Our beginner’s guide to trading will answer most of the questions that beginners may have. You don’t have to figure everything out on your own, because in this article we have collected the most valuable information about trading, after studying you can feel more confident.
What is the Forex market?
What is Forex? Usually when I meet new people and tell them what I do, many have no idea what forex trading is all about. This is quite surprising considering how big the forex market is. For example, when you visit another country, you need to make a currency exchange in order to make any purchases in that place. Unlike the stock market, which is centralized, forex does not have its own center and is electronically linked between various brokers and banks.
Daily forex trading exceeds $5 trillion, dwarfing all other financial markets. Forex is an abbreviation for foreign exchange. When one currency changes to another, a forex transaction occurs. For example, this can happen at currency exchange counters at the airport. Or when a company imports or exports goods. Even when you buy some product on the Internet from another country. These are all transactions with foreign currency. There are a huge number of transactions taking place every day, which is why the daily Forex turnover is so large.
What are the advantages of trading the Forex market?
Forex has advantages that make it special among other financial markets.
High liquidity. According to the Bank for International Settlements, forex is the largest financial market in the world with total liquidity of $5 trillion per day. This means that with such liquidity we can enter the market at any time and open trades without fear of slippage.
Low entry price. Most forex brokers will allow you to comfortably trade up to $100.
Optimal risk management. You can trade micro lots at 0.01 of a standard lot, which is a very small amount of money you are risking. Also, unlike stocks, there are rarely large gaps in the forex market, so you won’t lose more money than you planned.
Trade at any time convenient for you. Forex is open 24 hours a day, five days a week, except weekends. You can open trades at any convenient time of the day or night.
Low transaction costs. Unlike the stock market, in forex, most brokers will not charge you commissions for making trades.
How to buy and sell currencies on Forex?
There are many different currencies of many countries in the world. However, the majority of international currency trading occurs in the US dollar, euro and yen. Other common currency pairs include the British pound, Australian dollar, New Zealand dollar, Canadian dollar and Swiss franc.
Forex trading involves a currency pair, so you bet on the value of one currency against another. Let’s take the most traded currency pair in the world, EUR/USD. EUR is the base and USD is the quote. The price for EUR/USD indicated in your trading platform is worth 1 euro to 1 dollar.
In Forex you will have two prices. One is the purchase price and the other is the sale price. The difference between these prices is called the spread. When you decide to buy or sell, you buy or sell the first currency in the pair.
Let’s say you decide that the euro will rise in value against the dollar. Since the Euro is the first in the EUR/USD pair, you buy EUR/USD. If you think the euro will fall in value against the US dollar, you sell EUR/USD.
Let’s assume the buy price for AUD/USD is 0.8065 and the sell price is 0.8060, then the spread will be – 0.5 points (0.8064 – 0.8060 = 0.4). If the price moves in your favor, you make a profit on your trade.
How much money do you need to start?
Before trading with real money, it is best for a new trader to try trading on a demo account first. You may have heard other traders say that trading on a demo account will not replace learning on a real account and will not give you real emotions and a feel for the market. In part, this is true. But still, it is better to start with a demo account and try to achieve profitable trading there before you start trading with your own money. In addition, a demo account will allow you to understand the trading platform, give you the skill of opening new orders and managing transactions.
So how much money do you need to start trading forex? There is no magic formula because it depends on your personal finances, risk tolerance and other circumstances. But I suggest you the following approach:
- Determine the amount of money that you are willing to safely lose, and the loss of this amount will not affect your lifestyle in any way.
- Put half of this amount in your bank.
- Use the other half in trading.
- When you earn consistently, you can put the second part of the amount into your trading account.
The benefit of this approach is that you pay less in tuition fees because half of your money is in the bank. And when you really feel like you’re trading profitably, you can scale your way up by adding funds to your trading deposit. This is not a get rich quick scheme, but a way that will keep you in trading for many years, which is much more important.