New to trading? Forex Trading is one of the most lucrative and efficient ways for a beginning investor to earn their stripes. Unlike stock trading, Forex trading occurs daily making It easier for one to take care of their investments. While it is a market that is tough to learn, it is great to learn as a foundation for creating proper investments.
When trading on the Forex market, it is best to have a strategy. Strategies will help you effectively manage risk while gaining the most return from the investments. Thus, we recommend to take a bit of time to learn more about Forex before making any untimely decisions. Playing the Forex game properly will become a huge benefit to one’s life!
This guide will give a comprehensive outlook of the world of Forex Trading. Trading currencies has never been so easy!
Forex Trading Terminology
Before jumping in and making a trade, it is best to learn about the basic terminology. Most beginners often rush into making trades without understanding anything about the mechanics of forex trading. We can fix that problem!
Bull & Bear Markets
Bull & Bear markets refer to the psychology and mindset of the market. Both terms represent the prosperity and the tactics traders use throughout each phase.
A bull market, is a market that is high in confidence; currency or stock prices are going up. A “bull trader” will trade aggressively as they believe the market will rise.
A bear market, is when the market is low in confidence and currency prices tend to decease. “Bear traders” will play more defensively, as they are pessimistic about the future market growth.
Pips & Pipettes
A price interest point (pip) is the main unit of measurement in forex. It measures the change in exchange rate for a currency pair.
A pip is usually located in the fourth decimal point in a currency rate. For example: a pip is 1/10,000 of a dollar.
However, there Is one exception.
The Japanese Yen is only measured within 2 decimal points. So, a pip in yen is located within the second decimal point.
A pipette is simply a faction of a pip; it is 1/10 of a pip. Thus, a pipette is located within the fifth decimal point in a currency rate.
Simply, a spread is the cost of trading. Think of spread as the commission for a broker or a bank for their services.
For example, let’s assume that the official USD/CAD rate is 1.3000. If the broker sells you that at the same price, they would receive no profit. So, by creating raising the price by 1.3001, they increase the spread.
The difference between the official rate and the broker quote is .1.
That difference is the spread!
Long or Short? Order Types and Calculating Profits & Losses
Let’s talk on trade orders. A trade order tells a buyer when to enter or exit a position. To make it simple, we will speak on Long and Short order types. Both are crucial in learning how to trade effectively in the ever-changing forex market.
It is important to understand the duration of a trade and the direction in which a trade can be established. Two trades can be made in anticipation of a falling or rising market.
Long trades are the general form of trade orders. It is used when seeing if the market will rise in an extended period. When using long trade orders, it offers the advantage of having less risk than short trades. Long trades are the classic method in obtaining profits in a growing market.
Short trades are trades that tend to make a profit out of a falling market. Unlike long trades, the risk is unlimited. Meaning that a large drop in price can mean for a huge loss for a broker. Thus, by using short trades it is best to effectively manage risk to save one’s investments.
For beginners, we recommend partaking in long trades due to their low-risk and easy entry. Experienced traders should attempt short trades to receive higher rewards from their investments.
What is Professional Forex Trading?
Professional Forex Trading is where investments in currencies come to life. Professional Forex traders often use a set of analytical methods to ensure that their investment will net a high amount of returns and profit.
What is Fundamental Analysis?
Fundamental analysis looks at the economic strength of countries, which is influenced by monetary, political and social forces. The better the current and future economic outlook for a country, the more foreign businesses and investors will invest resources into it. By investing, they are creating demand for the country’s currency and they are converting their currency and buying local currency.
Here is a rule of thumb: The higher the demand for a currency, the higher its value.
For example, after the 2016 election the USD value skyrocketed. What was the reason? It was the increase in demand of the USD after the election results have been published. Currency changes in demand constantly and it is best to trade once the demand is at a peak.
What is Price Action Trading Analysis?
Price Action Trading Analysis is a form of analysis that only takes account of the price of the market. This means that most decisions will be made through observation of the price chart. For beginners, this is a great entry level of analysis. Price represents the economic strength of a country and when applied correctly, can easily measure how valuable a currency will be in each amount of time.
Introduction to Forex Charting
There are three forms of charts within Forex Trading.
Line charts are the simplest form of chart to analyze data within the forex market. However, the weakness of the line chart is that it does not have any form of measurements to accurately measure the change in currencies. However, for beginners it is the best way of getting a basic outlook as to how the market fluctuates over time.
Bar charts show the price bar for certain periods of time. So, if you are looking at a daily bar chart, you can see a chart for the day. If it is at a span of 4 hours, then it will show over 4 hours.
Like Line charts, they are simple to read, but are useless when it comes to making predictions.
Candlestick charts are the standard charts for forex trading. It is recommended to study the fluctuations from candlestick starts to see how the price changes in time. It displays the body of the price and how it changes throughout time.
What Is a Forex Trading Strategy?
The goal of a forex trader is to create the most return on their investments. The best way to trade effectively trade is by having a strategy.
One common mistake that new traders make is to create an optimal strategy that helps them invest in the long term. Forex strategies are usually free and can be utilized to help improve the skills of a trader.
Common Forex trading mistakes and traps
Trading at Wrong Times
Another mistake that traders make is conducting trades through non-optimal times. For example, trading during the weekends will lead to further losses. This is since the banks and hedge funds are starting to close for the weekend. Thus, making it inappropriate to trade effectively during this time.
Primetime TV Events
It is recommended not to trade during events such as the Super bowl, World Cup, Olympics, etc. This is because the economy can change at a rapid rate. Just like holidays, it should be avoided.
Bank holidays are a terrible time for trading. Banks often cannot process the transactions during this period. Meaning that through trading during this option it will cause a lot of losses in your investments.
What is Technical Analysis
With technical analysis, the focus is to check evaluate securities and attempt to forecast the future through analyzing the statistics. Unlike fundamental analysis, technical analysis focuses even deeper on the numbers and places on the chart. It is used for more experienced traders in the field.
It is recommended to study technical analysis to have a stronger understanding of forex trading.
How to Make a Forex Trading Plan
Plans are what separate basic traders to trading champions. Making an effective plan and strategy will aid you to making smarter investments.
Create a Journal
Creating a journal requires three easy steps.
1) Make a Forex trading plan
2) Use an existing trading journal
3) Use them both.
It is recommended to use the journal to note how the trades are doing. Logging in the trades will create a blueprint for the trading habits. By doing this, it allows one to figure out their trades and effectively manage the risks.
The Psychology of Forex Trading
The psychology of forex trading is simple. Some psychological traits that can cause for beginner traders to make rather untimely decisions. With proper discipline, one can easily make their way to become a good trader.
Greed is one of the main reasons that beginner traders fail. After receiving a positive return from one investment, they tap into their greed and often buy above their means. By letting one’s greed take into their decisions, it will often lead into more problems and less returns.
How to Survive this Trap
For beginners, make sure to leave the emotions at the door. Emotional trading and letting one’s mind psychologically affect their trades will only lead to further losses. Trade during the beginning of the day to have a clear mind. This will aid in making more sound investments decisions and is more helpful for the long term.
Professional Price Action Forex Trading Strategies
To trade professionally, it is best to have a high level of discipline. Discipline allows for calculated decisions to be made. Additionally, when the mind is thoroughly disciplined, it can check the markets with an efficient and strong method.
Making the switch from beginner to professional trading will take time. Through thorough discipline, predicting trends and understanding changes within the economy of a country makes the investment process even easier and more effective!