How to trade forex online
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In this beginner’s guide we explore the basics of forex, provide a starting point for how to trade forex, and offer useful information like how the market works, to the different ways to speculate on currency prices.
In order to get started in forex trading, you first need to understand two fundamental pieces of information first: what the market is and how does it work, and how to interact with it to perform trades.
What is the forex market?
The forex market (also known as fx or foreign exchange) is a global marketplace where national currencies are exchanged. Because the nations now trade worldwide cross-border, currency exchange is vital to the functioning of all markets. They are more liquid than other markets, like stocks or bonds, which makes them fast to trade. Currencies trade against each other as ‘pairs’, such as GBP/USD or EUR/GBP.
How does the forex market work?
The forex market operates through many currency ‘pairs’ where each currency’s value is given relative to another. In order to buy one currency you have to sell a different one, and the prices change according to supply and demand. This creates the price changes.
The most widely traded currency pair in the world is EUR/USD. That means that if you buy it, you’re buying the Euro and selling the US Dollar. The more people that do so, the ‘stronger’ (more expensive) the Euro becomes relative to the Dollar, and vice-versa.
Since there is so much volume, any change in value tends to be small and the market deals in fractions of a cent. To make money out of these tiny changes, traders use leverage in order to make trades big enough to turn a profit.
What are forex brokerages?
Forex brokers are essentially platforms that allow traders to interact with the market. They provide access to live forex rates, analytics, charting, indicators, and news based tools so that traders can assess the way the market is moving. In the past, these would have been actual people who perform a trade for you, however modern technology has made retail-trading accessible to all via forex apps.
When a trade is placed, a broker executes the trade ‘communicating’ it with the wider exchange market. Live data and systems reconcile the price change so it reflects on the entire market, so that the latest prices are updated. This is happening all the time, via thousands of brokers, across millions of transactions, consistently, in real-time.
Centralised systems operate cross-border, and brokers allow retail traders like you and me to interact with that system in order to profit from the free market.
How to trade forex online – a step-by-step guide
The forex market can look intimidating but the act of trading is fairly straightforward. This step-by-step guide takes you through the basics of how to get started.
- Find a broker. You have to place trades through a broker. Look for one that’s regulated and which has a good reputation. Then you need to create an account, which means providing some personal information, and deposit some money into it before you can do anything else.
- Choose a currency pair. The first decision you have to make is which coins you want to buy and sell. Each currency pair falls into one of three camps, which are known as ‘majors’, ‘minors’, and ‘exotics’. The major pairs are the US Dollar with other leading currencies, like the British Pound or the Euro. It’s best to start with these as they’re easiest to understand and have the most trading volume.
- Choose your trading method. There are two main ways to trade forex: on the ‘spot’ market or with contracts for difference (CFDs). Practically, these are almost identical but CFDs are a bit easier to get to grips with for beginners. You can be ‘long’ or ‘short’ a currency pair with CFDs and you can see profit/loss and settle your trades all in the same currency (normally USD).
- Decide whether to go long or short. Research the factors that affect the price of the two currencies you’re exposed to and use that to decide which one is likely to do better. If you’re trading the USD/GBP pair and you expect the dollar to perform better, you should ‘long’ (buy) the pair, for example, while if you think the pound might do well instead, then ‘short’ (sell) it.
- Set your position size. In the forex market the minimum trade size is normally $1,000, which is known as a ‘micro lot’. The standard lot size is $100,000 and you might find some platforms that offer ‘nano’ lot sizes that are just $100. Most traders don’t actually put this amount of money down every time they open a position, though, instead you can put a smaller amount down and use leverage to get to at least the value of a micro lot.
- Execute trade. All that’s left is to execute the trade. You should see it show up as one of your open positions, and you can monitor its fluctuations in real time. Each point of movement in forex is known as a ‘pip’. Pips normally refer to $0.0001 and are how we monitor currency price changes. Remember that if you’re using leverage to multiply the size of your trade, even a single pip can be important.
- (Optional) Set order limits. Stop loss limits are trades that execute automatically whenever the price hits a certain level and are particularly useful in the forex market where you’re using leverage and need to manage your risk carefully. You can set limits above your buy price to close your positions and lock in profits at a certain point or set them below in order to reduce your losses if the price falls dramatically.
Trading forex for beginners
The most important thing to do before you start is research. The forex market is fast-moving, works differently, and is affected by very different factors compared to other asset classes like stocks or commodities. Keep reading to find out what else you need to keep an eye on.
What to do before starting to trade
There’s a lot more to forex trading than just buying and selling pairs. You should set guidelines for yourself and make sure you’re prepared before you put any money on the line. Here’s a checklist of things to do before you get going.
- Research the currency pair. Make sure you understand the factors that affect how currencies rise and fall in relation to each other. For example, when each country releases economic data like interest rates or its balance of payments that might impact the value of its currency.
- Read up on forex terminology. The foreign exchange market has its own language and you need to know what it all means. Here’s a quick run down of the key terms and you can follow the links to learn about each in more detail.
- Pip stands for ‘percentage in point’ and is the smallest amount a currency price can change. For pairs that are denominated in US Dollars, it refers to $0.0001.
- A lot is the size of your trade and is usually made up of a fixed amount of currency. The standard size is $100,000 but there are now smaller lot sizes available, all the way down to $100.
- The majors are the most popular currency pairs that make up the vast majority of forex trading volume. The six pairs that make up the majors include the US Dollar with the Euro, Japanese Yen, British Pound, Swiss Franc, Australian Dollar and Canadian Dollar.
- The minors are all other combinations of leading currencies
- Exotics are pairs that include much smaller currencies, such as the Norwegian Krone or Thai Baht. They tend to be harder to trade and the price is more volatile.
- Base and quote currency simply refers to the two currencies in a pair, such as USD/GBP. In that example, USD is the base and GBP is the quote.
- Set a budget. Never risk more than you can afford to lose. It’s a good idea to set yourself some limits on how much you want to spend before you start. That way, you won’t be tempted to overreach or chase losses if things turn against you.
- Decide on a trading strategy. Forex traders fall into two camps depending on whether they base their decisions on technical or fundamental analysis. Technical is favoured by the most active traders, who study price data in order to predict future moves. The alternative is a more fundamental approach, where you use economic indicators such as interest rates or inflation to guide you.
- Choose a broker. Every broker is different and has its own pros and cons. You can find one with low trading fees or one with a set of the most advanced trading features. Decide what’s most important to you and use that to help pick a broker.
The different ways to trade
When it comes to the act of trading itself, there are a few ways to get involved in the forex market. Brush up on all of them by reading the list below so that you’re informed enough to decide what’s best for you.
- ‘Spot’ trading CFDs. Contracts for difference are contracts between you and your broker that represent the price of a particular asset and the ‘spot’ price is the current market price. When you trade a CFD your profit is the difference between the spot price when you bought the CFD compared to that at which you sell it. They’re ideal for short term traders and popular in the forex market, because you can use them to open and close positions quickly, and use leverage to make bigger bets each time. Learn about the best cfd trading brokers here.
- Spread betting. When you spread bet you make a prediction that the price is going to move in a certain direction and stake a fixed amount per point of movement. Your profit is the stake multiplied by the number of points moved (and it also works the other way: if you’re wrong the loss is the stake times by the movement). Learn about the best spread betting brokers here.
- Futures contracts. A futures contract is an agreement to buy an asset at a fixed price at a set date in the future. The key point to remember is that as soon as you enter into a futures contract you’re obligated to buy the currency on the specified date. Although they’re more traditionally used in the commodities market, futures are an ideal way to trade if you’re expecting something to have a significant impact on the price in the near future.
Should I start trading forex now?
It depends on your level of trading expertise and knowledge of how the market works. Forex trading can have a steep learning curve and so can be risky if you don’t know what you’re doing. To help you decide whether forex is for you, here is a summary of its most important pros and cons.
- It’s a highly active market so there is always someone on the other end of the trade
- You can trade all sorts of different currencies, from the most mainstream to smaller, exotic pairs
- There are a lot of potential trading strategies and you can pick one that suits you
Where can I learn more?
Here on Invezz, you can find out all the latest forex news so that you don’t miss out on anything important. We also recommend a crash course, we’ve rated and reviewed the best forex trading courses here.
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