Have you ever heard the term “foreign-exchange market”? This is forex trading for beginners.
It is where buying and selling various currencies around the world. The goal of forex trading is buying at a cheap price but able to sell at a high price. Companies that run business or tourism are familiar with forex trading.
But how does forex trading works? If you are new in forex, this article comprises pieces of information that will guide you to trade.
The Definition of Forex Market
Forex market is a marketplace where people can trade any national currencies. We know it as the world’s most liquid and largest financial marketplace, where trillions of dollars can change hands every minute.
Usually, there are multiple reasons that entities want to change currencies. They can use it for trading, commerce, or tourism. Other purposes are to give a barrier against the international currency, to expand portfolios, to contemplate geopolitical events, or any business-related.
Exchange currencies are one of the most important things in the world. Especially if you run a business or aim to conduct foreign trade.
Let’s take a brief example to deepen understanding:
You live in America and run a textile business. You need to buy some materials from India but you only have the U.S. dollar. It means that you need to exchange your dollar to rupee to pay India for the materials.
Forex has no centralized location. It is a marketplace that is in an electronic network that works with individuals, brokers, banks, and institutions. In other words, people can trade any national currencies and access forex any time they need.
Forex market itself opens 24 hours a day in five days a week, except for holidays. You can see the schedule here. So whenever any entities that have currency needs at the moment, they can take the advantage of the electronic network to post their order, whether it’s for buying or selling currencies.
Furthermore, they can finally interact and make a deal with other parties that may also post currency orders.
There are three types of accounts for investors in the forex trading market; standard lots, mini lots, and micro-lots. We suggest you start with a micro account worth $50 to trade. If you want to try a demo now, click here.
Terms You Should Learn
Now that you have understood the definition and purpose of forex trading, here are some beginner’s terms that you also need to learn.
You need to realize these terms and terminologies before jump into the forex market.
It is a structure based on the quotation and pricing of the currencies traded in the forex market. The currency’s value is defined by its ratio to other currencies. Currency pair has two currencies that connected to one another, base currency, and quote currency because quote currency is needed when a unit of the base currency is purchased.
It is the first currency quoted in currency pair for forex trading. It can be referred to as accounting currency or domestic currency.
It is the second currency quoted in the currency pair for forex trading. There are two parts that you should learn in quote currency, which are direct and indirect quotes. The direct quote takes part in foreign currency. On the other hand, an indirect quote takes part as domestic currency. It is also acknowledged as counter currency or secondary currency.
Cross Currency Pair
This pair of currencies in forex trading does not include the U.S. dollar in it. It can be used for those who need to trade foreign currency to another without exchanging the currency to American dollars first.
It refers to the smallest price change made by an exchange rate. Most major currency pairs have four decimal points, PIP is usually the last decimal point.
It is important to note that trading currencies are listed in pairs. For example, Euro and U.S. dollar (EUR/USD), U.S. dollar and Canadian dollar (USD/CAD), or U.S. dollar and Japanese yen (USD/JPY). Each pair will also have a correlated price.
Take this one as an example, if the correlated price of USD/CAD was 1.2569, then it costs 1.2569 CAD to buy a USD. However, if the price increased to 1.3335, then you may need 1.3335 CAD to buy a USD.
How to Trade Forex?
Forex opens 24 hours a day in five days during the week, except for holidays. That means that you are able to buy or sell currencies at any time in a week. If any country or global market still operates for business during holidays, it allows any parties to trade currencies at that time.
From a previous historical standpoint, only limited parties can trade forex. Those parties are such as large companies, governments, and hedge funds. But as time goes by, now everyone can access forex trading.
Not only because the process is as easy as scrolling to the virtual world, but also because we welcome even an individual investment to open an account to trade currencies.
Trading in the forex market allows the participant to buy or sell the currency of a particular country relative to another country. One thing to note is that there is no physical exchange of money that happens during trading.
The trading process is through electronic markets, so the participants can make a profit from a particular position in a specific currency that is taken. We can see it through some upward movement and strength or weakness in the currency that they buy or sell.
There is always a connection between forex trading to another currency. If a participant buys a currency, it means he is selling another one. Vice versa, if a participant sells a currency, he is buying another one. The connection brings profit to the participant, that is the gap between the transaction prices.
Types of Forex Market
Beginners also need to know the differences in forex markets. There are basically three markets where participants are able to trade forex, they are spot market, forwards market, and the futures market.
The spot market is known as the largest market to forex trading and also known as the base to jump in forwards and futures markets. In the previous time, people were more familiar with the futures market because it was the most popular among traders who ran as individual investors.
However, due to the advanced movement of the electronic networks in trading, the spot market has gone beyond the futures market and now preferred as a trading market for individual investors or speculators.
Currencies in the spot markets are bought and sold based on the current price, which is defined by supply and demand. The price also includes current economic performance, the current political situation happens both locally and internationally, interest rates, also the insight of future currencies’ performance against one other.
Participants usually finalized their deal as spot deal and make a transaction in cash. The trades usually take two days for the completion.
In this present moment, forwards and futures markets are more popular and most used by companies that need to avoid their foreign exchange risks that will happen in the future.
Even so, the trade that happens in forwards and futures markets do not count actual currencies. The deal that appears in both markets come in a form of contracts that describe ownership of certain currency type, a specific price per unit, and a future date for completion.
Contracts are bought and sold electronically over-the-counter between two participants in the forwards market, based on the terms and agreement that both participants have agreed.
The futures market is usually beneficial for larger companies. Contracts are bought and sold based on a standard size and settlement date on public commodities markets.
The contracts have characteristics, such as the unit being traded, settlement date and delivery, also unchangeable minimum price increased. In this case, the exchange provides clearance and settlement, also performs as a trader’s counterpart.
Both forwards and futures markets suggest the parties for protection against the high risk that may happen during trading. Large international companies usually prefer to use these markets to avoid future exchange rate fluctuation.
But sometimes, speculators also use these markets as well.
You may often meet such terms like foreign-exchange market, FX, or currency market during your learning as a forex trader. Take note that they all have the same meaning that refers to the forex market.
Basic Trading Strategies for Beginners
If you are a newbie, begin with a simple strategy. Here are some elements that you need to pay attention to and may include in your forex trading strategies. We also recommend that you look for our strategy updates in Juno Insights.
This is the first strategy you can use to trade forex. You can start small by stick to a minimum stock in the beginning while you try to find your strength.
Do it every single day.
Take note that it’s way better to start small than start in a hurry but get nothing accomplished.
You need to dedicate your time if you aim to reach success. You can not just dream of getting better luck if you only spend an hour or two in a day trading.
Dedicate your time to monitor the market. In that way, you can look for opportunities that will open the door for you.
Make a decision on how much of your stock that you are willing to risk. Most successful traders will not sacrifice more than 2% of their stock in every trade, but they still win anyway.
Remember to start small but think big, don’t forget to prepare for your losses if you still want to last long in forex trading.
Gain As Much Knowledge As You Can
You need to keep your eyes wide open to the market news or events and your soul thirst for knowledge about trading. Those two elements equal as weapons if you want to dive into forex trading. Knowing the current news about the economic market and event related to your asset may help to strengthen your trading game.
In addition, a click on your device can also access easily online sources about expanding your knowledge. It can be through online videos, blogs, PDFs, forums, and books. Many are available online and free. Like this Beginner’s Guide Tutorial.
Now that you already have basic strategies to start forex trading, keep those strategies, logic, and calculation as your guide. You need to be a commitment to yourself that you’re going to make it.
Why not? As you already dedicated your time, willingness, and also capital in it.
Get Yourself Some Tools to Use
You will need many tools as your weapon on your way to being a successful trader. Not only helping you to operate the system easier, but tools can also deepen your understanding through the experiment that you undertake.
You can get an unlimited demo account on the internet to start, such as this Economic-Calendar.
The Risks of Forex Trading
Take a note that any potential profit offered by any investment also has downside risk. Not only known as the most liquid financial marketplace, but we also know the forex market as a wild online trading world.
Even though it’s fast, liquid, and changeable, a participant can lose much more than the value of the transaction during trading.
This is the downside and risk of forex trading; you can make money fast, but you can also lose money fast. There are various major risks in the foreign exchange market, such as exchange rate risk, interest rate risk, country risk, liquidity risk, credit risk, transactional risk, marginal or leverage risk, even to risk of ruin.