It’s easy to forget, but Forex markets are actually very new. They do not date back centuries like stock markets do, and are insead a phenomenon of the past half century. Because of that, Forex strategy and markets are still evolving. Here is a guide to help get you started as a Forex trader.
Choosing the right broker for you
Whilst signing up to Forex brokers may not be the first thing on your list, it’s a vitally important step nonetheless. There’s a large, growing selection of brokers out there, as covered by Topbrokers.com. The key here is to remember that whilst traditional brokers used to charge considerable fees and such, competition is getting more fierce, so don’t settle for an expensive broker.
Moreover, there’s now a battle for features going on. Some brokers specialise in APIs for algorithm trading, whilst others specialise in having an accessible mobile user interface. As a rule of thumb, find one that will facilitate a demo account, so you can get started using fake money, and also find one with low minimum deposits, and a smooth, low-cost withdrawal process.
Always check the regulation and security of the platform to ensure your money is safe. If there’s a low minimum deposit, it may be worth trying out several accounts and using the interface you prefer the most. Some will have better research and data than others, whilst others specialise in great indicator and charting functionality.
Research and study
Jumping straight into Forex without any knowledge on the subject can be a recipe for disaster, unless you’re using a demo account. There’s a lot to learn, so start off reading about currency market fundamentals.
There’s a whole host of material to learn from, such as books, audiobooks, blogs, YouTube tutorials and so on. Once you understand the basics, learn about the different strategies of Forex trading: day trading, swing trading, fundamental analysis and so on.
It’s not just the technical aspects of Forex alone, though. Some reading on Warren Buffet and other investors, even if they’re not specifically Forex, can give great insight and wisdom.
Learn the Terminology
Research includes learning all about the terminology used in Forex. Here is a brief guide:
The spread is the difference between the sale and buy price of a currency pair. The larger the spread, the worse the deal. Generally, more popular currency pairings have lower spreads.
Spot Forex is the simpler version of Forex: you buy and sell the actual currency. This can be tangibly realised when the price goes up, and you trade back to your base currency, where you will have more than when you started.
Spot Forex may have sounded blatantly obvious, but it’s worth mentioning because there’s an alternative: CFDs (Contract for Difference). CFDs is a contract that represents the movement in prices of financial instruments. It’s a contract, not the currency or asset itself. Thus, you can trade these without ever owning the currency, which can also be a way to leverage your earnings.
Pip is equal to 0.0001 of the quote price – the base unit of a currency pair. This is a way to represent the difference between pairings, i.e. 1 pip.
Margin trading is a deposit with a broker which is used to open positions that are larger than their deposit. This is known as leverage, where the capital is provided by the broker in order to increase the volume of your trade.
Learn your charts
Before heading deep into Forex strategy, first learn the differences between charts and how to read them. There’s line charts, OHLC bar charts, Candlestick charts and many more. Then, it’s important to be able to read them, the resistance lines, pricing, time, and trends. If you have software at your disposal, play around with the different indicators.
Decide on a strategy and process
The strategy you decide on will not only have to appeal to you logically, but also match your personality. For example, algorithm trading can be great for those who are emotionally driven, because it will help prevent you making rash decisions. Buy and hold strategies based on intuition, news and other qualitative analysis however can throw some challenges for those with a less than steady hand.
After experimenting with all of the strategies, learn one to a very in-depth level, as opposed to spreading yourself too thin. A mixture of strategies can be useful down the line, but you want to first become an expert at just one. It’s not worth considering algorithmic trading unless you’re already proficient in programming, or would like to spend the time to be.
As mentioned earlier, it’s important to experiment first with a demo account and fake money. On top of this, you can also backtest your strategy if it’s rule-based, and perform other tests to ensure it’s working. No historical results can ever truly reflect the future, but it’s a better idea than jumping in without some evidence of it working.