Foreign exchange or forex trading is one of the most popular and largest trading transactions in the world. It encompasses all the currencies traded in the foreign exchange market. In a simple definition, forex trading is about converting one currency to another for financial gain. Essentially, a forex trader can buy one currency and sell another and gain an advantage from the fluctuation of the exchange rates by studying the trends of supply and demand.
Some people think that forex trading is risky and complicated. Yes, forex entails risks like any other type of investment. However, it isn’t necessarily complicated, as some impressive strategies and guides make you successful in this trade. Starting forex trading can be challenging, but various online resources can help beginners learn the ropes in no time.
To help beginners in forex trading establish a solid foothold in foreign exchange trade, we will share an easy-to-follow forex trading guide for starters.
Before jumping into the trade, you have to be familiar with the spot market first. Nowadays, when people talk about the forex market, they refer to the spot market. It is in the spot market where currencies are bought and sold according to their current prices. The supply and demand trends have a significant influence in determining the current price of a currency. Other factors that can affect currency price are economic performance, interest rates, local and international sentiments regarding ongoing political situations (e.g. the recent US presidential elections), and the perceived future performance of one currency against another. The finalized deal is known as a spot deal. When the spot deal is reached, it means that one party will deliver the agreed-upon currency amount to the other party and will also receive a specified amount of another currency at the agreed exchange rate. The settlement is in cash after a position is closed, and technological advancements make it easier to trade on this platform with PayPal and other payment provider services. These payment providers are crucial to faster and smoother settlement transactions between forex brokers.
Although the spot market is the preferred trading market by individual speculators and investors, you also have to take note of the forwards, and futures market. The forwards market involves the OTC buying and selling of contracts between two parties, where they determine the agreement terms. The futures market involves the buying and selling of futures contracts based on a standard size and settlement date on public commodities markets.
It is understandable for beginners in the forex trade to take a while to be entirely familiar with its concepts. Most forex trading platforms offer educational resources for beginners to ensure continued learning. There are various platforms available online, and choosing a beginner-friendly one can be quite tricky. People have different learning preferences, but a preferred choice would be a platform with more visual data. It is easier to get a good grasp of trends and numbers if they are presented as visual information like line graphs, pie charts, bar graphs, and others. Beginners can use these pieces of graphical data in formulating excellent trading strategies such as pin bar trading strategy and inside bar trading strategy. Both strategies need graphical information to be effectively applied during trading, and a good trading platform with graphical data, reports, and analyses can help you make a remarkable starting run.
It is only natural for beginners in the forex trade to be reluctant to make risky moves or use complex strategies. It is a smart choice. Starting with simple tactics with minimal risks and profits can help you build confidence in trading and make you interact and observe more experienced forex traders in action. Below are some simple and easy trading strategies beginners can use.
Perhaps one of the least complicated strategies you can use while starting the forex trade is the breakout strategy. A breakout happens when the market moves beyond its usual trend boundaries and begins a new part of highs and lows. You can use a graphical or numerical reference to take note of the current trend and observe new trends that might emerge. Before a new trend forms, a breakout must happen first. However, be careful in using this strategy as not all breakouts lead to new trends. By implementing risk management steps, you can minimize your losses on your first few trades using this strategy.
So how do you catch the breakout of a new trend? A good indicator is the period length of a breakout. A long breakout period can indicate a long-term trend while a short breakout period indicates a short-term trend. This period-length pattern observation allows you to react accordingly to the possible formation of a trend.
This is another simple and profitable forex trading strategy is the carry trade. It follows the principle of buying a high-yielding currency against a low-yielding one. Here, the broker will pay the interest rate differential to the trader as long as the position remains open. Another term for this is the rollover swap rate. As a trader, you have to look at the latest interest rates of the major currencies and observe and calculate the trends.
Let us take the example of USD/RUB trade. The US Federal Funds rate is 0.25%, while the Bank of Russia interest rate is 6%. It gives you a 5.75% interest rate spread between the two currencies. You can open a short position with $10,000 and 1:10 leverage to make this work to your advantage. You will earn $15.75 per day if your broker offers a rollover rate of 5.75%. It can accumulate to $472.60 per month and $5,750 in a year. You also have to note that many brokers do not offer rollover rates that match the interest rate differentials. However, this example shows the impressive profit potential of this simple strategy. There are plenty of options in this strategy, and you can always look for the most competitive rates.
We hope that the brief guide we have provided here can make new forex traders more confident in their trading. Any endeavor that involves investing money and potential profit need to be studied first. As a trader, it is essential to know the principles involved in the trade and develop strategies and decisions from these principles. No investment is without risks, and beginners will face struggles when starting the forex trade. Make it a point to take the trade as a learning experience and bounce back from your mistakes to succeed in this endeavor.