Forex trading can be a lucrative undertaking if you understand the basics and build on them with experience. While you shouldn’t expect that you’ll be a professional trader in a few weeks, with dedication, patience and knowledge you can become successful in a relatively short period of time.
In this article, we’ll show you on what you need to focus if you’re just starting out with Forex trading. We’ll cover how to trade Forex and some other important techniques that you need to be aware of, such as price-action and risk management. These are major building blocks that need to be understood early in your trading journey. So, let’s start!
Introduction to Forex Trading
Forex, or the Foreign Exchange market, is the largest financial market in the world in terms of daily turnover. Around $5 trillion is traded per day, which dwarfs all other financial markets, such as the stock or bond market.
Just like stock traders, Forex traders try to buy a currency cheap and sell it later at a higher price, making a profit from the difference in the buying and selling price. By learning how to invest in Forex, you’ll be able to do the same with some practice and experience.
Retail Forex traders don’t buy physical currencies to trade on the Forex market. Instead, they trade on a financial instrument called a CFD (Contracts for Difference). When trading CFDs, you don’t own the underlying asset, but are only exposed to its price movements. This has certain advantages, as trades are executed in a matter of milliseconds and you don’t have to actually store the underlying asset. Take Brent crude oil for example. With CFDs, you don’t have to store tons of Brent in your garage, but can still take advantage of positive price movements.
Another advantage of CFDs is the possibility to short-sell a currency pair. Basically, short-selling allows you to profit both from rising and falling prices. If you think that the exchange rate of EUR/USD (euro vs. US dollar) will fall, you could short-sell the pair and profit from the entry and exit price the same way as if you’re buying the pair and the price rises. If you want to learn how to trade in Forex exchange, you need to know what short-selling is early in your Forex learning process.
Learn How the Major Currencies Behave
Knowing how major currencies behave will have a great impact on your trading performance, and is one of the basics when learning how to use Forex trading. Let’s list the major currencies first, which include the US dollar, euro, British pound, Swiss franc, Japanese yen, Canadian dollar, Australian dollar and New Zealand dollar. If we expand this list to include all G10 currencies, then the Swedish krona and Norwegian krona are also part of the major currencies.
All those currencies have their own personalities, which means each of them behaves differently. The US dollar, Japanese yen and euro are major reserve currencies for example, held in central banks around the world. The US dollar and Japanese yen can also be considered as safe-havens which appreciate when investors are reluctant to take on risky trades such as in times of economic and political turmoil.
Commodity currencies, such as the Canadian, Australian and New Zealand dollar, are heavily linked to the price of commodities which make up a major share of exports of the respective countries. If you want to learn how to trade in Forex market successfully, knowing these details about the major currencies will help you a lot.
Another important aspect when trading currencies is their correlation. Currency pairs with high positive correlation ratios tend to move in the same direction, while currency pairs with high negative correlation ratios tend to move in the opposite direction most of the time. For example, EUR/USD and GBP/USD have a high positive correlation, so buying or selling both pairs at the same time would almost double your potential profit or loss.
Focus on Price-Action
In order to make a good trading decision, you need to analyze the Forex market. To do so, Forex traders pay attention to the price-chart and apply technical analysis on it, follow economic and market news and try to determine the supply/demand for a currency from a fundamental perspective, and check the market sentiment to see how other market participants feel about a certain currency pair.
Given the short-term trading horizon of most Forex traders, the best way to trade Forex online is by analyzing the market from a technical perspective and focusing on price-action.
Technical analysis involves the analysis of price-charts and historic price movements, in order to predict future price movements. To do so, traders use tools such as support and resistance zones, trendlines, channels, chart and candlestick patterns and technical indicators, to name the most important ones.
The following chart shows how support and resistance levels can provide profitable trading opportunities.
New traders often wonder how to deal in Forex trading and clutter their charts with too much technical indicators on very short timeframes, only to blow their account in a matter of days. You shouldn’t make the same mistakes. Technical indicators can be useful as confirmation signals to enter a trade, but your best bet is to immediately start to focus on price-action. Price-action is based on pure chart analysis and the behavior of the price, using simple technical tools like those mentioned above (except technical indicators). It has a proven track-record and will make a real difference to the way you play Forex online if you learn how to use it properly. The following chart shows the EUR/USD pair inside a channel, with consecutive touches of channel at points (1) and (2).
Market sentiment, on the other hand, tries to measure the confidence of market participants on a certain currency pair and determine whether they’re bullish or bearish. Again, market sentiment can be used to confirm a trend and trade setup, but shouldn’t be used on its own to trade the Forex market.
Don’t Neglect Fundamentals
While price-action and technical analysis as a discipline can return significant profits, you shouldn’t neglect the importance of fundamentals in the Forex market. Learning how to use Forex successfully is based on a combination of technical and fundamental analysis, especially if you aim to trade the market on longer-term timeframes. Many new traders don’t pay much attention to fundamentals when learning how to trade Forex, perhaps because they consider fundamental analysis to be too complicated when compared to technical trading. Here you can see when important market reports are published for each of the major currencies.
The truth is, if you really want to become profitable in the long-term and learn how to trade in Forex trading, there is no way around fundamentals. Try to focus on the simpler topics in the beginnings, such as Forex news, economic growth, unemployment rates and interest rates. After you feel that you’ve mastered these concepts, move on to the more complicated ones.
Fundamentals are what creates trends and reverses them, and being up-to-date on major market developments is crucial to increase your performance and learn how to do Forex successfully.
Always Respect Risk Management
Making trading decisions is just one side of the coin. Even the best traders have losing trades from time to time, which makes it important to manage the risk of losing. This is done with risk management, that provides a list of rules that you need to be aware of when learning how to do Forex trading.
Risk management has many concepts, the most important of which are the risk-per-trade, the reward-to-risk ratio and position sizing. If you want to master how to do Forex trading online, pay close attention to the following lines.
- Risk-per-Trade – As it name suggests; risk-per-trade determines the total risk you’re taking on a single trade. While this can be expressed in various ways, it’s best to use a fixed percentage of your total trading account to determine the maximum risk you’re willing to take per trade. As a rule of thumb, you shouldn’t risk more than 2% on any single trade. If your trading account size is $10,000, never risk more than $200 on a trade.
- Reward-to-Risk Ratio – The reward-to-risk ratio is the ratio between your potential profit and potential loss on a trade. For example, if you’re profit target is 50 pips away, and your stop-loss is also 50 pips away, then your reward-to-risk ratio would equal to 1:1. On the other hand, a profit target that is 150 pips away combined with a stop-loss that is 50 pips away from the entry price would lead to a reward-to-risk ratio of 3:1. Generally, try to take trades with a reward-to-risk ratio of at least 1:1 or more, preferably around 2:1 or 3:1. This ensures that you can have a losing streak and only one winning trade, and still remain in profit.
- Position Sizing – Finally, position sizing refers to the size of your position (trade) in the market. Learning how to play Forex trading is to a large part about risk management, and position sizing takes an important place in it. Your position size should always be determined according to your risk-per-trade and stop-loss levels. For example, if your risk-per-trade is $200, and your stop-loss is 50 pips away from the entry price, then your position size should equal to around $4 per pip.
As you can see, there’s no way that a Forex trader can be successful in the long-run without sound risk management rules. It’s an important concept in trading, and you should learn it together with other technical and fundamental concepts. If you’re wondering how to trade Forex online or how to deal in Forex, then try to remember the risk management guidelines mentioned above.
Start with a Demo Account
A successful start in the world of Forex trading begins with a demo account. You should demo trade while simultaneously trying to answer the questions “How to do Forex business” and “How to do Forex exchange”. Only by thinking and learning about it during all your free time can you gain enough knowledge to eventually become a profitable trader.
Demo accounts are a great way to practice and get familiar with the market and your trading platform. It offers a risk-free environment where you can open, manage and close trades without the risk of losing real money. Practice makes perfect, and it’s no different with Forex trading. If you’re wondering how to open a demo account and how to trade on Forex com, then simply follow these simple steps:
- Find a broker that offers demo account – This is simple enough, since most Forex brokers offer demo accounts nowadays. However, try to demo trade with a broker that you aim to use also with your live account. This helps in evaluating the broker’s service, price-quotes and customer support before depositing money with the broker.
- Register for a demo account – Fill out the form for a demo account on the broker’s website, and you’ll emailed the login details for demo trading.
That’s it, now you have a fully working demo account and you can start trading right away. Try to demo trade until you’re fully confident to open a live account and until you’ve mastered how to play Forex online.
Conclusion – How to Play Forex Exchange
In this article, we covered the most important aspects of how to play Forex. Forex is the largest financial market in the world and offers lucrative trading opportunities if you learn the basics early in the beginning and gain experience and practice through a demo account. How do you trade Forex in the future is completely up to you, but try to focus on price-action techniques, don’t neglect fundamentals and always have strict risk management rules in place to avoid large losses and increase the number of profitable trades.