Anyone can trade forex if they are willing to learn the necessary skills and the discipline. In fact, forex is the easiest market to enter and get started. And it’s also the least expensive. The steps to get started in forex are very simple. However, we try to map the journey of a beginner through four stages of learning and getting ready for the market.
LEARNING THE BASICS OF FOREX
You’ll learn the basics of forex in the first stage. You’ll understand the basic features of the forex market and the basic terminology. A beginner needs to know what quote and base currencies are and how we express them in a forex quote. You’ll learn what ‘exchange rate’ means as well as what ‘bid’ and ‘ask’ prices are. You’ll get to know what spread means in forex and what it means to ‘long’ or ‘short’ a position.
Next, you’ll learn how to read and understand forex quotes. You will learn to look at a forex chart and identify the important elements and numbers. You’ll then start a demo trading account and start practicing.
After some demo trades, it’ll be time to learn to calculate your profits and losses. If you already haven’t met the word ‘pip’ so far, this is the time. You’ll learn how to multiply pips with the exchange rate to compute your profits (or losses) per trade.
OPEN A LIVE TRADING ACCOUNT
People offering you demo trading accounts are most probably brokerages. You can start a live trading account with them. However, it’s better to be careful while moving to a live account from a demo. A lot of factors can impact your outcome as a trader, and a lot many of them depend on what kind of broker you’ve chosen.
What broker you’ll choose depends partly on what kind of a trader you want to be: whether you want to trade as a pastime or you want to do it for a living, how frequently you’re going to trade, how much money you’re going to invest, what level of risk tolerance you have, etc. At the broker’s side, you’ll have to consider what spreads, commissions and leverage they offer as well as how many products they offer. You’ll also consider how good their customer support is and the level of transparency.
You’ll not want to depend on any single factor when choosing a trader such as the number of years in existence, online popularity or reviews. The recommendation of a trader could be the most reliable input.
After choosing a broker, you’ll open an account. Accounts come in two categories: personal accounts and managed accounts. With a personal account, you can execute your trades, while with a managed account, your broker will execute them. After opening an account, you activate it to start trading. But before making your first trade, you’ll determine your margin. Traders are advised not to invest more than 2 percent of trading capital in a pair to mitigate risk.
MARKET ANALYSIS AND LIVE TRADING
You can analyze the market in three different ways: technical analysis, fundamental analysis, and sentiment analysis.
Technical analysis involves reviewing charts or historical data to predict how the currency will move based on its movements in the past. You can get charts from your broker or your trading platform. Fundamental analysis looks at a country’s economic fundamentals for insights. Sentiment analysis is largely subjective assessment, where you try to sense the mood of the market.
Once you decide to buy a pair, you place an order for the trade to take place. If it’s a market order, you or the broker executes the trade at the current market rate. After your buy, you’ll wait for the pair to gain in value (pips) so that you could sell and make a profit. You make more such trades after watching and analyzing the market.
By this time, you’ll be capable of analyzing your profit and loss statements. If you’re making consistent profits, you’re in the right direction. However, it’s very unlikely to be consistently profitable in the beginning. If, on the contrary, you’re losing money consistently, take a break to revise your strategy. After doing more research and better market analysis as well as improving your risk management measures, you’ll trade again.
CONTINUOUS IMPROVEMENT: LEARNING BY TRIAL AND ERROR
Forex trading is ultimately a personal journey of learning by trial and error. Somebody else’s advice may not suit you as your goals and risk tolerance levels differ from theirs. To individual traders, the market as a whole will look to be a lot smarter than them. Others know whatever you know, keep themselves up-to-date with roughly all the news you follow and adjust their strategies based on any new information. No one has any real edge in the market, to begin with.
What you gain by trial and error is the wisdom to spot trends as they emerge, ride the trends and make modest gains per trade. These trades will accumulate your gains and grow your account. Once in a while, some large opportunities arise, presenting you with options that have more potential upside than downside. These bets may give you windfall profits or modest losses.
A good strategy, over time, will prove to be a successful one even though every trade of yours may not be profitable. Achieving the skills and the wisdom to maintain a winning strategy is the final stage of the journey. And it’s a never-ending one.