What is Forex?
Forex (FOReign EXchange) is interbank currency exchange market where buy and sell transactions are executed at floating rates.
Forex market participants:
- Exporters and importers;
- Central Banks of different countries;
- Commercial financial institutions (banks, investment funds, insurance companies, etc.);
- Independent traders.
All operations on forex market are divided into four groups:
- Trading (when one buys currency to pay foreign suppliers for goods);
- Speculative (Forex traders’ operations);
- Hedging (to minimize risks);
- Regulatory (operations of Central banks allowing them to control country’s currency exchange rates).
Forex market was founded on the basis of Breton-Wood financial system where United States dollar was equated with gold and served as collateral for other currencies.
In August, 15th, 1971, Richard Nixon claimed the cancellation of free dollar convertibility to gold. Representatives of 20 countries developed new financial system that was finally signed off by International Monetary Fund in 1978 as amendments to foundation rules.
New monetary system introduced a concept of floating exchange rates, and money (currency) became a product that could be a subject of trading operations. Forex market quickly became self-regulated trading environment. Trading and information technologies development made this market accessible to anyone. Today’s forex market motto – Forex for beginners.
How to Start Trading on Forex for Beginners?
How can one start trading on forex market? This question is a subject for numerous publications, starting from small booklets like “Forex for dummies” and ending up with serious works of famous experts.
Many authors try to show Forex for beginners as very easy and ordinary job. They tell you rags-to-riches stories about “mythic personalities” who knocked up a fortune within days. In real life everything is more complicated.
Answer for a question “how to start trading on Forex” lies within two stages – theory and practice. Without these two stages and their correct performance Forex trading for beginners will become a lottery with small winning odds.
You should learn currency trading terminology and get acquainted with popular tools.
Remember. Numerous forex brokerage firms offer you to complete a free course of introductory lectures. But in most cases those “lectures” are an advertisement of brokerage company’s service, they are aimed to persuade people to open live trading account as quickly as possible.
After some lectures you have to start your “practice”. The most important thing is to choose the right broker. Professional skills, technical base and honesty of broker are the basis of trader’s success. So, it is very important to choose the right broker bindingly. To make a right decision, you can use all available information on our website.
How to Earn Money on Forex
This topic is very popular nowadays. In this situation many myths occur. Forex mythology is a huge field for large-scale research, but it is quite possible to earn money here.
To succeed on Forex market, trader must be disciplined.
“How to earn money on Forex trading” question is important, but for every successful trader the question “how not to lose money on Forex” has higher priority. In other words, risk management and allocation of capital are even more important for successful trading than trading operation itself.
Every beginner heard about “perfect forex trading strategy”, that allows to increase capital in the shortest terms.
Unfortunately or fortunately it’s a myth. Every trader has his own trading strategy that represents a set of rules and guidelines. Mentioned before rules and guidelines concern trader’s attitude guidelines in any market situation. Developed strategy has to take into account not only financial possibilities, but also trader’s desires about his profit. It has to take into consideration trader’s psychology and his temper.
There are some rules that help to ensure risk reduction. They are independent from trader’s personality. One of the rules is: you should tightly control the ratio between open position and deposit amount. Beginners should not risk more than 3-5% of account capital per trade.
As we mentioned before, Forex market has its special glossary. Below you can find glossary with necessary terms.
Currency pair – the main commodity on Forex market. Includes two currencies, connected quotes. Currency pair can represent independent trading instrument, or be the basic asset for futures or options.
Chart – graphical interpretation of time sequence, in which the price of trading instrument is changing. Types of charts:
- Line chart;
- Bar chart;
- Candlestick chart.
Deposit – the private money, deposited by trader into the trading account.
Trading session – time period, during which currencies are sold and bought on Forex market. Trading session lasts 9 hours. There are 4 trading sessions per day.
Ask (Offer) – price of the currency you buy. In currency quote it is placed to the right.
Bid – price you sell currency for. In quote it is on the left.
Spread – difference between ask and bid price. In fact it is commission trader pays to the broker for every operation handling.
Market volatility – measure of price movement within the certain time lapse.
Tick – minimal change in price.
Leverage – the relation between trading operation size and initial margin.
Open Position – selling or buying currency, towards which reversing trade to close this position weren’t performed.
Long position – trade position, profit of which is growing when the market price grows (when you buy trading instrument).
Short position – trading position, profit of which is growing when the market price decreases (when you sell trading instrument).
Swap – overnight payment for roll-over to the next trading day, charged on or withheld from the trading account.
Gap – situation, when the open price of the trading session is different from the close price of the previous session, it often occurs when there is a gap in price range.
Slippage – trade execution for price that is different from ordered price.
Advisor – software that allows to automate trading process.
Macroeconomic data analysis is a key point of fundamental analysis. All macroeconomic and political forecasts and news influence the currency exchange market.
Fundamental analysis on Forex market allows to make mid-term and long-term forecasts of market movements. But it is impossible to define entry and exit points precisely. It means that fundamental analysis can be used for long time frames trades. For traders who trade in short time frames, fundamental analysis is not so important.
The subject for fundamental analysis is movement of the trading instrument price, but for technical analysis dynamic of the price change is an object.
Technical analysis on Forex market is based on idea that “price takes everything into consideration”. In such situation technical analysis analyzes price fluctuations on the basis of past events. And gathered experience.
Technical analysis has many indicators, if you use them right, you can precisely determine optimal conditions for open and close trading positions.
Forex Trading Psychology
To successfully trade on Forex market, one has to estimate market situation in right way, and efficiently react to changes. Right and efficient risk management, connected to trading activities, is vastly important too.
The third point – you should be able to manage your emotions. This ability is very important, but it is often underestimated, or even ignored.
Shortly, control of your emotions means that you have to search for reasonable balance between caution and greed. General list of objects that become subject of Forex psychology looks like:
- Overtrading (trading too much);
- Self discipline (its absence);
- Unreflective following of someone’s forecasts and copying of someone’s trading.
- Uncertainty (as consequence of failure);
It is necessary to admit that Forex psychology (psychology of successful trader) has to minimize or even exclude emotions from decision making process. Any psychological practice and techniques are efficient when we talk about Forex trader. They have to help him follow his strategy and feel less emotional.
Forex Risk Management (Money Management)
Efficient risk management is a must for successful Forex trading. There are many methods of risk management. The simplest and most efficient include:
- Never place orders without stop-loss (position will close with opposite changes in quotes) and take-profit (order will be closed in positive conditions). It allows you to minimize stress and will protect your deposit from unexpected and unfavorable market situation.
- If you open position, plan your losses towards profit in following way: in 1:2 proportion. If take profit value level is 100 pips than stop loss must be at the distance of not more than 50 pips from market entry point.
- You have to analyze market direction trend at minimum 3 time frames before order placement. Only this way you can make right conclusions about trading direction.
- If you open the order, no more than 5% of your deposit has to be secured, only this way you can withstand possible price pullback.
Money Management – it is a strategy that covers variety of actions, aiming to save present assets and minimize risks while safekeeping them.
This strategy also provides risk diversification. It is recommended to distribute assets on different accounts. Such distribution additionally protects you from losses and secures your deposit.
Many brokers offer different asset protection schemes. You shouldn’t neglect the possibility to secure your money additionally, this service is free of charge or requires small commission.
Trading strategies make trader’s “constitution”. Every trader, even if he doesn’t understand that he’s trying to develop his own trading strategy, uses some set of indicators. He chooses the most convenient time frames, i.e., creates comfortable trading environment. This environment is created with cut-and-try method, thus it is maximum adapted to trader’s demand.
Myths about efficient usage of someone’s strategies still exist, and sometimes they are useful, but take into consideration that:
- It is unlikely that successful trader will share his really successful strategy that he can use himself.
- Even if it happens, and someone’s strategy really works, your success won’t last for long.
Books About Forex
The main idea of numerous Forex books and “Forex for dummies” guides can be placed in one sentence – “trader has to create his strategy himself”. Talking about books, it is very useful for beginners to learn and read following books:
- B. Williams “Trading Chaos”;
- R. Vince “The Mathematics of Money Management”;
- T. Oberlehner “The Psychology of the Foreign Exchange Market”.
Choosing Forex Broker
Choosing forex broker you have to pay attention to company’s reputation and trading instruments. Quality of broker’s services is very important criteria of estimation. Pay attention to:
- Precise orders execution;
- Efficiency and accuracy of orders execution towards deposit\withdrawal operations, and also set of financial tools to provide those operations.
Reliability and high trading control are very important to secure assets, but there are some restrictions. E.g. US brokers provide 1:50 leverage (not more), but brokers with lower trading control provide 1:500 leverage. Those companies (with good trading reputation) impose high requirements to minimal deposit size.
All brokers regulated by any financial trading authorities have to include special chapter about risks into customer agreement. So, client can find detailed information about dangerous trading situations, covered by agreement. Also, there is a strict division of broker’s and trader’s responsibilities. This approach allows to minimize issue amount and provides high security level to client’s assets.
Complicated address and passport verification procedure for new clients is another feature of reliable and highly liquid brokers.
Thus, to choose broker (if we simplify this procedure), you should find balance between broker’s features and requirements and trader’s abilities and needs.
Virtual Private Server (VPS) is a separate virtual computer that is used for smooth trading on forex no matter where you are now.
Using VPS, trader can manage his account, using any devices with Internet connection, and be independent from internet connection quality at home, electricity blackout and physical location.
The main advantage of VPS servers for forex is its smooth operation and twenty-four-hour access to trading platform. It is very important for trader who uses automatic forex trading advisors.
Another VPS for forex is the fact that physically servers are located in the largest financial centers around the world, and trading is performed faster.
Choosing Forex Expert Advisor
Expert advisor allows you to optimize time for decision making and trading operation performance.
Modern trading platforms include numerous advisors, called “experts”, so you can choose any advisor you like. Those advisors are free of charge. Besides, there are many firms and individuals that create and develop such programs.
Trading expert advisor is a special software that trades automatically according to restrictions and objections specified by trader. Trader is fully responsible for all operations performed by advisor, and also of risks that occur.
Demo Account Trading
Every broker allows you to open a demo account. For beginners those accounts are great possibility to check their theoretical basis on practice. But you shouldn’t overestimate their importance. Such accounts have one substantial weakness – they provide no financial motivation. In other words, you can learn how to trade, how to use orders, how to make and execute them, but such trade has no emotional feedback – there is no greed – dangerous emotion that trader has to control.
That’s why beginners should use micro accounts that allow to trade in small amounts. It is enough to have 1-5 USD deposit for such trading accounts.
Demo accounts are also widely used by advanced traders when they want to test new strategies or advisors.
People who want to start trading on forex must take into consideration that Forex trading is high-yielding activity. As any other activity, that promises pie in the sky, Forex trading is quite risky.
“What is Forex for beginners?”, “How to trade on Forex?”, “How to earn money on Forex?” many people who search for additional source of income want to find answers on these questions. But hardly anybody asks himself – “how not to loose my money on Forex?”
With rapid development of computer and information technologies the number of foreign exchange market participants is growing quickly. Demand for broker services increased the number of offers for traders, and dishonest brokers and scammers became the main danger for forex beginners.
The most useful method to protect you from sсammers is to attentively choose your broker and necessary trading instrument.
Do you have additional questions on forex for beginners? Feel free to ask us.