risks. The strategy can be used regardless of the time interval, however, the scheme gives the maximum result in the interval from 4 hours.
There are other strategies for earning income. However, the main rule of successful trading is still precisely the preservation of a sober mind. You should not be led by your emotions, so as not to waist money.
Pros and cons of Forex trading
Trading on the foreign-exchange market has its advantages and disadvantages.
The advantages include:
- the ability to reach high profits in a short time
- no need for special education
- trading from anywhere in the world
- work with no fixed hours
The disadvantages include:
- high risks when concluding transactions
- unstable income, which is often accompanied by losses.
You should not consider the Forex trading as a source of passive income, much less – as a "freebie". Because in the absence of proper analytics, the market will immediately cease to be profitable.
Forex is a unique financial system with its own rules and opportunities, knowledge of which will allow you to achieve the desired result. However, before you start trading, it is important to carefully study the pros and cons. Otherwise, instead of making the desired profit, you can lose your invested money.