Starting trading on a real account too soon is one reason most traders fail in the Forex Market. To be successful in this complex trading scenario a trader needs to spend ample time on preparation first. There is a learning process to be followed and the trading plan should be rigorously followed.
A trader should fully understand the Forex Trading Market, and how this market operates. What are the limitations and available opportunities? How the trading system of Currency Pairs works. Understand the common terminologies that are used in the Forex Market and on trading platforms.
Understanding Forex Market
Forex Market is the biggest trading marketplace in the world with a daily turnover of more than $ 7.5 trillion. This Market is used for the transaction of changing one currency pair into another currency pair. These Currency Transactions are carried out due to multiple reasons like to do trade between two countries, banking transactions, Currency exchange due to tourism, trading, etc.
This is one of a kind International Market that is open 24 hours and 5 days a week. Anybody can gain access to the International Forex Exchange from all over the world through the Internet. Retails Investors, Traders, Banks, and Corporations buy and sell currency pairs through an Over The Counter Computer Network.
Understanding the Forex Trading Process
Simply, Forex Trading is buying and selling of currencies. Currencies are traded in a pair where a trader sells one currency to buy another currency. Profits are made by projecting the correct trends and movement of currency pairs over a time period.
Forex brokers act as a bridge between the trader and the Forex Exchange. Trading Platforms are provided by the Brokers to place the orders. Trades cannot be executed directly through the Exchange. The Brokers charge some fees or commissions to provide the services of trading.
Understanding Basic Trading Terminologies
Like any other field, Forex has also some terms that are used by traders every now and then. New traders should get accustomed to these terms to understand the market quickly. Common Terms that are used in Forex are elaborated.
Currency Pair
When two different currencies are quoted together such that the value of one is relative to the other currency. For Example, EUR/USD, USD/JPY, and GBP/USD are major currency pairs with huge trading volumes.
Base Currency
The first currency in a Currency Pair is called the Base Currency. For Example, in EUR/USD, Euro is considered the base currency.
Quote Currency
The second currency in a Currency Pair is called Quote Currency. For Example, in EUR/USD, USD is considered the base currency.
Buy
Buy refers to buying a currency pair, unlike any other financial security where you buy that item against some defined amount. In currency pairs, a trader is buying the base currency and sells the quote currency.
Sell
In Currency pairs, when you place a Sell order it means the base currency is being sold and quote currency is being bought.
Stop loss
Stop Losses are placed after the trade is executed to reduce the loss. By placing a stop loss a trade is closed as soon as the price reaches the set point.
Trailing Stop loss
Trailing stop loss is applied to maximize profits and minimize losses. Unlike a standard stoploss, the trailing stop loss is moved with the trade. This is an efficient way of managing risk.
Pip
A Pip is the smallest unit to measure the change in the rates of the currency pairs. For Example, if EUR/USD is being traded at 1.1054 and reaches 1.1059 then the total change in the value would be 5 Pips.
Bid Price
It is the highest price a buyer is willing to pay to buy any financial security.
Ask Price
It is the lowest price a seller is willing to pay to sell any financial security.
Commission
A commission is a fee charged by the Broker when a trade is executed. The commission can vary from Broker to Broker. Basically, a trader is utilizing the services of the brokers for trade execution and paying a commission as a service fee.
Spread
Forex spreads refer to the difference between the bid price and the ask price of a currency pair in the foreign exchange market. The difference in the bid price and ask price is lower in currency pairs with large trading volumes because the liquidity is high.
The Forex spread is measured in pips, which is the smallest unit of price movement in the Forex market. For example, If the ask price of a currency pair is 1.5479 and the bid price is 1.5471 then the spread between this currency pair is 8 pips.
Chart Patterns
Chart patterns are graphical representations of price movements in financial markets, such as stocks, currencies, or commodities. They are formed by the movement of prices over time and can be used by traders to identify potential trading opportunities.
Chart patterns can be classified into two main categories: continuation patterns and reversal patterns.
Continuation patterns indicate that the price trend will continue in the same direction, while reversal patterns indicate that the trend is likely to reverse. Some common continuation patterns include the flag, pennant, and triangle patterns. These patterns typically occur in the middle of a price trend and can signal that the price will continue in the same direction.
Reversal patterns include the head and shoulders, double top, and double bottom patterns. These patterns typically occur at the end of a trend and can signal that the price is likely to reverse direction.
Traders use chart patterns in conjunction with other technical analysis tools, such as indicators and oscillators, to confirm their trading decisions. It is important to note that chart patterns are not foolproof and should be used in conjunction with other analysis methods to increase their accuracy.
Developing a trading strategy for Forex Trading
Developing a trading strategy is an important step for Forex traders to achieve success in the markets. Here are some steps to help develop a trading strategy for Forex trading:
Define your trading goals and risk tolerance: Before developing a trading strategy, it’s important to determine your trading goals and risk tolerance. This will help you determine the type of trading strategy that is best suited for you.
Analyze the Forex market: Analyze the Forex market to identify trends, patterns, and price movements that can help inform your trading strategy. This analysis can be done using technical analysis tools, fundamental analysis, or a combination of both.
Determine entry and exit points: Based on your analysis, determine entry and exit points for your trades. These points can be based on price levels, technical indicators, or a combination of both.
Set stop-loss and take-profit levels: To manage risk, set stop-loss and take-profit levels for your trades. Stop-loss levels will help limit your losses if the trade goes against you, while take-profit levels will help you lock in profits if the trade goes in your favor.
Test your strategy: Before implementing your strategy, test it on a demo account or using backtesting software to see how it performs under different market conditions.
Monitor and adjust your strategy: Monitor your trading performance and adjust your strategy as needed. This may involve tweaking your entry and exit points, adjusting your risk management strategy, or refining your analysis methods.
Remember that developing a successful Forex trading strategy requires patience, discipline, and a willingness to learn from both successes and failures.
Conclusion
Learning Forex trading can offer many benefits to those who are willing to put in the time and effort to understand the markets. First and foremost, Forex trading offers the potential for financial independence and the ability to work from anywhere with an internet connection.
In addition to the financial benefits, learning Forex trading can also help improve your analytical and decision-making skills, as well as your ability to manage risk. Forex trading also offers a diverse range of trading styles and strategies, allowing you to find a trading approach that fits your individual goals and preferences.
Finally, Forex trading can be a rewarding and intellectually stimulating activity that can provide a sense of personal satisfaction and achievement.