What is Forex Trading?
Forex trading means buying and selling foreign currencies on the global market. It involves speculating on fluctuating currency exchange rates to make a profit. It is usually reserved for experienced traders because of its complex strategies and high risk. Before joining the market, beginners should learn about currency pairs, market analysis, risk management, and trading strategies.
How to Trade Forex for Beginners?
Forex trading involves exchanging one currency for another. Foreign exchange is important for commerce, trade, tourism, and various other reasons, which makes forex trading the largest global market.
In the forex market, the value of one currency fluctuates against another currency influenced by global and local market conditions, political and economic conditions of the country, inflation rate, government debt, GDP, etc. A fluctuating exchange rate creates opportunities for speculation and arbitrage, leading toward profit. Forex traders bet in the direction of the rate change. If you want to enter the market as a beginner, you must first open a forex trading account that helps you transact smoothly.
Tips for Forex Trading Beginners
Forex trading for beginners requires careful planning and learning. Here is a list of essentials for forex trading for beginners.
- Educate yourself about the market: A careful understanding of the forex market is a prerequisite, and it involves learning about currency pairs, market dynamics, and technical and fundamental analysis.
- Choose a reliable broker: By choosing a reputable broker, you can leverage their user-friendly platform and technology suite for a faster and smoother trading experience.
- Make a plan and stick to it: Having a trading plan is important for forex trading. Once you have a plan in place, make sure that every trade you are thinking about fits within the constraints of your plan.
- Practise with a demo account: Use a demo account to gain hands-on experience without risking real money. Practise executing trades, analysing charts, and managing risk.
- Start small: Until you gain confidence, bet only a moderate amount in the market. This way, you will be able to contain your losses and recover faster.
- Manage risk: Employ loss-minimising techniques such as stop-loss. Use proper position sizing and avoid overleveraging if you don’t want to suffer a significant loss.
- Keep learning and adapting: Stay updated with market news, economic indicators, and continuously refine your trading strategy.
Forex Trading for Beginners – Trading Systems
Here are 4 points to remember while selecting a forex trading system as a beginner.
- Regulatory compliance: Selecting a reputed forex broker will ensure that they meet all the regulatory requirements and offer legitimate trading options.
- Account features: The account should have modern features and transparency to conduct trades without worries.
- Currency pairs offered: The trading platform should allow you to trade in all the major currency pairs.
- Initial deposit: Many trading platforms would ask for an initial deposit. You must check that the amount is within your comfortable range.
Basic Forex Trading Strategies for Beginners
- Price action trading: It involves making trading decisions based on price action. Price action trading doesn’t involve technical indicators.
- Range trading strategy: Traders in range trading strategies look for trading instruments that fall within a range they have set. Depending on the timeframe used, the range can be anything from 20 pips to several hundred pips.
- Trend trading: Trade in the direction of the trend. Beginners can capitalise on the trading strategy as it is easy to follow and understand.
- Moving average crossover: Traders use the moving average chart to identify trading signals based on crossovers.
- Breakout strategy: Traders trade on currencies which show signs of breakouts on the trading chart.
- RSI Divergence: Traders use the Relative Strength Index (RSI) to spot potential reversals. They look for differences between two price movements.
How to Read Forex Charts for Beginners?
3 price charts that are useful for beginners learning forex trading basics.
- Line chart: A simple line chart compares one closing point to another with a single line. The graph represents a clear visual representation of how the price of the instrument has moved over time. It is best for identifying trends.
- Bar chart: Bar charts are more complex and show opening, closing, high, and low prices within a bar. The vertical height of the bar represents the high and low points of the price range.
- Candlestick chart: This is a type of bar chart that represents opening and closing prices and high and low values in a candlestick-like pattern. Candlesticks help to get a visual representation of bullish and bearish trends.
Pros and Cons of Currency Trading
Like every trade, forex trading also has a bunch of pros and cons.
The pros of forex trading are:
- Accessibility: The forex market is the largest and most accessible one for individual traders.
- Leverage: Leverage is commonly used to increase one’s bet in the market for a sizable profit.
- Quick returns: Fast-moving and highly liquid, forex is suitable for short-term gains.
- Easy Short selling: Short selling is simple in the forex market. Every forex trade involves buying one currency and selling another.
- Fees: There are fewer fees involved in forex trading.
Cons of forex trading are:
- Volatility: Foreign currency is highly volatile which makes forex trading riskier than equity or commodity trading.
- Small trader’s problem: For a significant profit, you might have to increase your ticket size, which also increases the potential loss amount.
- Regulation issues: RBI strongly regulates foreign currency transactions in the country and doesn’t encourage Indian citizens to participate in speculative transactions.
Forex Trading terms/notes for Beginners
To understand the forex market, you must familiarise yourself with the terms used daily. It will give you the confidence to start currency trading for beginners.
- Currency pair: Foreign currencies are always traded in pairs, where one currency is bought and the other sold. Together, they form the exchange rate.
- Exchange rate: The exchange rate represents the rate at which one currency is exchanged for another.
- Base currency: The currency written first in the currency pair is the base currency. For example: in EUR/USD, EUR is the base currency.
- Quote rate: In a pair, the currency written after the base currency represents the quoted rate.
- Long position: Long position refers to buying an asset with the expectation of its price rising.
- Short position: A short position refers to selling an asset in anticipation of a price fall.
- Bid price: The price quoted in the market to trade the asset.
This forex trading for beginners guide outlines the basic requirements you need to start understanding the market. Forex is a dynamic market with multiple opportunities. If you familiarise yourself with its actions and trade within your limits, you can trade profitably and for a long time.
What is forex trading?
Forex trading is the buying and selling of currencies in the global market and profiting from the differences in the exchange rate. The exchange rate depends on numerous factors like the political and economic conditions of the country etc. For example, if US$1 is Rs. 80 and you expect the dollar to appreciate further, you will buy more dollars in anticipation of making a profit when the price rises.
Is forex trading risky?
Currency is a volatile asset. Moreover, most forex traders are highly leveraged, which makes forex trading high-risk.
Is forex trading legal in India?
Forex trading isn’t entirely illegal in India, but it is very restricted. RBI doesn’t permit Indian citizens to participate in speculative activities involving foreign currencies other than for permissible reasons under the Foreign Exchange Management Act (FEMA). It can be done only on authorised brokers’ platforms.
How can I trade forex in India?
Forex trading is allowed only on the platforms of the NSE, BSE, and MCX-SX. To trade forex, you must first open a forex trading account with a regulated broker and trade from their trading platform.
Can I make a profit in forex trading?
You can make a profit from forex trading, but there are several factors that you must consider before starting, like assessing your risk appetite, the amount of money you can invest, the amount of loss you can digest etc.