Forex for Beginners
Forex (also known as FX or currency trading) is a short term for foreign exchange. Forex trading is simply buying and selling currencies with the aim of earning a profit from the transaction. The Forex market being the largest liquid financial market in the world insures there are always a buyer and seller for any type of currency because the world economy relies on the movement of goods from country to country which involves the exchange of currency. Forex trading is becoming increasingly popular amongst retail (individual) investors.
Currencies are quoted in pairs e.g. EUR/USD, USD/CAD. The first listed currency is known as the base currency, while the second is the quote currency. For example in EUR/USD, EUR is the base currency, while USD is the quote currency. Let’s say EUR/USD is quoted as 1.7710/1.7712, it means that EUR1 will give you $1.7712. If you decide to buy the EUR/USD, you are buying the euros, while at the same time selling the US dollar. You would do this in anticipation that the euro will rise (increase in value) against the dollar.
The most popular currency pairs are; EUR/USD GBP/USD USD/JPY USD/CHF USD/CAD AUD/USD EUR/GBP
The key to successful trading as a beginner lies in selecting one or two pairs of currencies that you wish to trade. You stalk these pairs until you learn everything possible about how they react in current market conditions and to your selected indicators. As you gain confidence and experience, you may wish to add more pairs to your trading portfolio. But for a new trader or investor, it is always advisable to have limited pairs to ensure simplicity during the learning process. As a beginner you should also open a virtual or demo Forex trading account to practise and test your strategies.
When buying and selling in Forex markets, one currency is usually showing strength while the other currency is showing weakness. The strength and weaknesses displayed by the currencies might vary depending on the timeframe which you are trading. The strength or weakness of a currency is determined by a number of things, but mostly by the fundamentals of the country’s economy. A week economy equals a weak currency.
It is estimated that around 95% of the Forex market is speculative. In other words, the person or institution that bought or sold the currency has no plan to actually take delivery of the currency in the end; rather, they are solely speculating on the movement of that particular currency.
Before you start trading, you have to decide on the type of strategy you want to you. First you would have to decide whether you would trade based on fundamental analysis, technical analysis or both. Most short term Forex traders use technical analysis. In technical analysis the charts provide a lot of information on what is happening to a particular currency pair, and in most cases the fundamentals are reflected in charts.
Things that you need to start include:
- A good course or book
- Open a Forex account with a reputable broker
- Charting package – should come with the account
- A virtual/demo account to start practising
- Access to a computer.
To be a successful Forex trader you would need to be very disciplined.