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Getting Started in Forex Trading: What Every Trader Should Know



Intrigued by the potential of the forex market but unsure where to start? It's true that the forex market can be a lucrative avenue for experienced traders, offering the chance to capitalize on global currency fluctuations. However, it's crucial to remember that forex trading also comes with inherent risks, including the possibility of significant financial losses. Therefore, before you rush to join the market, learn its basics.


Forex Trading Terms

Before diving headfirst into this dynamic market, equipping yourself with the necessary knowledge is essential. This means understanding fundamental concepts like currency pairs, exchange rates, and trading strategies. By taking the time to learn the ropes, you'll be better prepared to navigate the complexities of forex and make informed decisions that align with your risk tolerance and financial goals. Here are the common terms you need to know:


Spreads

Essentially, each trade requires a seller offering the asset at a price that a buyer is willing to pay for a currency.

The highest amount the buyer is willing to pay is known as the bid price, while the lowest price the seller is ready to accept for the same instrument is referred to as the ask price. Now, a spread is the difference between these two prices.

Suppose the bid price for the EUR/USD pair is $0.99, and the ask price is $0.98. You guessed it right! The spread is $0.01.


Lots

Currency pairs are traded in lots, which usually denote the number of units you are trading. A standard lot comprises 100,000 units of the pair’s base currency (the first currency quoted in the pair).

You can also trade 10,000 units (mini lot) or 1,000 units (micro lot). For instance, if you purchase one standard lot of EUR/USD at 1.2130, it means you are acquiring 100,000 units of Euros and selling 121,300 US dollars. Likewise, in case you sell one micro lot of EUR/USD at 1.2130, you are selling 1,000 Euros and purchasing 1,213 US dollars.


Pips

A pip, which is short for ‘point in percentage,’ represents the smallest price movement in the fourth decimal place of most currency pairs. Let’s say the GBP/USD moves from 1.1155 to 1.1157. That’s a two-pip movement.

However, in currency pairs that involve the Japanese Yen, a pip is represented by a move in the second decimal place. Generally, pips tell you whether a trade is profitable or not.


Leverage

In most cases, the size of trades you can execute depends on the capital you have. Luckily, forex brokers can loan you money that allows you to magnify your purchasing power and take large positions.

The borrowed money is what is termed as leverage. The good thing about it is that it amplifies your potential profits. Nonetheless, leverage is equally risky and can lead to huge losses, especially when the market behaves unfavorably.


Margins

This is the minimum deposit amount your trading account should have to allow you to open a position in the market and maintain it.

Suppose your trading margin is 1%. This means you need to have a deposit of $1 for each $100 you trade. Therefore, if you plan to purchase one standard lot (e.g., 100,000 EUR/USD), you are only required to maintain 1% of the traded amount in your forex account, which is $1,000.


Bid and Ask Price

The ask price is the price at which you can purchase the base currency and is often placed on the right-hand side of a quote. For instance, if the GBP/USD price is displayed as 1.1968/70, it indicates that you can purchase 1 British pound for 1.1970 US dollars.

The bid price, on the other hand, represents the selling price of the currency pair. Let’s say the GBP/USD is priced at 1.4570/1.4573, the initial figure is the bid price. Generally, the ask is higher than the bid.


Bull and Bear Markets



The forex is characterized by various conditions. There are periods when the prices of currencies increase and provide significant opportunities for traders to make money.

So, the market sentiment is positive and more investors are attracted to buy an asset, further driving up its prices. These characteristics define the bull market.

On the contrary, the market sometimes goes through a rough patch where the prices of a currency take a downtrend, prompting investors to sell off their holdings. This is what a bearish market looks like.


Long and Short Position

You can either take a long or short position when trading in the forex market. The former allows you to place a buy order for a currency pair when you expect its price to go up. You later sell it at a higher price, enabling you to profit from the difference.

Conversely, taking a short position entails opening a sell trade for your asset after speculating its price will reduce. You then initiate a buy order at a later date at a lower price, making a profit as a result.


Understanding Resistance and Support

Resistance and support levels are vital concepts in forex that can help you identify potential entry and exit points, allowing you to make more accurate trading decisions. Here’s a detailed description of each term:




What is a Support

Generally, the forex market is very volatile, and currency prices keep moving up and down due to demand and supply dynamics. When supply is more than demand, currency prices often take a downward trend.

Consequently, more investors are willing to purchase an asset as it becomes cheaper. A support level shows you the point where a currency’s demand has strengthened, so there’s a slowdown in price decline, and a reversal is looming.


What is a Resistance

Resistance is the opposite of support. When the demand is more than the supply, currency prices increase. So, there’s less desire to buy as more traders sell off their assets, probably because they have reached their target or have determined the prices are too high.

At this point, supply starts to overwhelm demand, and this is what is called the resistance level. This is where the price is expected to pull back and start decreasing.


Leveraging Support and Resistance for Trading Success

Once you know the support or resistance area, it’s easier to spot possible entry or exit points. When the price hits the point of previous support or resistance, it will bounce back away from the support or resistance point.

It can also defy the price level and continue in its previous direction till it reaches another support or resistance level. Therefore, you could initiate a buy order when the price of a currency falls towards support in the event of a “bounce.” In case the price rises towards resistance, it’s time to sell.

Sometimes, the currency’s price can move outside the defined support or resistance level with increased momentum. If this happens, it suggests there’s a breakout. You can leverage this phenomenon by implementing the breakout strategy. As such, execute a buy order if the price breaks through resistance and sell when the price breaks through support.


Reading Forex Charts

Reading forex charts is an important skill you need to learn and master to predict price movements more effectively and initiate the right trading moves. Let’s look at some of the basics below:


Understanding Candlestick Patterns

 



Candlesticks are a visual representation of currency price movements using charts that look like candles. In essence, the candle’s ‘body’ tells the difference between the opening and closing price. The vertical lines above and below the body are known as the wick or shadow and represent the lowest and highest prices within a certain trading period.

As a beginner, you can start by reading single candles. The size of the candle’s body and wicks can give you insight into market sentiment.

For example, a long wick at the bottom might indicate an asset is increasingly being bought, so there’s a high chance its value will go up. On the contrary, a long wick at the top may suggest that traders want to take profits, indicating a huge potential sell-off in the near future.

A strong bullish sentiment (on a green candle) is strongly present if you notice a body occupying nearly the entire candle structure, with very short shadows. When you see the same features on a red candle, then the market sentiment is bearish.

 

Bullish, Bearish, and Ranging Markets

Forex charts can help you to identify bullish, bearish, and ranging markets easily. You can achieve this by identifying price trends.

Bullish markets are normally characterized by upward trends where currency prices have successive higher peaks and troughs. Bearish markets are the opposite. As such, they feature downward trends, with currency prices having consecutive lower peaks and troughs. 

You can tell you are dealing with ranging markets when you notice the asset’s prices are moving sideways (back and forth) or within a horizontal range.


Forex Indicators

Forex indicators are technical analysis tools that help identify market trends. There are different types of indicators, with most applying unique strategies to help you study the market and make appropriate trading decisions.

One of the common indicators is the Moving Average (MA), which usually levels out price data to formulate a single flowing line. As a result, you can pinpoint trends, possible reversals, and entry/exit points.

Bollinger Bands are also popular among traders. These usually determine the volatility of currency prices within a certain trading period. The wider the bands are spread apart, the higher the volatility levels, while narrower bands suggest decreased volatility.

Another forex indicator that is widely used is the Relative Strength Index (RSI). It measures how currency prices change and the corresponding speed to help traders identify overbought and oversold conditions and, hence, trade accordingly.

Other common forex indicators include the Average True Range (ATR), On-Balance Volume (OVC), Stochastic Oscillator, and Moving Average Convergence Divergence (MACD).


Risk Management in Forex

Even though the forex market has the potential to earn you good money, it is riddled with risks that can cause you to lose a lot of money. The good news is that you can apply several risk management strategies to help mitigate these risks and optimize your returns in the long run. These strategies include:


Set stop-losses



A stop-loss is an order that instructs your broker to close a position when a currency’s price reaches a certain level. This way, you are protected from making continuous losses, especially when the market takes an unexpected turn.

Using stop-losses also instills discipline as they prevent you from holding onto losing trades, hoping that market performance will improve.


Use position sizing

This focuses on determining the capital amount to allocate to specific trades or deciding the amount you are willing to risk per trade. The former approach ensures you don’t put all your money in a single trade, helping you preserve capital in case many trades turn out to be losses.

When it comes to determining the portion of capital to risk, ensure the percentage risk per trade ranges between 1% and 2%.


Control your leverage

Forex trading can be an exciting venture, especially if you continuously make profits. In this case, you may be tempted to take higher leverage values to earn more money.

However, this move can be dangerous when the market experiences sudden, unexpected changes. Be careful and take small leverages to be on the safe side even when things don’t work out in your favor.


Choosing a Forex Broker

Choosing the right forex broker can be the difference between success and failure in currency trading. Here are the factors to look out for while selecting the ideal broker:

●      Regulation: Is the broker licensed and regulated by the relevant agencies? Such a broker ensures that your trading practices adhere to industry standards. Moreover, a regulated broker provides a safe trading environment, free from fraudsters.

●      Reputation: What are other clients saying about the broker? Are their reviews positive or negative? Settle for a broker who has a history of providing reliable services to customers.

●      Trading platform: Assess the broker’s trading platform. It should be easy to navigate and integrate important trading resources and tools.

●      Trading fees: Check the amount of fees the broker is charging. Avoid trading with a broker that demands high fees, as this can greatly increase your transaction costs and reduce your overall profits. The fees should be reasonable and coincide with the types of services offered.

 

While the allure of quick gains can beckon the impatient, remember that true mastery in forex trading lies in a blend of patience, discipline, and continuous learning. The market is a dynamic playground, rewarding those who respect its volatility and prioritize risk management. Approach it with a humble hunger for knowledge, a steadfast dedication to sound strategies, and a willingness to evolve alongside the ever-changing currents. With this compass guiding your journey, you'll navigate the complexities of forex, not just as a participant but as a seasoned navigator, ready to chart your own path to success. The open waters await, beckoning you to test your mettle and potentially reap the rewards of your diligent exploration. So, step onto the trading floor, equipped with newfound knowledge and unwavering resolve, and embark on your forex adventure – remember, the journey itself is half the treasure.

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