Forex Trading For Beginners – Forex trading for beginners guide is very essential if you must succeed in the business. The business is a lucrative one, even though it’s not without it’s upsides or downsides. So if you are confused on how to start a Forex trading, here’s is our guide for forex trading for beginners.
Table of Contents
What is Forex?
Forex is a global decentralized trading market of the world’s currencies of changing one currency into another currency for reasons like commerce, trading or tourism etc. Banks, traders, investors and exchanges buy, sell and speculate on these currencies, and this activity in turn determines the foreign exchange rate.
How Does Forex Trading Work?
The primary purpose of forex is to buy and sell currencies, with the sole aim of making a profit. The forex trading involves two currencies at a time, the base currency and the quote currency. Where the difference in price comes in, is where you will make your profit or loss.
How Sure is Forex Trading?
Every business has its high’s and low’s, but in every thing you just have to take the risk and see how it works. Forex can create profits, which is the reason so many people are taking the risk to invest in it. If you are new to the business, you should start with a live account, and consider the risks fully involved before you start. Avoid using a demo account if you are just starting up with forex trading.
What is Position?
Position here, refers to a trade which is currently in progress. In forex trading you can get long positions and short positions, let’s discuss the two.
Long Position: Long position is when the trader has purchased a currency with the expectation that it will increase. After the currency is sold back, the long position is considered closed.
Short Position: A short position is when the trader has sold a currency with the exception that it will decrease. After the currency is bought back, the short position is considered closed.
What Currency is the Most Popular in Forex Trading?
Any currency pair can be traded with in theory, but still there are some that are consistently the most traded. These are known as major pairs. They make up to 80% of the entire trading volume in the forex market.
These major pairs are linked with stable economies, thus offer low volatility and high liquidity. Another thing to note, about the major pair, is that there is similar risk of them getting manipulated and the spreads and normally small.
What are Cross Currency Pairs?
Also known as crosses, cross currency pairs are the pairs that do not include the US Dollar. This makes them more volatile and less liquid than Majors. The US Dollar features in every major pair, while Crosses are concerned with more ‘minor’ currencies like the EUR/GBP, the GBP/JPY and the EUR /JPY.
What are Exotic Pairs
Exotic pairs are those currencies that come from smaller economies and the emerging markets. Exotic pairs are usually paired up with a major currency. This is because these, offer the least amount of liquidity and the highest volatility of the three brackets, and are regarded as the most risky to trade. Examples includes USD/MXN, GBP/NOK and CHF/NOK.
Forex Risks Every Beginner Should Know
Leverage Risk: Leveraging in trading can have both a positive as well as negative impact on your trading, (i.e.) the higher the leverage, the larger your benefits or losses.
Interest Rate Risk: Once a country’s interest rate goes up, the currency could strengthen. The boost in strength can be attributed to an influx of investments in that country’s money markets because with a stronger currency, higher returns could be likely. Note, that if the interest rate falls, the currency may weaken, which will automatically result in more investors withdrawing their investments.
Transaction Risk: This is a risk exchange rate that can be linked with the time differences between the different countries. This can happen sometime between the beginning and end of a contract. There is a likelihood that during the 24-hours, exchange rates will change even before settling a trade. The transaction risk increases the greater the time difference between entering and settling a contract.
Abbreviations for the Most Common Currencies
Forex relies on abbreviations for ease for the various currencies.
- EUR: Euro
- USD: US Dollar
- JPY: Japanese Yen
- GBP: British Pound
- CHF: Swiss Franc
- AUD: Australian Dollar
- CAD: Canadian Dollar
- NXD: New Zealand Dollar
- MXN: Mexican Peso
- NOK: Norwegian Krone
- DKK: Danish Krone
- CNY: Chinese Yuan Renminbi
Nicknames for all Pairs
When it comes to forex trading, the various combinations of currency pairs have come up with their own nicknames. While some have historical relevance, others are self explanatory. They are:
- EUR/USD – “Fiber”
- GBP/USD – “Cable”
- AUD/USD – “Aussie”
- NZD/USD – “Kiwi”
- USD/JPY – “Gopher”
- USD/CHF – “Swissie”
- USD/CAD – “Loonie”
- EUR/GBP – “Chunnel”
- GBP/JPY – “Guppy”
- CAD/CHF – “Loonie Swissy”
- EUR/JPY – “Yuppy”
- NZD/JPY – “Kiwi Yen”
How to Start Forex Trading
If you desire to make a business out of forex trading, you should always use a broker who is a regulated and has a five-year track record in the minimum. With trading, you will be required to deposit funds to make the first trade, in what is known as a margin account. As a beginner, it will actually help to start with a demo account. This will accommodate all your mistake as a newbie without risking any of your actual money, until you gain more confidence