Let’s start with the most basic questions. What is forex trading? Is it possible to earn money by trading forex, and where can we learn how to trade forex successfully? As a beginner in the forex market, you probably have lots of questions that you want answered. In this “how to trade forex for beginners” style article, we’ll answer all your questions, and get you started on the path to becoming a successful forex trader.
Forex trading is simply the buying and selling of foreign currencies for the purpose of making money on fluctuating exchange rates. Foreign currencies and a well-functioning currency market are important for people all over the world, whether they know it or not, as currencies need to be exchanged in order to trade goods or services across borders. For example, if you live in Australia and want to buy a football shirt from England, you need to pay for it in British pounds, which first must be exchanged from your Australian dollars.
The forex market is therefore an important market that the entire global financial system depends on. It is also important that the market is liquid, meaning the ease at which a trader can buy or sell any given currency at any given time.
Without liquid markets, it would be impossible for banks to exchange currencies with each other, or for companies to make international transactions. This is where you come in – the retail trader. Retail traders around the world provide plenty of liquidity to the markets so that all the other participants are able to accomplish what they need to do, 24 hours a day.
Forex trader lingo
As a new forex trader, things can easily seem a bit overwhelming. Experienced traders like to toss around complicated words like leverage, spread, or short. To help you clear up the confusion and appear more educated when meeting these guys, let’s explain the meaning of some commonly used terms:
Long and short can be very confusing terms for anyone who is new to trading. In the world of finance, long basically means buying and short means selling a financial asset in an attempt to make a profit. If you are going long, you will make money when the asset goes up in price, and lose money when it goes down in price. If you are going short, you will make money if the asset goes down in price, and lose money if the asset goes up in price. It’s as simple as that!
Stop-loss is another term that gets tossed around a lot by forex traders. Now, this one is important so there is a good reason traders are talking about it. The stop-loss is the price level where you have decided to get out of a trade that is moving against you. The order will automatically be sent to the market once the price crosses this level. This is key to proper risk management and preservation of capital in trading.
Bid-ask spread is the difference between the price you are offered to buy an asset at and the price you are offered to sell it at. Forex brokers usually make their money on the difference between the buy and sell price.
A pip is sometime referred to as a “point in price.” It is basically the smallest possible price move in any given currency pair. Forex traders often measure their wins and losses in pips rather than percentages or dollar value.
Leverage is basically borrowing money from your broker to increase your buying power in the market. In forex trading, leverage is always part of the game, and brokers will by default let you take much larger positions in the market than the cash in your trading account would otherwise suggest. Keep in mind that leverage is a double-edged sword; on one hand it’s great because it boosts your profits when you’re right, but on the other hand it also increases your losses when you’re wrong. Be careful and learn to manage your risk properly!
Unique characteristics of the forex market
The forex market has a set of unique characteristics that make it unlike any other financial market in the world. To be an informed trader, you should know what these are.
- The world’s largest market. This need to exchange currency in order to perform basic tasks is the main reason why the foreign exchange market is the largest and most liquid market in the world. Other markets such as the stock or futures markets, for example, seem small in comparison with the forex market.
- No central exchange. Unlike the stock market where all trading happens on an exchange, the forex market is a decentralized market where trading is done between banks and other players in the market through various computer networks. It is the only market where millions of retail traders like you on a daily basis battle it out against central banks, government institutions, large banks and hedge funds.
- 24/5 trading. The forex market is open 24 hours a day, five days a week. It opens on Monday morning in New Zealand and closes Friday afternoon in New York. The truth is therefore that the market is open something like 5-and-a-half day per week. The most active trading happens when the major financial centers of the world are awake, such as Tokyo, Hong Kong, London and New York, to name just a few. One major advantage of a market that trades 24 hours a day is that you will not experience any “overnight gaps” like in the stock market, where a stock may open at a completely different price than it closed at the day before. In the forex market, this can only happen over the weekends, but even then it is usually not as big of an issue as in the stock market.
Get the right forex education
As you probably know if you have read this far, it easy to get lost as a beginner forex trader. Perhaps all you have is just a dream of learning how to trade forex from home, and to be able to finally escape a low-paying job or a horrible boss.
Learning forex trading the right way is essential in order to succeed in your trading journey. Successful traders have already spent years accumulating knowledge about the markets, trading strategies to use, and best practices beginners should adopt. At Learn to Trade Australia, we have gathered a team of experienced and knowledgeable forex educators to help you realize your dream of becoming a successful independent forex trader. Come and join us today!