Many seasoned traders in the Forex market often say that the learning process is never-ending as they have to keep updating their strategies to withstand the risks that emerge. So, we can say that hands-on trading experience is essential for expanding your knowledge and enhancing your skills.
However, a newbie should not be holding back from stepping into the realm of Forex trading just because they don’t know it all yet. In fact, trading platforms like MT4 are ideal for novices who need more time to learn. You can get started after doing some research and indulging in self-study to prepare yourself for Forex trading.
In this blog, I will be sharing some important things to know before placing your very first trade in the Forex market, so that you can mark a successful beginning to your trading journey.
Learn the Basics to Build a Firm Foundation
We often underestimate the significance of basic education in any field and this happens with Forex traders too as new traders don’t pay enough attention to comprehend the basics.
They simply learn some technical terms that are used in trading and rush into live trading as they think that they can learn the rest through trial and error.
But this can lead to your downfall even before you find a footing in the Forex world. So, make sure you have enough time to spend on learning all the basics thoroughly as you need to build a firm foundation to build your trading career as a beginner.
You need to understand how the Forex market functions and why you find it to be the best one for trading out of all other financial markets. You should also study the characteristics of different currency pairs to find the best ones that you can add to your watchlist.
Since the Forex market runs round the clock, you should learn about major trading sessions and observe how the market situation changes during different trading sessions. You can easily get real-time market data by joining a trading platform that connects you to the market.
To talk about trading platforms, MetaTrader 4 and 5 are two of the most popular trading softwares which are preferred by both amateur and expert traders due to their user-friendliness and powerful features for market analysis.
MT4 perfectly matches the requirements of a beginner as it is easier to navigate and simplifies the learning process. MT5 has more tools and features which perfectly complement advanced trading strategies like automated trading. It is also popular among modern traders interested in multi-asset trading.
Now, let’s have a look at some important Forex terms that you must learn before trading.
Base currency
The 1st currency in a currency pair is the base currency and its value is stated as the price of the pair. The base currency in USD/JPY is USD.
Quote currency
This is the 2nd currency in a pair that is used for quoting the value of base currency. In the above example, Japanese Yen is the quote currency.
Pip (Price Interest Point or Percentage In Point)
It’s the standard unit to measure the price movements in currencies in other words, it tracks the exchange rate fluctuations no matter how small it is. This is abbreviated as pip.
Bid Price
The price that a buyer is willing to pay for a pair is the bid price.
Ask price
This is the price at which a pair is being sold.
Spread
Spread is the cost that you pay for placing a buy/sell order with a broker as there will be a difference between the bid and ask prices.
Lot size
The size of a trade depends on the type of the lot chosen and the number of lots you specify in the order.
Long position
A trade position opened for buying a pair is a long position. Going long means that you expect a price rise.
Short position
When you enter a trade to make a profit from a potential price fall by selling the pair, it is referred to as a short position.
Leverage
Leverage is a term used to describe the practice of trading with borrowed money from the broker. Leverage amplifies the trade size and traders use it for opening bigger-sized trades with a smaller amount of capital.
Margin
The minimum account balance for entering a trade and keeping it running is the margin requirement. This margin requirement will be lower when you use higher leverage but the trades will be automatically closed if the balance falls below margin and you don’t deposit additional funds.
Factors that Influence the Forex Market
In other financial markets, demand and supply conditions are the most impactful forces that lead to price movements but in the Forex market, macroeconomic factors and geo-political factors are more influential as the value of currencies is connected to the economic state of a nation.
This is why different currency pairs carry different levels of risk, depending on the country that they originated from. For example, exotic pairs are the riskiest assets as they include currencies from developing or emerging economies which lack stability.
The volatility of exotic pairs is very high and the liquidity is very low due to low trading volume. Thus, they respond more to any event that can impact the currency’s value and novice traders are advised to stay away from these pairs to minimise the risk.
Major and minor pairs will be the safest ones to trade for a beginner. Because they have sufficient liquidity. Major pairs have the lowest spreads which is another advantage.
The factors that you need to consider and economic events to watch out for while trading any pair are listed below.
Economic Indicators
- Gross Domestic Product (GDP)
- Employment data (Non-Farm Payrolls)
- Consumer Price Index (CPI)
- Producer Price Index (PPI)
- Retail Sales
Interest Rates
- Central bank interest rate decisions
- Divergence in interest rates between different countries
Inflation Rates
- Inflation expectations
- Central Bank inflation targets
Political Stability and Economic Performance
- Political events, elections, and government stability
- Economic policies and reforms
Fundamental analysis is about predicting the potential price movements based on these factors as you can use it to predict currency values.
For example, inflation leads to depreciation in the value of a currency and when the economic indicators like GDP is favourable, it indicates appreciation in the value of a currency.
To keep track of these events, you should keep an eye on the news. You should use an economic calendar to stay updated about the date and time of important events or key economic data releases.
Relevance of Trading with a Trusted Broker
The last thing that you need to know before taking your first step as a Forex trader is the role that a Forex broker plays in the trading process and why it is relevant to choose a trusted broker and trading platform.
The broker is in charge of executing all the orders that you place and the spreads you pay for the trades will also vary depending on the trading conditions you get with the broker. So, you should do enough research to find a reliable broker.
Watch this space for updates in the Hacks category on Running Wolf’s Rant.
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