Online Forex Trading:
A Step-by-Step Guide For Beginners
Forex trading can seem complicated for those who are completely unaccustomed to it. However, knowing the basic terms and how they work would help you in this field if you are interested in this trading type. In this article, you would get a basic understanding of Forex trading in general.
What does Forex Trading mean?
Forex trading, or foreign exchange trading, involves evaluating the currency price movements. Traders can make speculation for practical use or earning a profit. In the case of the latter, if one accurately forecasts the next currency price movements, they can capitalize on their money.
A dyadic quotation of two currencies, quoting one currency value against the second, is called a currency pair. There are three main types of it, based on the learn to trade the markets and trading volume one paired currency holds.
- Minor Currency Pairs
These pairs, also called crosses, do not trade against the global reserve currency, U.S. Dollar. Previously, these were converted into USD and then into another currency. But now, it is used directly in Forex trading. They are more volatile; EUR/CHF and EUR/GBP are two common examples.
- Major Currency Pairs
These pairs make up almost 80% of the total Forex trade volume and have high liquidity and low volatility in the Forex market. The major currency pairs can trade against the global reserve currency. The countries with stable economies adopt this pairing mainly, for example, USD/PY and EUR/USD. The latter is the least volatile currency pair in the Forex market. Overall, all these pairs have smaller spreads and can withstand manipulations.
- Exotic Currency Pairs
Also known as minor pairs, the exotic currency pairs are riskier, can be manipulated easily, and are highly volatile. Plus, sudden changes in the financial or political conditions can affect these highly. These are visible mainly in emerging economies; two examples are Brazilian Real and South African Rand.
Price Chart in Forex Trading
The price chart is an important part of the Forex market and it is important to understand it well from the very beginning. While Forex trading, you have to utilise one for technical analysis more frequently.
The price chart is a simple visual picture of the prices of the currency pairs during a set time period. You can refer to it to understand the price movements of currency pairs, their patterns and tendencies.
On a chart, the x-axis showcases the time scale and the y-axis, the price scale. Across the former line, the prices are plotted in a left-to-right sequence, with the most recent one plotted at the extreme right.
There are three specific types.
- Line Charts- This is a simple chart that includes a drawn line between the two closing prices. Thus, you would notice only a series of closing prices here. For a quick overview of the price movements, traders can use this chart; however, it is not the most popular type.
- Candlestick Charts- These are the most detailed price charts, and are highly popular for Forex trading. It represents a specific period of the high, low, opening and closing prices of a particular currency. Here, for easier legibility, a graph appears between the two horizontal hashes. It visibly looks like a candle, and the projects at the bottom and top end outside of the graphic are called shadows.
- Bar Charts- These types of charts, also known as OHLC charts, are somewhat the middle ground of a line chart and candlestick chart. You can view both opening prices and closing prices here. In a 1-hour chart, one bar refers to 1 hour and details the closing and opening prices within that time. Also, it shows the lowest and highest prices in that hour as well.
These imply the commands that the traders give to a broker, stating their trade direction, order type, preferred currency pair, where to exit and take profit, and more such details.
You can use a Forex order to sell (short) when you expect that the currency pair would fall. In this case, your broker would close the sell order at the Ask price and execute at the Bid price. For buying (long), which you can do if you are expecting the currency pair to rise, the Ask price and Bid price positions, as seen during shorts, interchange.
In the Forex market, you can use any order type to exist or enter a position. Under this, there are five common types available.
- Market order- Traders can buy and sell immediately at the available market price. The trade occurs successfully in most of these orders, except with slight differences in the volatile markets.
- Limit order- You can trade in this order at a particular time and with an expiration data available. It works well for both selling and buying, and your orders would complete at the designated price. In the case of shorts, you need to keep the trigger price above the market price, and the opposite for longs.
- Take-profit order- Here, traders lock in their profits and then close the trade.
- Stop-loss order- You can limit your losses before losing your entire capital through a stop-loss order. When the exchange rate starts declining and you are buying at that time, this order would liquid your position automatically. Thus, the loss would be less.
- Stop order- When the trigger price is more than the current market price, you can buy. In contrast, if the trigger price is lower than the current market price, you have to sell. This is the basic form of this order.
Tips for Forex Trading
Before beginning to trade, you can try out the different strategies in Forex trading to measure the success rate of different techniques. Some tips that would help you achieve better trading success are as follows.
- Create a proper plan, with entry and exit strategies in place. Then, you should follow it carefully and that would help you maintain consistency.
- You need to analyse the two currencies you would pair and the macro-environmental forces that can affect them.
- Practise is very important when you are just starting with Forex trading; also, do not trade very big amounts early on.
Overall, if you have a proper understanding of the terms, your experience in Forex trading would go well. Research about the market, the currencies, etc., first and then begin trading.
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