Are you planning to pursue a trading career in the forex market? Or do you just want to trade part-time to earn some extra bucks as you make profits from the exchange rate fluctuations? Maybe, you are already in the process of trading but still confused about many things as you didn’t spare enough time to prepare beforehand. Well, you are not alone as novice traders might not know everything about the dynamic currency market and it’s never too late to learn something new.
Whether you are just skimming through the basics of forex trading or just taking a break to refresh your knowledge, this blog can be an informative read as I am about to share some important things that you need to know before becoming a forex trader.
- Forex Broker
The first thing you should know about forex trading is that you cannot participate in trading without signing up with a reliable broker who is responsible for connecting you to the decentralised market and executing the orders that you place. When you are choosing a broker, you need to consider a number of aspects. If you are looking for a specific type of trading account, you should filter your broker options based on that. For example, Muslim traders will find it hard to trade on a regular account and an Islamic forex account would be a better choice.
The trades on regular accounts will be subject to a swap fee when it is kept open for more than a day and the interest-based transaction goes against the principles of Islamic finance which prohibits riba (interest). Make sure the broker is regulated and check the trading conditions they offer. The minimum capital requirement, spreads, commission, and leverage should be perfect for you. You should also test the platforms and trading tools that they offer. Remember that the broker you trade with will play a key role in the trading process.
Your entire trading experience and even the results will be dependent on the functionality of your platform and the quality of the services you get from your broker. If the trading conditions aren’t good enough, your trading cost will go up and this will reduce your profits. If there is a delay in order execution, you will not be able to execute your trades at the right time and since timing is crucial for trading success, you must find a broker who not only provides solid trading conditions but also ensures immediate execution of orders without any delays.
- Learning To Trade Forex
Only skilled traders can achieve long-term success in the volatile forex market and to develop these skills, you will have to indulge in learning. You should start by studying the currency market and then dive into the theories and concepts that are applied in the trading process. There are a lot of technical terms that are exclusively used in currency trading and as a beginner, you have to get familiar with the forex jargon and also understand their meaning. Only then, you will be able to build a strong foundation for gathering more knowledge.
Just reading books or scrolling through online content will not be enough to prepare for the actual trading process. You will have to learn about different trading styles and strategies by trying them yourself. But you should not trade with real funds while experimenting with various trading techniques as you might end up losing money due to the mistakes you make as a first-time trader. To eliminate the risk, you should trade on a demo account first and test your knowledge before going live. Even when you start trading for real, you need to keep learning to get better over time.
Through demo trading, you will get to know your strengths and weaknesses while also evaluating the efficiency of your strategy. This allows you to improve your skills and trading approach for optimum results. One thing that you need to master is technical analysis and you should also educate yourself about the influence of economic factors on the market. Because you might miss out on important details if you only focus on the price charts and patterns. So, you need to combine both types of analyses for planning your trades.
- Trading in Pairs
In the forex market, currencies are traded in pairs as the value of one currency is quoted with another currency. So, you just need to consider the price of the pair, which is the exchange rate. When you decide to buy the pair, you are expecting a rise in the value of the first currency known as base currency. This is referred to as going long in forex terms. But if you think that the 2nd currency or quoted currency is becoming stronger than the base currency, you will place a sell order and this is shorting which gives you the opportunity to make profits even during a price fall.
Beginners are told to trade with one pair at a time and once you become an expert in that pair, you can add more pairs to your watchlist. But you should study the correlation between different pairs before that. There are currency pairs that are connected in a way that prices rise and fall together. This is a positive correlation and in case of a negative correlation, the price of one currency pair will rise while the other pair experiences a downtrend and vice versa. The liquidity and volatility will be different for each pair, so you should select the one that’s suitable for your strategy.
- Forex Pips
The last but one of the most important things to know before becoming a forex trader is the concept of pips which is the basis of all trading activities. Pips is the universal unit to measure the price fluctuations that happen in forex currency pairs no matter which pair you are trading or the currency you have used to fund your trading account. Pips make the trading process easier as they can measure the smallest change in currency prices as 1 pip is 0.01 for pairs with Japanese Yen and 0.0001 for all other pairs.
Since the gains and losses of trade depend on the entry and exit price, the profit targets are set in the number of pips and you need to consider pip value for managing the risk as well. Risk management is done by limiting the risk per trade and placing a stop loss while also trading with a favourable risk/reward ratio. You can depend on tools like trading calculators to precisely calculate the risk you will have to take per trade. any value including the number of pips you should target to make from a trade. This is how you follow your trading plan and strategy with precision.
Conclusion
To conclude, the topics that are covered in this blog are just the basics that you need to know before stepping into the forex world and you should keep learning to expand your knowledge. You should not rush the learning process due to eagerness. Because skipping any trading lesson will reduce your chances of success. So, take your time to practise and start trading with a plan.
