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What is the Forex market? Forex trading for beginners

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If you’re looking to start trading forex online and feel as though it is a potential opportunity for you make money, you’re properly wondering about the best way to get your feet wet and learn how to get started in Forex trading.

It’s important to have an understanding of the markets and trading strategies used to trade so that you can more effectively manage your risk, make winning trades, and set yourself up for success in the financial markets.

What is Forex?

For those of you who are complete newbies to Forex trading and are trying to learn the ropes, it can often be an overwhelming and daunting world, but it doesn’t have to be.

To put it very simply, Forex, otherwise known as foreign exchange (FX), is simply the practice of exchanging one currency for another.

Have you ever been on a trip abroad and had to swap your Dollars (USD) for Euro (EUR)? Or how about exchanging your British Pounds (GBP) for Australian Dollars (AUD)? If you answered yes, then guess what?

You’ve already had your first experience as a Forex trader, although it’s pretty likely that you didn’t make any money in this trade.

The Forex market that you are here to learn how to trade is made up of a huge decentralized trading network that allows you to trade currencies from all over the world. And when we say huge, we mean enormous.

The Forex market has a daily trading volume of just over $5 trillion USD. This is pretty staggering when you compare it with the stock exchange market that has around $250 billion USD of daily trading volume.

This makes Forex the largest and most liquid trading market in the entire world, so the opportunity to make profits are aplenty! One of the main reasons why it is so popular is due to it being open for business 24 hours a day, 5 days a week.

Don’t worry you don’t have to be glued to your screen all day. The market is closed over the weekend which gives you time to take some rest, reflect on your past trades and step away from the charts for a little while.

How does Forex trading work?

In the Forex (FX) market, you essentially buy or sell currencies with the aim of making a profit from the changes in their value. Forex, also known as foreign exchange, is a decentralised global market where all the wvorld’s currencies trade.

If you’ve ever travelled to another country, you usually had to find a currency exchange broker and then exchange (swap) your local currency into the currency of the country you are visiting. This is the basic principle of the forex market, buying currencies when the price is going up and selling currencies when the price is going down.

You may have heard of the New York stock exchange (NYSE) and thought to yourself that this is where the real money is being made. It may be a surprise to you to find out that the Forex market is actually the giant when it comes to trading, transacting over $5 Trillion per day compared to $22.4 Billion per day on the NYSE.

With an average daily trading volume of $5 trillion, Forex is one of the most actively traded markets in the world. Due to this huge popularity, the Forex market attracts many UK traders, both beginners and experienced traders alike.

Why trade Forex? What are the main advantages of being a Forex trader?

Forex market hours

Unlike Wall Street, the Forex markets are open 24 hours a day, 5 days a week. This provides traders with a huge window of potential trading time to work with, which can be both a blessing and a curse.
 
  • Certain markets such as stocks often have opening and closing times meaning you can’t place orders outside of these times. However, the Forex market is a 24-hour market, 5 days week from the Australian Open to the New York Close. The Forex market closes on Friday night at 10pm (UK time) and does not open again until 9pm (UK time) on Sunday evening. However, because the market is only closed to retail traders (not central banks and related organisations), Forex trading actually does take place over the weekend. This means that there can be a difference in price between Friday close and Sunday open – known as a gap.
  • This is an advantage for those who want to trade part time because you can choose when you want to trade: morning, noon, night, during breakfast, or in your sleep. Because Forex is a truly global market, you can always take advantage of different active session’s forex trading hours.
  • Traders need to be highly aware of the weekend Forex trading hours and alter their positions accordingly. If you do not want to expose your position to the risk of gapping, you may want to consider closing your position on Friday evening or placing stops and limits to manage this risk.

Tax-efficiency

Both spread betting and trading CFDs on forex can offer significant tax benefits:

  • Spread betting is completely tax-free.* There is no capital gains tax (CGT), as you never own the underlying asset
  • CFDs are not exempt from CGT. However, you can offset your losses against your profits for your CGT liability, which makes CFDs useful for hedging

Trade a wide range of currency pairs

Forex trading gives you the opportunity to trade a wide variety of currency pairs, speculating on global events and the relative strength of major and minor economies.

With most Forex brokers you can choose from over 80 currency pairs, including:

  • Major currency pairs, eg GBP/USD, EUR/USD, and USD/JPY
  • Minor pairs, eg USD/ZAR, SGB/JPY, CAD/CHF
  • Emerging currency pairs, eg USD/CNH, EUR/RUB and AUD/CNH
  • Exotic pairs, eg EUR/CZK, TRY/JPY, USD/MXN

Learn more about currency pairs and how to trade them in our free online trading course

Leverage can make your money go further

  • Leverage or margin trading offers the ability to make large profits from a relatively small investment. Leverage in Forex enables you to open a position against a currency pair by paying just a small proportion of the full value up front, similar to a deposit. The profit or loss you make will reflect that of the full position, not just the deposit (margin). However, this can also amplify losses, meaning losses could exceed your initial deposit. For this reason, it’s important to refer to our 6 risk management tips to stay as safe as possible whilst trading.

Hedge with Forex

Hedging is a technique that can be used to reduce the risk of unwanted moves in the forex market, by opening multiple strategic positions.

There are a variety of strategies you can use to hedge Forex, but one of the most common is hedging with multiple currency pairs. By choosing forex pairs that are positively correlated, such as GBP/USD and EUR/USD, but taking positions in opposite directions, you can limit your downside risk. For example, a loss on a short EUR/USD position could be mitigated by a long position on GBP/USD.

Alternatively, you could use forex to hedge against loss in other markets, such as commodities. For example, because the USD/CAD generally has an inverse relationship with crude oil, it is commonly used as a hedge against falling oil prices.

Why trade Forex instead of Stocks?

Deciding whether to start trading Forex or Stocks is an important decision that you should base on which asset you are interested in trading – currencies or shares. Here are a few reasons why some traders prefer to trade Forex than Stocks:

  • Market opening hours: The stock market is limited to an exchange’s opening hours, whereas the Forex market is open 24-hours a day. However, it is worth noting that certain stock indices are available for weekend trading
  • Higher liquidity: the Forex market sees an average daily turnover of $5 trillion, whereas the stock market sees comparatively fewer trades per day
  • Greater volatility: the stock market tends to have more stable prices that change over a longer period of time. Although this is great for investing and some trading styles, the volatility of the Forex market can create an exciting range of opportunities for shorter-term traders.

When you are deciding whether you want to start trading the Forex or the Stock market, you should consider your attitude to risk and your financial goals.

Learn about the currencies you are trading

Before you start, you’ll need to understand what you’re trading. A vast majority of new traders tend to jump in and start trading anything that looks like it moves. Usually using high leverage and trade sporadically in either direction, ultimately leading to loss of money.
 

Understanding the currencies you are buying and selling makes all the difference. For example, currency may be beginning to increase in value after a large fall in price. Encouraging inexperienced traders to “try to catch the bottom.” The currency itself may have been falling due to bad employment reports for multiple months. Ask yourself, you would you buy something like that? Most likely not, this is why you need to know and understand what you buy and sell.

Currency trading is great because there are so many different currency pairs to trade. However, it doesn’t mean that you need to trade them all. It’s better to pick a few and focus on those, at Starttrading.com we’d recommend 3-6 if you are starting out. Having only a few will make it easy to keep up with economic news, politics and tendencies of the countries involved.

What are the main currencies in Forex?

Across the globe, there are hundreds of different currencies in use. Each of them are divided into two main sorts, major and exotics. All of the major currencies have been derived from the most powerful economies. These nations include the US (USD), Japan (JPY), the UK (GBP), the Euro Zone (EUR), Canada (CAD), Australia (AED), Switzerland (CHF) and New Zealand (NZD). These seven currency pairs make up almost 80% of the total daily trading volume.

What are the major FX pairs?

Trading EUR/ USD 

This is the most popular traded currency pair in the world, representing the two largest economies (Euro vs US Dollar) and has faced the most volatility since the inception of the euro in 1999.

Due to the high popularity of this conversion means that is always highly liquid, offering the potential for the competitiveness of price as offers to buy or sell are easy to find.

Trading USD/ JPY 

Being the second most popular trading pair in the world, the characteristics of this pair make it perfect for both the beginner and experienced Forex trader. Day traders have plenty of opportunities to turn a profit due to its high levels of volatility. The popularity of this pair also means that finding trading tips and Forex signals is relatively easy.

Although volatility is a benefit, traders should be aware that sudden price fluctuations can occur – so it can be easy for seemingly winning scenarios to become a loss. By conducting a thorough market analysis before trading, you can understand the patterns in price action and movements that may threaten economic growth in the market.

Trading GBP/ USD

Compared to other major pairs, there is often a much wider price range to play with, due to its unpredictability and volatility. It can move extremely quickly, which means professionals need to employ effective risk and money management strategies to avoid losing money when trading.

It is thought approximately 35% of the volume traded in the FX markets goes through London. However, when working with British pounds and the London Stock Exchange, traders with less experience may fall victim to misleading signals.

Trading USD/ CHF

In times of economic uncertainty or market turmoil, the Swiss franc has become a very safe investment. This is an excellent choice for traders who seek markets that are perceived as lower risk, as Switzerland has an exceptional reputation for stability, safety and neutrality.

The Swiss franc is also very similar to the British pounds in terms of volatility, price shifts, and technical characteristics. Therefore, if you are a beginner of trading with this currency there are plenty of bar charts, graphs, and forums which have been developed from experienced traders available for you to use.

What moves the Forex market?

It is essential that you understand the market before you make any investments or trades, determining exactly what moves the price and why can set you up for long term trading success. The Forex market consists of currencies from all over the globe, which can make exchange rate predictions extremely difficult as there are many factors that could add up to price movements. However, like most financial markets, Forex is primarily driven by the forces of supply and demand, and it is important to gain an understanding of the influences that drive price fluctuations.

The banks

The central banks control the currency supply, they can announce measures that will have a significant effect on their currency’s price. For example, quantitative easing involves injecting more money into an economy, causing the currency price to drop.

News reports

Commercial banks and other investors tend to want to invest their capital into economies that have a strong outlook. If a positive piece of news hits the markets about a certain country, it will encourage investment and increase demand for the local currency.

On the other hand, a negative piece of news can cause investors to pull their money and sell positions, in turn lowering a currency’s price. This is why currencies tend to reflect the reported economic health of the region they represent.

Market sentiment

Market sentiment, which is often in reaction to the news, can also play a major role in driving currency prices. If traders believe that a currency is headed in a certain direction, they will trade accordingly and may convince others to follow suit, increasing or decreasing demand.

How to learn Forex trading

Here at starttrading.com, our main aim is to provide individuals with the information and educational content they need to become a more successful trader. We have an entire team of professionals who would be more than happy to guide and support you on your trading journey, turning your wealth into success.

To learn more about our online trading and Forex trading courses. Include all of your relevant information and a member of our staff will get back to you as soon as possible, to discuss how we can best meet your requirements.

The importance of forex education

To start trading effectively, it’s critical to get the right forex education. You can find a lot of useful information on forex here at Starttrading.com. Spend time reading up on how forex trading works, forex pips, forex NFP, and risk management, for starters.

As you may learn over time, nothing beats experience, and if you want to learn forex trading, the experience is the best teacher. A trading mentor is always great to guide to and stop you making those rookie mistakes.

When starting out it is always recommended to open a forex demo account and try out some demo trading. It will give you a good technical understanding of the mechanics of making forex trades and getting used to trading on a trading platform.

No amount of trading books or networking can teach you better than experience the value of closing your trades and getting out of the market when your reasoning for getting into a trade becomes invalid. It is very easy for traders to think the market will come back around in their favour, letting their emotions get the better of them and cloud their judgement. You would be surprised how many traders fall prey to this trap and are left heartbroken and often out of pocket when the market only continues to trade against their anticipated direction.

This emphasises the famous and painfully true statement from John Maynard Keynes, “The market can stay irrational, longer than you can stay solvent.” Meaning, it does little to no good to say the market is acting irrationally and think it will come back in your favour (direction of your trade).

How to trade Forex?

Simply put, when you trade forex, you are buying one currency and selling another.

This always happens simultaneously, when you buy one, you are immediately selling another. This is the reason why currencies are always quoted in pairs.

Here are the top 5 forex currency pairs based on their trading volume:

  • Euro/Dollar (EUR/ USD)
  • Dollar/Japanese Yen (USD/ JPY)
  • British Pound Sterling/US Dollar (GBP/ USD)
  • US Dollar/Swiss Franc (USD/ CHF)
  • Australian Dollar/US Dollar (AUD/ USD)

Currency pairs will always rise and fall against each other for a varying number of reasons.

For example, if there is a particular political turmoil in one country, then the value of their currency may plummet – think GBP after Brexit was announced.

Forex produces price fluctuations each and every day in a wide number of currency pairs. These price movements are usually caused due to either fundamental or technical reasons, but we will go into these in much detail later on in the course.

It is these fluctuations that give traders opportunities to make a profit by correctly forecasting the direction that the price changes will move in.

What do you need to trade forex?

The beauty of the forex markets is that anybody can trade them. All you need is an internet connection, a device and enough cash to open up an account (this depends on the website or broker that you decide to use).

You can register a trading account with as little as $10 in most cases. However, as with anything, the more you put in the more you get out.

How to start trading Forex?

By now your probably eager to get started and what to know how to get set up placing your first trades. Its really easy to get started and you can start trading within 3 steps.

Step 1 – Open a trading account 

You need to open a trading account in order to start trading. The application process is simple and secure and you can apply for an online account at any time by filling in the online application form.

Once you have successfully completed the verification process, you will receive a confirmation email to confirm that your account is open.

You may receive a call from an account manager, in case you have any additional questions.

Step 2 – Fund your trading account

Once your account is open, you’ll need to deposit funds into it to start trading. You can do this in a variety of ways via the ‘Account’ tab in the trading platform.

Your initial deposit must be at least $1.

For more information on how you can transfer funds in and out of your account, visit NAGA

Step 3 – Start trading

Now you have an online trading account and have deposited funds, you can utilize all of NAGAs innovate features to start trading. The social trading tool that takes your trading experience to another level. Beginner traders can benefit from automatically copying the professional traders live trades and strategies.

You can access live price feeds, streaming charts and news instantly and trade 24-hours a day. Good luck and safe trading.

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