Entering the Forex market for the first time is challenging. There are dozens of confusing terms - from pips and spreads to bulls and bears - and no easy tips for how to open and when to close your first orders.
Below and in the gallery of trading term “cards” above, OctaFX presents the ultimate guide to forex, with all you need to know as a beginner in the forex market.
Learn the fundamentals
First things first: learn how the forex market works, who participates in it, and how you can make money from trading in it.
In short, the forex market is where everyone - from individuals to major banks and even countries - buy and sell currencies. You can buy and sell currencies at an exchange office, but to profit from currency pair trading in the global market, you need a broker. Simply put, a broker is an intermediary who sends your trades to the wider international market where prices change every second - instead of once a day, as at a currency exchange office. This allows you to profit in minutes. The broker, in turn, profits from markup - a small share in the difference between the price at which you buy and sell a currency.
Create a strategy
To trade successfully and not just waste your money, you need a strategy. A trading strategy requires a systematic approach, including when and how to open a trade. First, decide on when you enter the market. This could be done using technical analysis, fundamental analysis, or a combination of both. Second, determine the amount of funds you can put in one trade. Third, set up strict rules of exiting the trade, whether with or without profit, so as not to keep it open for too long, which could potentially result in a loss.
Master risk management
Risk management keeps you from ending up with an empty account and incurring preventable losses. There are two main rules that you have to follow to effectively reduce the risks during trading. One requires you not to spend more than 4% of your capital on a single trade. Another rule is to keep your loss-per-trade at a maximum of 25%, and quit it once it gets there. You can calculate these percentages in pips and then set a Stop Loss order to exit the trade for you at a certain level.
Control emotions
Emotions such as greed, fear and hope often make you open unprofitable trades or keep some trades open until they start bringing losses. Whether it’s a bull market or a bear market, you always have to keep your emotions in check by implementing strict risk management techniques. For instance, even if you think that the price will go higher than the level at which you set Take Profit, don’t remove it. With forex, less is more. Consistent strategy-based profits eventually bring in more than occasional big wins based on luck. Alternatively, you can set a trailing stop order to move higher together with the price.
Remember: leverage is a double-edged sword
Leverage provided by forex brokers not only increases your profit potential, but also your risks. Should the price go into an undesired direction for a long time, you could lose all your capital. Watch your margin level closely and set up Stop Loss to prevent the trade from going down too far.
There’s one final tip: to become a successful trader, you need to practise a lot. Try opening a demo account with OctaFX to get an understanding of what trading is - or test your skills in a real account.