How to trade Forex: Step by step guide to Forex Trading
Services that are provided by forex brokers is quite easy. Everything is handled automatically, you register and log in to a platform and that platform allows you to trade currencies. Of course, individuals can still buy or sell currencies through banks and exchange offices, forex brokers provide many benefits, like tools that allow you to make analysis, charts, as well as a certain degree of leverage which allows you to engage in more lucrative trading.
The first thing that you’ll need to do is choose a forex broker. Once you do that you’ll need to make a deposit, optionally claim a trading bonus and then you’re good to go.
Currency pairs and its characteristics
You are surely aware that forex trading involves predicting whether the value of one currency in a respective currency pair is going to grow or decrease. Therefore, you’ll need to select the currency pair that you’re going to be trading.
- It would be wise to pick one of the major currency pairs, especially if you’re new to forex trading.
- If you know a bit more about the two currencies of the respective pair and the financial situation in the respective countries, that would be even better.
- You don’t have to limit yourself to just one currency pair, but trading more than few is probably not a good idea either.
Major currency pairs are more frequently traded, brokers usually offer higher leverage and lower market spread on those pairs and therefore they are a lot more suitable for traders who are not yet ready to take major risks. Plus, currencies of which major pairs are consisted tend to be a lot less volatile, which means that you are not likely to lose a large amount of money.
In many cases, it would be smart to trade one of the pairs which include your country’s currency, it is not necessary. Perhaps you come from a country with an unstable currency, or you know more about other currencies. It is important to do a bit of research and aim to find a strong reason why you think that a certain currency would gain or lose value.
Don’t trade too many currency pairs at once, but trading a few might be a good solution. As the old saying goes, it is never smart to put all eggs in one basket. Investment diversification is usually a good idea.
TRADING ON MARGIN
If prices are quoted to the hundredths of cents, how can you see any significant return on your investment when you trade forex? The answer is leverage.
When you trade forex, you’re effectively borrowing the first currency in the pair to buy or sell the second currency. With a US$5-trillion-a-day market, the liquidity is so deep that liquidity providers—the big banks, basically—allow you to trade with leverage. To trade with leverage, you simply set aside the required margin for your trade size. If you’re trading 200:1 leverage, for example, you can trade £2,000 in the market while only setting aside £10 in margin in your trading account. For 50:1 leverage, the same trade size would still only require about £40 in margin. This gives you much more exposure, while keeping your capital investment down.
But leverage doesn’t just increase your profit potential. It can also increase your losses, which can exceed deposited funds. When you’re new to forex, you should always start trading small with lower leverage ratios, until you feel comfortable in the market.
Pip basic trading units
A pip (abbreviation from price interest point) is the smallest change of the value of traded currency. If you’re trading US dollars, the pip is usually $0.0001. An increase of 1 pip is a very small change, which wouldn’t make a particular impact if you’re trading a small number of currency units, but if you trade, say 10 lot sizes worth 100,000 units, than an increase of one pip could yield a profit worth $100.
The pip is usually the fourth decimal place for major currencies, expect for pairs which include the Japanese yen, in which case it might be the second decimal. Some brokers set the pip at the fifth and third decimal spot respectively. Often a unit smaller than the pip is also offered, called a pipette.
- When making an estimate that a currency is going to grow against another, try to predict by how many pips, at least roughly, will it be. That way, you’ll be able to calculate the expected gains, which will help you decide what leverage you should use and what lot size you should trade.
- Always remember that in times of crisis or expected market fluctuations, the value of currencies may change significantly, even in the course of one day.
- Some currencies are generally more volatile than others and if you’re thinking of trading them, beware of that.
Learn before moving to a more Complex Platform
You will notice that most forex brokers offer more than one trading platform. But, we’re not talking about download and web-based platform, we’re talking of platforms that include different trading options and features. Generally, you can expect one platform to be simpler and more straightforward and another which includes more complex options.
Essentially, the basic, simpler platform is designed for rookie traders, who are still new to forex trading and aren’t well familiarised with the more complex aspects of the trade process. For example, this platforms often include so called floating spreads. Floating spreads offer you a chance to get better bid and ask price throughout the day, but the risk is also increased, as the value of the floating spreads may change rapidly.
- Begin with platforms that have simpler features and are easier to use.
- Make sure that you understand every element or option, its advantages and disadvantages before you use it.
- Read some of the provided learning materials, or watch the provided tutorial videos before you start trading on a new platform.
When you claim a bonus at a forex broker, whether it is a Welcome Bonus, or some other promotion, you should know that the amount of the bonus isn’t the only thing that matters. The small print often says a lot more. Bonuses usually come with a trading volume requirement. This means that you would have to trade through, usually a pretty large amount of money before you are allowed to cash out your bonus, i.e. the money you earned with it.
- If you’re planning on depositing a larger amount of money, then claiming a bonus is probably a good idea.
- No Deposit Bonuses are generally a good idea, as you don’t risk anything.
- Always read the bonus terms and conditions before claiming it, and make sure you understand the requirements.
Guide to Trading Forex
Forex Trading Online currency trading is a process that uses the internet based forex trading account in predicting the value of the currency and how far it can vary accordingly in relation to another foreign currency. On predicting them correctly you’ll get profit. On the other side you’ll get into loss when you predict them incorrect.
During the time you trade forex you tend to buy a currency and sell the other currency. It is when trading a currency online with UK traders you have to choose a ‘currency pair’.
For instance, you might want to buy the USD against the JPY expecting the value of the dollar will increase in value relatively to the Japanese yen. If the US dollar rises in value compared to the Japanese yen during the time of your trade, you will obviously gain. On the other side you’ll get a loss.
Frequently traded currencies across the world forex markets are the EUR, GBP, USD and JPY.
There are various advantages available in the online forex trading. The UK investors benefit from the online forex trading platform is that you always can trade ‘on margin’. Indirectly it means you can avail a position for the excess of the capital available in your online forex account.
For instance, when you wanted to trade £10,000 on the currency pair GBP/USD you would be just be required to have just £200 capital at very low 2% margin.
It is believed that if the forex market goes against you then you would require having the full amount, along with any additional losses incurred, that is available to compensate your trade.
What has to be checked while browsing for the best online forex trading platform?
Trading forex online always requires you to have a dedicated forex trading account with a forex broker.
There are importantly three major factors that you should check while you’re searching for the best forex broker and the best online forex trading platform. The following are the major factors:
- The type of online currency the trading account basically deals with
- Degree of spreads that is charged to the traders by the broker
- The varieties of offers on currencies accommodated and the frequency
- How the broker lets you manage your account?
Basically you have to find out exactly what is the type of account you wanted to go with. There are various ways in trading currencies forex online along with contracts for difference forex trading, betting forex along with spreads and traditional forex trading. You have to think about how you need to trade and use forex. And you have to make sure that you get a better forex trading account that will allow you to do this.
The next thing that has to be checked is if it pays in comparing the ‘spreads’ charged by various broker for the currency you actually need to trade on. The ‘spread’ is simply the difference between the buying and selling price of the currency that you trade on. The best online currency trading accounts will tend to have narrow spread as this is exactly what is that the forex brokers earn as their profit.
Finally, there’s no use in getting a forex account opened which has limited access to trade on currencies like you will find brokers who restrict the currencies to trade on. Hence it’s very important in checking the broker who offers multiple promotions before you apply for the forex trading account.
Usually it is noted that most of the forex brokers will provide access to the most of the popular currencies. But when you need to go to something beyond than the exotic then your options and the services provided are likely to be restricted and limited.
Basic thing in the forex account is that you should know the way to manage your own forex account. There are many forex brokers who will offer a range of services in making trades and monitoring your account without any extra charges to the customer.