Starting out in forex trading: What you need to know
You should take the time to understand how forex trading works and learn more about currency markets before you invest. The foreign exchange market isn’t for everyone, but if you do decide to try forex trading, it’s important to do it carefully and responsibly.
- What is forex trading?
- Forex trading refers to buying currencies when they decrease in value in relation to another currency and selling them once they increase in value. The goal of this type of investing is profit maximization and wealth accumulation; thus, investors buy low and sell high.
Forex trading involves significant risk of loss and is not suitable for all investors. Increasing leverage increases risk. Investing in foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in foreign exchange, or any kind of trading you should carefully consider your investment objectives, level of experience, and risk appetite. No information or opinion contained on this site should be taken as a solicitation or offer to buy or sell any currency, equity or other financial instruments or services. Past performance is no indication or guarantee of future performance.
Choosing the Right Trading Platform
Choosing the right trading platform is one of the most important decisions you’ll make as a beginner trader.
Since there are so many different options (and there are way more than just one best forex trading platform for beginners), we’ve done research for you and found some of the best places to trade online with forex.
Here’s a quick breakdown:
- Not all online platforms are created equal – from beginner friendly options like eToro, to more advanced options like FOREX.com, make sure that you do your research and find an online trading platform that will suit your skill level.
- Demo accounts/free trials are a really good option if you’re trying to learn about forex trading for beginners – they allow users to test out how it works before committing their own money.
How to Use Leverage in Forex Trading
Leverage means that you can trade a large amount of money with a small amount (as your margin/collateral). Leveraged trades allow you to take bigger positions and increase your potential profit.
For example, if you want to buy 100,000 units at a margin of 1%, the required equity would be $1,000. If the price moves in your favour by 10 pips and you decide to close the trade, the return on investment is 100% ($1,000 * 100%). But what if you wanted to buy more than $1,000 worth? How could you possibly do it? Well…this is where leverage comes in!
Trading with a leverage of 1:10 means that for every $1 dollar in our account we can control $10 dollars. In this case we would need only $100 (the equivalent of 10 lots) instead of $1000. You can see how leverage allows us to make bigger trades and potentially earn higher profits!
Understanding Pips and Spreads in Currency Pairs
Pips and spreads are terms most of us use daily in the forex market. But what exactly is a pip, and what is its relation to spreads?
A pip is a measure of the change in value between two currencies, i.e., the smallest price change that a given exchange rate can make. The value of a pip varies based on currency pairs and lot size, but it’s always equal to one unit of the base currency. To calculate pips for currency pairs in which your account denomination is not the same as the base or quote currency, you must first convert your account balance into the same currency as that of your pair by using our forex pip calculator.
The spread refers to difference between the bid and ask price for a particular pair; it represents how much money you need to spend on buying versus selling units in that pair. To calculate spreads in USD, divide tick size by current exchange rate (remember to include commissions if applicable).
When you’re new to the world of currency trading, it helps to start with a few tips and tricks of the trade.
Whether you’re new to currency trading or a seasoned trader, you don’t have to be overwhelmed, because here’s what you need to know about forex trading for beginners.
Have the right attitude.
Forex is all about your mental approach, and it can get addictive if you allow it to. Forex trading can be a thrilling hobby and a great source of income so don’t go into it with false expectations. If you can do that and avoid most of the mistakes new traders make, then you might even find that trading is actually very easy!