How to Trade Forex: The Basics
Whether you’re a trading veteran or a novice in the world of forex, understanding the basic fundamentals of placing a trade is vital to learning how to trade forex successfully.
This is a comprehensive guide on the basics of placing a trade. By bypassing fancy industry jargon and specialist terminology in favour of a clear and direct step-by-step explanation, we’re ensuring you understand all the necessary know-how regarding how trades are opened and closed on the world’s most liquid market.
Accessing the market
In order to place a trade, an individual must have access to the forex market. As a 24/5, globally interconnected digital trading platform, the market can be virtually entered at any time from anywhere throughout the working week.
In order to access this platform, a trader must use either a leveraged trading provider or broker. Both of these intermediaries will usually deal with the banks on a trader’s behalf, however, there are some providers that enable direct market access (DMA) for more advanced traders who wish to interact directly with market makers.
Opening an account
It is vital for you as a trader to thoroughly research which broker or provider they want to use. Once you have decided you’ll need to open an account – you’ll often have multiple account options, and deciding which one is right for you very much depends on the extent of your knowledge on how to trade forex. Options often range from small accounts with low minimum deposit requirements to more advanced account types with specialist, sophisticated trading features.
Once you’ve decided upon your account type, you’ll need to fill out an application form you’ll then receive your username and password that will give you access to your chosen trading platform, simply login to your broker or provider’s client portal and arrange your first deposit – this can usually be done via credit or debit card, bank or electronic transfer. There you go. Simple.
Placing your first trade
Now you’re in there are a number of vital considerations that must be made before placing a trade…
Choosing your currency pair
There are over 65 currency pairs to choose from, so evaluating which trading opportunity is most profitable for you requires a lot of dedication. There are many factors to take into consideration such as natural disasters to geopolitical tensions affecting a currency’s valuation at any given time, it’s important to understand the volatility associated with each currency in order to effectively manage risk.
For beginners such as yourselves, we recommend starting with the ‘majors’ – these are the 8 most commonly traded currencies on the market, constituting 80% of all traders worldwide. These major currencies are as follows:
- US dollar (USD)
- Great British pound (GBP)
- Euro (EUR)
- Japanese yen (JPY)
- The Canadian dollar (CAD)
- Swiss franc (CHF)
- New Zealand dollar (NZD)
- Australian dollar (AUD)
Deciding on the type of trade
The majority of forex trading happens between big banks and financial institutions, trades are often made in large lots, with massive amounts of currency (a mammoth $5.1 trillion per day) being bought and sold around the world. As individual traders don’t typically have the funds to partake in billion-dollar transactions, there are two alternative approaches to trading on the market: CFD (contract for difference) and spread betting. Both of these approaches deal in pips (percentage in points), that enable individuals to trade just a small percentage of an overall lot.
What is CFD in forex?
A CFD (contract for difference) is a common form of derivative trading in which a trader enters a contractual agreement to exchange the price difference of a pairing from the opening price to the closing price. Open a long position in the hopes of profiting from a valuation rise or, in contrast, open a short position in the hopes of profiting from a price drop. As such, this is a purely speculative form of trading.
What is spread betting in forex?
Another common form of forex trading is spread betting, which involves betting on a particular direction of a currency pairing’s valuation – meaning that the further a pair moves in said direction, the greater your profits. The size of your profits (or losses) is subsequently dependent on the amount of capital risked.
Choose your trading platform
As a digital trading platform, the forex market can be accessed via a variety of different mediums:
- Smartphone apps
- Web browsers
- Specialist platforms
Each platform will offer different forms of interaction, so it’s best to learn all the options and find out which is best suited to you. Specialist platforms such as MetTrader 4 offer a variety of useful features to enhance the trading experience. This can be overwhelming to first-time traders, it’s all about finding the platform that best lends itself to your strategy.
Establish a trading strategy
It’s important to have established a clear and defined strategy before diving into the market. Having a logical, informed trading plan in place is particularly important for first-timers, as this helps you understand how to trade forex effectively by ensuring you’ve removed any aspect of reactionary emotional trading from your decision-making.
Open, supervise and close your trade
If you are confident in your chosen pairing, platform and strategy, you’re ready to open your first position. Before risking any capital, however, you must consider whether this is the most opportunistic time in which to place this particular trade.
What is the best time to trade forex?
Deciding upon the best time to open a position on a pair depends on which currencies you are dealing with. Typically, the most profitable time to trade is during periods of overlap between two international markets, as these often boast the highest price ranges and most frequent activity. Throughout the day, there are three market overlaps:
- New York/London (1pm-5pm GMT) – The New York/London lasts 4 hours, making it the longest occuring overlap. With over 70% of trades being placed during this window, volatility is high, making this an optimal time to place a trade
- Sydney/Tokyo (7am-9am GMT) – As the US dollar and the euro are the two most commonly traded currencies, this window isn’t quite as prosperous as the aforementioned New York/London overlap. That’s not to say there isn’t an opportunity, however. On the contrary, if you were to trade in the window’s primary currency (JPY) then PIP fluctuation is still high
- London/Tokyo (8am-9am GMT) – Though this window typically sees the least activity, market volatility is still significantly high during this time
The best time to open or close a trade during your currency’s primary market hours. For example, if you were trading a USD/GBP pairing, the New York/London window would be most prosperous, as this is when these currencies are seeing the most activity.