FOREX (Foreign Exchange) or currency market is a decentralized global market where all the currencies of the world are traded. Forex market is also the largest and most liquid market in the world. The forex market has a daily trading volume of more than $5 trillion. Forex market is the largest financial market in the world according to daily trading volume; the forex market is by far largest a market in the world, followed by the credit market.
For a brand new trader, before signing up for a live account it is very important to have basic concepts of this market clear. A trader who enters into this market without getting familiar with forex’s concepts, there are high chances of facing failure.
FOREX Trading – Basic Terms
Before getting into this market practically, a new forex investor should know different basic terms of this market. So, here are some basic terminologies of forex trading.
Leverage: This is the ability to control a large amount of money in the forex markets. It gives the traders the ability to make meaningful profits on the normally minuscule daily currency movements, and, at the same time, risk only minimal capital in a given position.
Position: a term used to describe a trade in progress. There are two types; long and short position. A long position refers to a trader has bought currency expecting the value to increase. When a trader sells a currency and expected it to decrease and plans to buy it back at a lower price, it is called short position.
Spread: Spread is the difference between the BID and ASK price in the market quotes. BID price is applicable to a SELL order while ASK price is applicable to BUY order.
Margin: is a term given to the amount of money required in your account in order to open a trade.
Margin Call: When traders do not sufficient funds to sustain their current open positions in a market a warning message is sent.
Hedging: When a new position is opened opposing the direction of an already made position on the same instrument.
Currency Pairs: It is the quotation of two different currencies, with the price of one currency being quoted against the other currency. In a currency pair, the first listed currency is called the base currency and the second currency is called as the quote currency.
Major Pairs: Most traded and this account for nearly 80% of trade volume on the forex market. Low volatility and high liquidity are what these currency pairs could have. They are known for stable, well-organized economies.
So, the above mentioned are some key terminologies of forex trading, that new traders should be familiar about. For a new trader, instead of signing up with standard or platinum forex trading account, it is better to learn the trading practically. To help you out in practical knowledge about trading, we have elaborated two types of accounts for beginners.
Type of Accounts Suggested for New Forex Traders
New forex traders should not take risk of signing up their account with standard or platinum account, because it requires comparatively big amount. For practical knowledge of trading, it is better to sign up with below-mentioned accounts:
1. FOREX DEMO TRADING ACCOUNT
Forex Demo accounts are funded with fake money which helps the prospective customer to experiment with his forex trading strategies. They also help the prospective customer in understanding the potential risks involved in forex trading. Most of the forex demos trading accounts are rigged, they are not accurate, the forex brokers rig the account so that they can make money while you sign up for a live account.
Forex traders generally do not test their new method on their live account because it is risky to implement the new strategy in the live account; there is no guarantee for success. A new trader could gain practical knowledge of different terms of the forex market.
Generally, traders experience a big difference while trading with a demo account and with a live account; though there is a big psychological difference in both. With a forex demo account, we don’t feel real risk or emotional pressure.
But, forex demo accounts are very useful when you are totally new to the market and unaware of basic concepts, you can learn basic concepts through demo accounts. By considering its limitations, you should limit the use of demo account, because they are not as much effective as live trading accounts.
It is suggested that the use of forex demo trading account must be limited to learn trading concepts only because over-use of such accounts builds bad habits in trading, it negatively affects your live trading performance. Hence, their basic purpose is only to give a basic idea of service provided by the broker. To avoid your confusion regarding the usage of the demo accounts here’s when to use demo trading accounts:
➤ If you are a brand new trader and need to learn basic concepts of this market, demo accounts are best for you. Forex market basic concepts like pips, short positions, long positions, etc are important to have knowledge about, before starting with a live account.
➤ When you want to test out the broker’s performance before going live, you should definitely try out the demo account.
➤ When you have a new method to try out, you cannot simply try out with your live account then, you can try it out on the demo account.
These are the three main reasons brokers use the demo accounts. But, overuse of this account would negatively affect your trading performance. That’s why, we have made a list, why you should not use demo trading accounts excessively?
➤ Most of the forex demo accounts are rigged.
➤ Forex Traders are not trading with real money.
➤ Demo trading losses don’t feel real.
➤ Excessive use of demo trading account builds poor trading habits.
➤ Real trading conditions differ from demo trading.
So, here we have seen the meaning, importance, and roadblocks of trading through demo accounts. As we have seen, demo accounts are not effective because its loss doesn’t feel real, there the new trading account came into existence, and here is the elaboration of another best forex trading account for new traders:
2. MICRO FOREX TRADING ACCOUNT
Micro forex trading account is more effective than the demo account, for beginners. Demo account is effective for brand new traders who do not have proper knowledge of this market. A trader can switch to the micro forex account after learning basic concepts of the forex market and testing the service of his selected broker.
Money trading instructors often suggest you open a micro forex trading account. As forex demo account consists of many hurdles, micro forex account is another solution for new traders. Small/micro forex trading account allows you to start trading with the least amount of investment.
As you cannot learn other practical and important skills through demo account, micro forex trading is the best way to learn those crucial skills practically. Demo account does not train the brand new trader for the adoption of risk management skill, it is generally made for sample trading or testing before entering to the live account.
Adoption of risk management skill is important in forex trading, as a trader, you should learn how effectively you can decrease the size of a potential loss, at the same time, how effectively you benefit by getting the most out of single trade. Micro forex trading account helps you in adopting the skill of risk management. Micro lot forex trading provides you more knowledge as compared to sources like courses, articles, books, etc. because here you apply your trading strategy practically.
Mostly, micro forex accounts don’t have the minimum deposits, while standard forex trading accounts generally have the minimum deposits of $10,000. Standard accounts are generally used by large traders who invest big in this market.
So, here we can see new traders can start trading at a minimum amount with the help of small/micro forex trading account. With a very low investment, a trader can learn a lot about this market, practically. Here are some factors explaining how micro trading accounts are more effective as compared to demo trading accounts:
➤ In a micro trading account, you are trading with the real money.
➤ Micro/Small trading losses do feel real.
➤ It consists of real trading situations.
➤ Helps in understanding the market situations thoroughly.
➤ Demo accounts build poor trading habits, while this is not possible in micro trading accounts.
Hence, these are the two new traders should sign up with to gain knowledge and experience of forex trading without risking big amounts of money. When you sign up with a micro trading account, there you can select a random broker because you are not risking big amounts.
But, when you have done with demo accounts and small trading account, the next step for you is to get started with standard or regular forex trading account. When you sign up with a standard trading account, you are risking big amounts of your hard earned money, so there you should take care of forex brokers. It is found that most forex brokers are unregulated and they rig their clients’ accounts, especially new clients.
As a new trader, how you can avoid unregulated brokers and find out the best one that does not rig your account? Well, to find the perfect broker, you need to do a lot of research, after all, the broker is the person through whom you are going to trade on Forex.
Things to Consider When Choosing a FOREX Broker
Choosing the right forex broker is the motive of any forex trader because the broker is the person through whom you are going to trade. The reason why traders are very conscious while choosing a broker is only because of the increasing number of scam or unregulated brokers.
Most of the brokers in the forex market rig accounts of forex traders, to make more and more money. So, to find a perfect and genuine forex broker, traders do research. To ease your research, here, we have elaborated some crucial things you should consider when choosing a forex broker:
1. SAFETY & SECURITY
This is one of the most important things you should consider while choosing a forex broker. When choosing a forex broker, make sure it must have a high level of security; this is the first and foremost feature that a good broker must have.
You cannot simply hand over your hard earned dollars to the person who claims he’s legit. So, make sure you do your research well and find out the safety and security of your money. And, the good news is, it is not so difficult to check the credibility of a forex broker. There are different regulatory agencies all over the world that separate the trustworthy from the fraudulent.
The below-given list shows the countries with their corresponding regulatory bodies:
United States: National Futures Association (NFA) and Commodity Futures Trading Commission (CFTC)
United Kingdom: Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA)
Australia: Australian Securities and Investment Commission (ASIC)
Switzerland: Swiss Federal Banking Commission (SFBC)
Germany: Bundesanstalt für Finanzdienstleistungsaufsicht (BaFIN)
France: Autorité des Marchés Financiers (AMF)
Canada: Investment Information Regulatory Organization of Canada (IIROC)
So, before putting your money in a broker, make sure that your selected broker is the member of the regulatory bodies mentioned above.
2. TRADING PLATFORM
In online forex trading, most of the trading activities happen through the broker’s trading platform. So, before choosing any forex broker, make sure the platform of your broker is user-friendly and stable.
Also, when choosing a broker, do check what is the trading platform has to offer. Does it offer you free news feed? Does it offer you technical or charting tools? And, does it present you with all the information you will need to trade properly? So, make sure you have selected the right broker which will provide you the right trading platform.
3. CUSTOMER SUPPORT
Customer support by a broker is a very important thing in the forex trading. You need to choose a broker who is providing the proper customer support to its clients. When you are in need of customer support very badly and what if you do not get a proper response from your broker, you would be frustrated and this might also lead to loss of money due to lack of the proper customer support.
When your forex broker does not respond to your emails or calls on a timely manner when you request to open or close the position according to the market, it would take too long and it would result into huge losses. So, if you are not getting the proper response you expect, avoid signing up for that broker.
4. TRANSACTION COST
Whatever currency trader you are, you will always be subject to transaction cost, every time you enter the trade, you will be charged a transaction cost. So, this is a very important factor for you as a trader because taking a wrong decision would lead to high cost on transactions.
But many times, you may need to sacrifice low transaction cost for having a regulated and reliable broker.
5. DEPOSIT AND WITHDRAWAL
An ideal forex broker will allow you to deposit and withdraw your forex trading earnings hassle-free. They generally have no reason to hold your trading earnings, the only reason they hold your earnings is they want to facilitate your trading.
Hence, while choosing a broker make sure he has the proper deposit and withdrawal facilities.
So, the above mentioned are some important factors you need to consider before choosing a forex broker. As we know decision regarding selection of a forex broker is a very crucial one, you need to consider these factors carefully and then select the perfect forex broker.
Analyze the World Economy
After you have analyzed all the factors to consider before choosing the right broker and also selected a perfect broker for you, the next important thing is to analyze the world economy. Here, you will be analyzing the currencies of different countries in the world.
Making money through forex or currency trading is all about accurately predicting the movement of the world economy. To be a profitable trader, you must convert the base currency into the quote currency set to rise in value, and then convert the quote currency back to base currency when the value peaks.
Do research the GDPs, trading positions and political climates of the country’s currency you are interested in purchasing, and you’ll get a great lead on which quote currency is worth your investment and which countries have economies projected for growth.
Make your First Trade
After you’ve decided which quote currency you are going to buy, this is the time to place an order for your first trade. Your broker probably has provided you online trading software that allows you to place an order to buy or sell currency and you also have amount funded to the software that you can use to trade.
Now you have an online trading software or platform and have deposited funds, now you can start trading. Firstly, login to your account and choose whether to trade forex through CFDs, spot FX, or spread betting, pick your pairs and open a position. So, this is the process you need to follow to make your first trade.
Top FOREX Trading Tools that every FX Trader must have
As a new forex trader, you might be unaware of trading tools that can help you in smoothing your trading experience. So, to ease your trading experience and increase your trading earnings, we have listed down some trading tools that every forex trader must have. These tools are also used by many expert traders:
1. ECONOMIC NEWS CALENDAR TOOL
Economic news calendar tool is one of the useful tools for forex traders, greatly useful in fundamental analysis. Economic calendars are offered by financial news websites and forex brokers. Economic calendars consist of a listing of future fundamental economic releases that will affect the valuation of the nation’s currency. This important fundamental information is generally available on most of the online calendars one or two weeks in advance of the releases listed.
Most published economic calendars consist of the type of release, such as the unemployment rate, what was the previous outcome and market’s consensus expectation for the upcoming release.
2. THE CURRENCY CORRELATION TOOL
As we know the foreign exchange market is made up of currency pairs, known and calculable correlations exist between currencies, which can be either positive or negative, with correlations it is being more prominent in some pairs than others.
The currency correlation tool can be found in most of the brokers’ websites and it is generally offered without any charge. Correlations can be listed properly and it can also be coded in intervals. To educate you perfectly, about currency correlations, here we have a list of possible correlation intervals from -1.0 or +1.0:
➤ -1.0 represent a perfect inverse correlation
➤ -0.8 represent a very strong inverse correlation
➤ -0.6 represent a strong inverse correlation
➤ -0.4 represent a moderate inverse correlation
➤ -0.2 represent a weak inverse correlation
➤ 0.0 represents no correlation, the pair can move randomly
➤ +0.2 represent a weak positive correlation
➤ +0.4 represent a moderate positive correlation
➤ +0.6 represent a strong positive correlation
➤ +0.8 represent a very strong positive correlation
➤ +1.0 represents a perfect positive correlation
3. PIP CALCULATOR TOOL
Trading with the amounts expressed in foreign currencies can be a bit confusing as a new trader if you are not familiar with the pip valuation system. The pip is the lowest trading unit for a currency pair and it usually worth a different amount depending upon the base currency and the counter currency involved.
The currency pip calculator the forex trading tool that allows forex traders to determine the amount a pip is a worth based on the size of their position in their local currency. To trade using the pip calculator, a trader has to enter the details of their positions that include the instrument or currency pair, the amount of currency in the account, the size of the trade and the leverage and position size parameters.
4. BROKER SPREAD COMPARISON TOOL
One of the crucial things that spread sensitive traders need to examine before selecting a perfect forex broker for them is their typical dealing spreads. Forex traders always prefer a tight dealing spreads, since getting in and out of positions can be considerably less costly if the forex trader is able to implement his trades at the better exchange rates generally offered by a tighter spreads.
While a wide dealing spreads will increase the cost of trading and it can also severely hamper the short term traders like scalpers, they make money by taking positions that they wish to liquidate as soon as the small profit materializes.
5. KEEP A TRADING JOURNAL
You must keep a trading journal with an accurate record and journaling trades; it is the best way to learn from forex trading. You should keep a recorded history of each trade, it should also be included the reasons why the trade was initiated and also the reason for liquidating the trade.
By doing this, it would give you some valuable insights into your trading habits. By keeping a trading journal, you can improve your poor trading habits, learn from mistakes and you would avoid mistakes in the future.
Problems faced by New FOREX Traders
To become an effective forex trader, you need to learn a lot from this market and as a new trader; you might face some hurdles in your trading journey. Here we have described some problems faced by new forex traders; it would help you in avoiding these problems:
1. Overtrading: This is the biggest problem faced by most new traders. This is might be the result of excessive trading with demo accounts.
2. Lack of discipline: Generally, new traders lacks in the discipline in limit/stop/execution.
3. Ego: As a new trader, being egoistic would not make you a profitable trader; you should be humble and try to approach this market as a student.
4. No trading plan/strategy: A forex trader must have a trading plan; the plan includes what’s your aim, what you are looking for and how you plan to achieve goals.
5. Poor risk and money management skills: A forex trader need to have a good risk and money management skills, they are very important in trading forex.
For a new trader, it is very important to gain as much knowledge about this market as he can, because this is the large market, also the complicated one.
New traders have to face a lot of difficulties and challenges in this market, sometimes huge loss, but things becomes effective if the trader has a proper strategy/plan for trading, discipline and effective risk and money management skills. So, here we have provided a guide for the beginner forex traders.