A Closer Look at the Basics of Forex Trading

You see investing as your path to financial freedom. But you fear the Bitcoin wave is already over, and you want to stay away from the stock market.

What’s your next move?

People are always looking for the next big investment. Bitcoin, stocks, etc. But there’s one you might not have considered, and it’s right under your nose (and no, it’s not stock trading).

It’s called Forex trading. And believe it or not, the odds are high that you’ve already participated in it.

Read on, and we’ll tell you more about the basics and how you can cash in on something you’ve probably already done.

What Is Forex Trading?

See, Forex stands for the foreign exchange market, and it’s even larger than the stock market.

Countries around the world each have their own currency (as we know). If you’ve ever travelled outside the EU, you’ve probably had to exchange your euros for the local currency.

For example, if you travelled to Japan, you would have to exchange your Euro for Yen upon touching down in Tokyo.

Congratulations! You’ve just participated in the foreign exchange market.

Every day, throughout day, the exchange rate between these pairs of currencies is changing. The value goes up and down based upon events occurring around the world at any given time.

What kind of events, you ask? Well, the currencies can respond to several things including government meetings, holidays, and even terrorist attacks.

The difference between the values of the currencies creates movement up and down in the market. For example, sometimes the Euro may be worth more than the Japanese Yen, and other times it may be worth less. This is what allows us to trade foreign currency pairs to make money.

Open A Trading Account To Get Started

The first thing you’ll need to do is sign up for a broker account. This is the platform where you will do your trading.

There are a wide variety of broker platforms with different features. Some even have mobile apps that allow you to trade right from your phone!

If you’re interested in trading Forex, you can search the internet, read reviews, and find the best trading platform that works for you.

Once you open this broker account, you’ll have to fund it. Most brokers can take money from a bank account, credit card, debit card, and some even take cryptocurrency.

Once your forex broker is funded you are ready to go!

**NOTE: The type of Forex trading you want to pursue will dictate what broker will work best. Do your research and choose wisely.

Two Types of Trading

There are two different ways you can trade Forex.

You can take longer trades that may last the span of a whole day or more. These trades can be a little bit more complex, as you have to pay attention to things like lot size and stop loss. With these trades, you’re looking for price to rise or fall a significant distance.

The other form is known as Binary Forex. These types of trades happen in minutes, and the distance price moves doesn’t matter. In Binary Forex your only job is to predict if price will move up, or move down, within a specific timeframe you select within your broker platform.

Trades can last 3 minutes, 5 minutes, 15 minutes, all the way up to a few hours. The main difference between Binary and traditional Forex is Binary trades are always finished within the day. Whereas traditional forex trades are held for longer periods of time.

The longer a trade is, the more subject to currency exchange rates it becomes. So, while there is a potential to make more money with longer-term trades, the potential risk is greater.

Shortening the amount of time you spend in a trade comes in handy, in particular, when someone’s income is in a different currency than is being traded.

There are various strategies you can use to analyse the market charts and decide whether to buy or sell a particular currency pair. In any investment, however, the same general rule applies: buy low, sell high.

It’s important to go over some terminology. When you’re trading Forex, Binary especially, the buttons you’ll click to enter a trade will be labelled “Put” or “Call”.

“Put” is just a fancy way to say you’re choosing to sell the market. “Call” is just a fancy way of saying you want to buy the market.

Analysing a Currency Pair

To successfully decide whether to buy or sell a Forex pair, you’ll need to do some analysis.

Generally, there are two types of analysis in the Forex world: technical and fundamental.

Fundamental analysis is based on everything happening in the world. Essentially, fundamental analysis is reading the news. Some investors feel more comfortable investing based on what is occurring in the economies or politics of the countries involved in the currency pair they are trading.

Technical analysis refers to analysing how the price of the currency pair moves throughout the day. For technical analysis, you need to become familiar with a price chart.

If you’re looking for help with analysing a currency pair, join our telegram chat to receive our Forex analysis, tips, and strategies.

How To Look At A Price Chart

As the price of a currency pair moves up and down, it is charted throughout the day on something called a candlestick chart. Each currency pair has its own candlestick chart.

These charts are called “candlestick charts” because they contain green and red “candlesticks” that plot the movement of price. Let’s look at an example to help explain:

For this example, we’re going to be trading the Euro as it relates to the U.S. Dollar (EURUSD).

When you pull up EURUSD in your broker, you will see the candlesticks moving up and down the chart. You’ll notice that the “candlesticks” can be either green or red. Green candles move up and red candles move down.

But how do we know which currency is behind which candle? We’re glad you asked. When you look at the way the pair is written, EURUSD for our example, the currency that’s listed first is the one that indicates upward movement. The second currency in the pair always indicates downward movement.

That means, in our example, the Euro (EUR) is responsible for the green candles and the U.S. Dollar (USD) is responsible for the red.

Each chart can be viewed on several different “timeframes” (1-minute, 5-minute, 15-minute, etc.).

The timeframe dictates the amount of time it takes for each candle to close. If we are viewing EURUSD on a 1-minute timeframe chart, each candle will take 1 minute to close. These different timeframes of the chart come in handy if you decide to trade short-term Forex.

Reading Price Itself

When you first open up a candlestick chart it can be a lot to take in. Just know that the candles are a representation of price.

Now that you understand why the candles move the way they do, let’s talk about price itself. Price is measured in a unit called “pips”.

Next to the name of your chosen pair, EURAUD for example, you will see a 7-digit number. It will be a whole number followed by 6 decimal places. You’ll notice that the last 2 decimal places will be constantly changing.

The second-to-last decimal place measures “pips” and the last decimal place measures price in “micropips”.

If you are trading Binary Forex, you will be watching price until it hits your desired level and then ultimately click the buy or sell button yourself. In traditional Forex, however, you’ll have to enter your entry price level beforehand.

Also, when trading traditional Forex, you’ll need to monitor when you want to exit the market as well. These are called your “take profit” levels.

 

Risk Management

Risk management is an important part of investing in Forex. You want to see your account grow, not be depleted.

This is where risk management comes in. You can make a lot of money in the Forex market, but you can also lose a lot. Proper account management and responsible trading make sure that doesn’t happen.

To practise proper risk management, most investors say you should risk 1-3% of your account balance on a given trade. If you win, great! Your account grows. If you lose, great! You learnt something and you don’t have to sell your house to pay back your losses.

Tools like your stop-loss can help you manage your account as well.

Your stop-loss isn’t necessary, but it’s very important. It helps you to manage your risk and not lose a lot of money. Trading without one leaves you at risk.

Let’s go back to our example of EURAUD. Let’s say you want to buy EURAUD (which means you’re predicting it to go up). Think of your stop-loss as the “emergency brake” on your trade.

If we’re predicting EURAUD to go up, we will have a stop-loss at a slightly lower level than our entry price just in case we were wrong and price starts to fall.

Once price hits our stop-loss level, we will be out of the trade. We will have lost some money at this point, but we’ll live to fight another day!

Sharpen Your Skills Risk-Free With $100,000 Virtual Cash

So what now? You’ve learnt the basics of how to invest in Forex. It can be a lot to take in, and the only way to start to grasp the skill is to practise.

But how do you practise without losing money? Download our app! If you’re interested in traditional Forex, check out MetaTrader 4.

Once you download our app on your smartphone or tablet, you can open up a demo account for forex trading. This allows you to watch how price moves, test out new strategies and take trades on live market data without risking any of your own money.

Your demo account will be “funded” with “money” you can use to start sharpening your skills.

For more information on Forex or our app, feel free to contact us anytime.

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