gu id e f or b eg in n ers ultimate f orex trad in g · forex market in the hope of making more...

Ultimate Forex TradingGuide for Beginners

Francois J Oosthuizen

Ultimate Forex Trading Guide for Beginners

Forex Trading: The Ultimate Beginner's Guide

Meta description: If you are a beginner Forex traderseeking to become an expert, here is the UltimateForex Trading Guide to help you realise your goal.

Introduction

As far as the economy is concerned, there will alwaysbe good and bad times. On October 28, 2019, the NewYork Stock Exchange, recorded the best single-dayperformance since 1950 and the best year-till-date(YTD) performance of the year. For the day, the S&P500, the most tracked market index, inched up by anaverage return of 0.54%.

That sterling performance rode on the back of theUnited States hinting that it would be keeping thepeace with China. And, 78% of the 202 companies ofthe index component companies that had declaredtheir financial results at that time, had posted solidearnings result to beat analysts’ expectations.

Conversely, with the S&P 500 shedding 0.51% on theaverage, the same stock market had earlier recordedits worst performance of the year on October 19.Following from this, it can be inferred that althoughthe stock market has, overall, been doing impressivelywell over the years, its swinging yearly performancemeans that it has not always been able to deliver the10% annual average return.

In fact, for some years, investors can expect to lose upto 2-3% of their purchasing power as a result ofinflation. What is even serious is that the effects of thewild up and downswings of the market can be evenmore disastrous for beginner investors. Therefore, thiscategory of investors might want to look for alternativefinancial markets for greater returns.

Yes, experts have invented many stock market-basedproducts over the years to help investors diversifytheir risks. For example, there are equity-based mutualfunds, exchange-traded funds (ETFs), and optionsdesigned to help them take advantage of both the upsand downs of the stock market. You could choose todevote time to understand all these, but, really, do youhave enough time for that?

But there is Forex. The Forex market can help you takeadvantage of both upward and downward movementsof the economy. Besides, it has the highest potential,of all financial markets, to beat inflation. And as youread ahead, you will discover that the Forex market, infact, can even be the ultimate solution to all yourfinancial woes.

What is the Forex Market?

The Forex market, short for Foreign Exchange Market,is the largest financial market in the world. It is a globalmarketplace where currencies are exchanged for oneanother. In its entirety, it has over $5 trillion changinghands in it every day.

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However, in comparison, the New York StockExchange (the NYSE), the largest stock market in theworld, clears just $22.4 billion worth of transactionsevery day. Evidently, the Forex market is indeed huge!

And here is how it works. If you live in the UnitedStates, your currency in which all your transactions areconducted is the USD. However, if you are going toEurope, Germany specifically, you will have to changeyour currency for that being spent in your country ofdestination.

At airports, you would notice a currency exchangedesk. There, you can give up your dollars for euros,the currency of Germany. In that case, you will be saidto sell your dollars and buy euros. This transaction isessentially a Forex one as you are giving up yourdollars to get some euros!

Exchange rates are not static. Depending on theinteraction of a wild range of economic andgeopolitical factors, currencies gain or lose in valueagainst one another from time to time. At the time ofyour exchange, you could get more euros for yourdollars. Other times, you could get less.

Then, after spending time in Berlin and you want toreturn home, you will have to go through a similarprocess to change your remaining euros to dollars atthe airport. Depending on the same factors earliermentioned, you could be getting more or less dollarsfor your remaining euros.

However, it is important to note that the Forex marketis mostly famous for its speculative segment, eventhough the segment accounts for only 6% orapproximately $400 billion of the overall markettrades. Participants of this segment are known as theretail Forex traders, and they seek to largely profitfrom the intraday fluctuations in exchange rates.

In addition to its size, the Forex market is also knownfor its notorious trait of “never sleeping.” Closing onlyon weekends, it is open 24 hours a day and 5 days aweek!

The Genesis of the Forex Market

Currency trading is almost as old as man. The Greeksand Egyptians are known to have transacted goodsusing silver and gold coins over 2,000 years ago.However, currencies were not freely traded for the firsttime until roughly 1500 years after in Amsterdam.

In 1900, to guarantee the value of its currency, theUnited States decided to fix it to a gold standard. ThenWorld War II came and devastated the economies ofEurope and Japan. Consequently, the members of theglobal economy saw the need to establish a commonground. So, through the Bretton Woods Accord, theydecided to peg the values of their currencies to thevalue of the U.S dollar which had been pegged to thevalue of gold.

Soon, however, continuing with the gold systembecame impossible. The U.S. had been printingmoney at an alarming rate to finance its debt and aserious inflationary problem was setting in. To protectthe value and integrity of their currencies by avoidingthe impending inflationary crisis, the foreigngovernments attacked the peg, when, on August 15,1971, President Richard Nixon moved the U.S dollar offthe gold standard. Nixon's step culminated incurrencies eventually floating freely. And the resultingfree-floating system gave them the ability to rise orfall in value based purely on the interactions of theeconomic forces of demand and supply.




Consequently, the modern Forex market, with itsabundant opportunities to profit, was birthed.Although it is still clear that the market can be erratic,its participants have been able to devise two effectiveways — fundamental and technical analyses — toapproach it. Fundamental analysis is the study ofthose factors that move it by influencing the supplyand demand of currencies. These factors includeinflation and interest rates, the balance of payments,government debt, and political stability, among others.

On the other hand, technical analysts seek to interpretthe action of price on charts and predict its movement.As a result, they use tools such as candlestick chartpatterns, technical indicators such as Simple MovingAverage, Moving Average Convergence/Divergence(MACD), and Relative Strength Index.

Despite being a controversial practice, there aretraders that combine both methods of analysing theForex market in the hope of making more informedtrading decisions in it.

Understanding the Basic Lingo of the Forex Market

Like every other human endeavour, the Forex markethas its terminologies. As a beginner trader, anunderstanding of this basic lingo will go a long way inhelping you become successful in the long run.

Currency Pairs

What is traded in the Forex market? Money in the formof currencies. In fact, there would not have been theForex market if currencies were static against oneanother. It is the fluctuations in the values ofcurrencies against one another that createopportunities to trade.

Every Forex transaction is quoted in pairs. That is,there must be two currencies before any Forextransaction can occur. When you buy a currency inanticipation of a rise in its value, you mustsimultaneously sell another. Based on thisarrangement, every Forex transaction is made up ofthe base and quote currencies.

©Babypips.com

The base currency is the first currency in the pair. Itrepresents the currency gaining or losing in strengthagainst the other, the quote/counter currency.Consequently, it is the “basis” for every order — buy orsell — that you place. That is, for example, if the GBP isgaining against the USD, you buy the GBP/USD pair.

On the other hand, the quote currency is importantbecause it is the currency in which the exchange rateis quoted. For example, when you say that theexchange rate of GBP/USD is 1.32471, you are saying itcosts 1.32471 dollars to buy 1 GBP. Based on thevolumes of transactions they record, currency pairshave been categorised into majors, minors, andexotics.




Major Currency Pairs

The most liquid and widely traded in the world, themajor currency pairs are those pairs that have the USDin them. They constitute the largest share of the Forexmarket, accounting for close to 85% of all its trades.They are;

EUR/USD

USD/JPY

GBP/USD

AUD/USD

USD/CHF

NZD/USD, and

USD/CAD

Those currency pairs that do not contain the USD areknown as the minors, crosses, or cross-currency pairs.The most frequently traded cross-currency pairs arederivatives of the three currencies, EUR, GBP, and JPY.Hence, there are EUR crosses, GBP crosses, and JPYcrosses.

EUR Crosses GBP Crosses JPY Crosses

EUR/CHF GBP/CHF EUR/JPY

EUR/GBP GBP/AUD GBP/JPY

EUR/CAD GBP/CAD CHF/JPY

EUR/AUD GBP/NZD CAD/JPY

EUR/NZD AUD/JPY

EUR/SEK NZD/JPY

EUR/NOK

For clarification, the SEK and NOK symbols representthe Swedish Krona and Norwegian Krone respectively.

Finally, there are the exotic pairs. These currency pairsare made up of one major currency and the currencyof an emerging economy such as Brazil, Mexico,Russia, India, Indonesia, or South Africa. The problemswith exotic pairs is that because they are not widelytraded, the transaction charges on them are high.

Examples are:

USD/BRL (USD/Brazilian Real)




USD/MXN (USD/Mexican Peso)

USD/SAR (USD/Saudi Arabia Riyal)

From those examples, you should have noticed thatthere is a convention by which currencies are written.The first two of the three letters represent the countrywhile only the last stands for the currency itself.

Pip

The pip is the unit of measurement in the Forexmarket. It is the smallest amount by which theexchange rate of any currency pair can change. Sinceyou will be measuring your profits and losses in it, thepip is a concept you must grasp.

This is how it works. Imagine you buy an item for$1.5000 (since in the Forex market, currencies arequoted up to 4 decimal places). The last number ofthe decimal place represents the pip, and, dependingon the direction of your trade, you either make or losemoney when the price moves.

When the price moves from 1.5000 to 1.5005, forinstance, it will be said to move 5 pips. Except forJapanese pairs which are quoted only in two decimalplaces, every other exchange rate is carried to fourdecimal points.

Bid and Ask Price

Forex brokers always have two prices for eachcurrency pair. These are the bid and ask prices. Thebid price represents the price at which thebroker/market maker is willing to buy from traders; onthe other hand, the broker/market maker seeks to sellat the ask price, also known as the offer price.

For example, in the EUR/USD quote, 1.1051/1.1053, thebid price is 1.1051 while the ask price is 1.1053. Whatthis means is that to sell 1 euro to the broker/marketmaker, you will need $1.1051 while to buy 1 euro fromthe broker/market maker, you will need $1.1053.

Bid-Ask Spread

Forex brokers make money on each completed tradeprincipally through the two ways: bid-askspread/commission and market making. When it isthrough the bid-ask spread, the broker profits bytaking the difference between the bid price and theask price. For example, in the earlier EUR/USD quote,1.1051/1.1053, the difference between the bid priceand the ask price is 2. This is the spread.

©Babypips.com

The major currency pairs, being the most traded, oftenhave the lowest spreads. Exotic pairs have the largest.Then, the relationship between spread andcommission is that brokers that charge commissionsusually have lower spreads. Conversely, spreads arehigher with brokers that do not operate a commission-based fee structure.




Market making is a controversial practice. This is sobecause Forex brokers who use it take the oppositeend of their clients' trades. That is, clients must losebefore market-making Forex brokers can earn.

Lot Size

Stock trading is straightforward: you like Amazonshares? You place an order for a thousand units of it.However, it is not as simple for Forex trading. In fact,when you trade in the Forex market, you are buyingcontracts, also known as lot sizes, of each country'scurrency.

A lot size is simply the number of quote currency unitsyou buy or sell. And there are four types to choosefrom. They are:

Standard

Mini

Micro

Nano

The standard and mini lot sizes, respectively, aremade up of 100,000 units and 10,000 units of thequote currency. On the other hand, micro and nanoaccount sizes consist of 1,000 and 100 unitsrespectively. On a standard lot account, a move of 1pip equals $10. For a mini lot, it is $1.00. For micro andnano accounts, it is 10 and 0.1 cents respectively.

So, how do you decide the lot size to trade? Thatdecision will depend on your investment style, thesize of your trading capital, and your expected return.Nevertheless, for beginners, the micro lot accounttype, because of its low risk, is best advised.

Margin Trading

Forex trading has a low barrier to entry mainlybecause of margin. Margin is a provision that enablesForex market participants to deposit only smallamounts when opening trading accounts with brokers.As a result, the margin is the minimum amount that aForex trader must deposit with his broker.

A certain percentage of the deposited amount in youraccount is set aside as the initial margin requirementfor each trade your place. The percentage size is afunction of the currency pair being traded, the lot size,and the market price. Margin requirements can be aslow as $50 and as high as $100,000 depending on thebroker.

Margin and leverage are highly correlated. The latter isthe ratio of the amount you are using on a transactionto the required deposited amount, the margin. Theadvantage of leverage is that it helps Forex traders tocontrol large positions with small monetaryrequirements.

Different brokers offer different leverage ratios.However, many provide up to 1:1000.




Cons and Pros of Forex Trading

Forex trading has its pros and cons. While it isrecommended for even traders of other markets to tryout, some cautions are warranted based on thepeculiarities of the Forex market. Hence, as a beginnertrader, here are the benefits of Forex trading that youshould watch out for.

Low barriers to entry

Perhaps, the greatest benefit of the Forex market is itslow barriers to entry. In fact, nowadays, you do nothave to be rich to start participating in it. While a largetrading capital will boost your returns, you can,however, start Forex trading with as low as $100.

Hence, do not be afraid to start trading Forex. Youneed far less in capital that you probably think.

Profitability

The Forex market is the most profitable financialmarket in the world. It is the only financial market fromwhich you can easily profit irrespective of the directionof the economy of your country or that of the world atlarge.

You think the US economy is weakening against thatof Europe? Buy the euro, sell the dollar. While you canalso profit from a falling stock market throughshorting, it must be noted that this process is never asstraightforward as it is in the Forex market.

Flexibility

The Forex market offers more flexibility in terms oftrading due to its long active hours. It is open 24 hoursa day from Sunday afternoon to the following Fridayevening. As a result, you can technically buy and sellany time of the day.

However, the same cannot be said for any otherfinancial market. The stock market, for example, isclosed at weekends and is only open for somespecified hours during the weekdays.

Less analysis

Analyses are essential irrespective of any financialmarket you decide to trade in. In fact, the rule is thatyou must be an analyst first before you become atrader. However, financial markets have differinganalysis requirements.

Stock traders have a higher chance of suffering withanalysis overload compared to their Forexcounterparts. Over 2,000 companies are listed on theNew York Stock Exchange (NYSE) alone. Add to thesethe thousands of mutual funds and ETFs, too, and youwill agree it can be a hell lot of work.

Diversification

Diversification decreases risk. While most financialplanners often recommend only the triad of mutualfunds, cash, and bonds, currencies, surprisingly, too,are one more viable vehicle for investment portfoliodiversification.

So, when you engage in Forex, you can see it as adiversification tool. Whenever growth in the otherinstruments that make up your portfolio stalls,currencies will be there to pick up the slack.




Nevertheless, too, the following are the risks of Forexthat you should work to guard against:

Scams

Scams are as prevalent in the Forex industry asopportunities are abundant in it. The alarming fact isthat Forex scams come in different shapes and sizes,in different forms! Still, however, you can be aware ofthe crucial ones to easily avoid.

First, there are scam brokers. These are brokers withshady regulatory claims. They present a safe and well-regulated facade while, in fact, they are a fraud.Through intensive promotions and campaigns, theysecure undiscerning folks to sign up for accounts withthem.

Often, they are discovered by their unsuspectingvictims after they have deposited their funds.Sometimes, those fraudulent brokers can take theirwell-orchestrated shady operations further byallowing their victims to trade. But when it now comesto withdrawing their gains, they show them who theyare.

In addition to broker scams, there are also the scamsof self-acclaimed Forex gurus and Forex courses.While there are genuine Forex teachers and highlyeffective Forex courses, you should still be careful inthe considerations of your options.

Leverage Risk

The Forex market is so lucrative because, amongother things, its participants can leverage their trades.As explained earlier, margin trading is the mostpowerful tool that makes Forex easy to start and moreprobable to profit with.

With a small amount, you can start trading Forex. Andwith leverage, you can boost your gains. However,margin trading and leverage, the major reasons for thehuge profit potential of Forex trading, paradoxically, isits greatest undoing.

Irresponsible use of leverage can result in substantiallosses. In fact, it is not uncommon for reckless, highlyleveraged Forex traders to have their accountscompletely wiped out during highly volatile marketmoves. So, what’s the way out of this risk? Useleverage reasonably.

Country Risk

The Forex market is highly prone to country risks. Mostcountries, especially the developing ones, indirectlypeg the values of their currencies to the USD.Consequently, to maintain exchange rates, they needto have substantial foreign reserves denominated in it.

So, whenever there is devaluation, because of, forexample, balance of trade deficits, investors can catcha negative whiff about the country, resulting inmassive selloffs of its currency. Considering this risk,you should, therefore, be involved only in countrieswhose currencies are stable and well-structured.

Tips to Succeed in the Forex Market

As risky as the Forex market is, there are some tipsthat, if well applied, can boost your chances ofsucceeding in it. Some are discussed here.




Know yourself and understand your needs.

“Know thyself” is a popular maxim. It has gainedusefulness across diverse spheres of humanendeavour. Interestingly, it finds application in Forextrading, too. In fact, any trader seeking to succeed inthe Forex market must first abide by it.

Know thyself, dear Forex trader. What are your tradinggoals? Why do you want to trade Forex? To diversityyour portfolio? To create an alternative stream ofincome. Or, as a desperate, unemployed individual?Perhaps, you are attracted to Forex trading because ofits promise of financial freedom and locationindependence.

Also, what is your risk profile? That is, how much doyou tolerate risk? Answering those questions isimportant in helping you formulate a sound tradingstrategy and style that will be peculiar to your needs.

Get Coached by Experts

Forex trading requires knowledge. There is so much tolearn and the learning curve is very steep. As abeginner Forex trader, you must be committed tomastering the approaches to analysing the market.These are fundamental and technical analyses. Also,you should learn risk and money management andthe psychology of trading.

Diversit-e Smart Trading College helps to shorten thelearning curve for beginner traders, making it lesssteep. Registration with us gives you the privilege tolearn and be mentored by expert Forex traders whohave been in the business for years. Besides, we willprotect you from falling victim to the schemes of scambrokers via our partnership with an FSCA-registeredand regulated broker.

Evolve a comprehensive trading plan

Having identified your trading needs and goals, youshould then use the knowledge gained about yourselfto develop a comprehensive trading plan. Often it issaid that he who fails to plan plans to fail. In Forextrading, that is no less true.

The plan should contain your goals and expectationsand should highlight your strategy for approaching themarket. Will you be a fundamental-based trader? Doyou want to be basing your trading decisions mainlyon technical analysis, or a combination of both?

Importantly, how do you intend to be managing risks?For every pip you want to gain, how many are youwilling to risk?

Use a safe and secure Broker

Newbie, beware. The greatest undoing of mostbeginner traders (and even a few established ones) istheir brokers. That is why trustworthiness is such animportant factor you must consider when you want tochoose a broker. And the good news is you can findout the credibility of any broker through diligentresearch.

However, you do not have to go through the tiresomeprocess yourself because we have done the selectionfor you. We have partnered with a broker that providesour clients with top-tier security systems and realstate-of-the-art trading terminals and platforms,effective Forex trading signals, and much more!




In fact, our preferred broker has been awarded theprestigious NASDAQ “Best Financial Broker in Africa”for 3 consecutive years and nominated as a finalist inthe “National Business 2019” awards. These awardsrecognise the important social and environmentalcontributions made by organisations through theexcellence of service, commitment to their clients,ethical behaviour, and environmental sustainability.

Our preferred broker is registered with the FinancialSector Conduct Authority (FSCA), the only regulatorybody for financial institutions in South Africa. Theagency regulates financial institutions such as banks,retirement funds, insurers, administrators, and marketinfrastructures.

Initially established in 1991 as the Financial ServicesBoard (FSB), the FSCA is a respected authority inAfrica, with the primary aim of ensuring clients' safety.Due to its strict guidelines, only 81 brokers have beenable to obtain its prestigious license. One of itsrequirements for licensure is that a broker keeps itsclients' deposits in segregated accounts, that is,separately from its operational funds. Now imagine:our preferred broker is fully licensed by it!

Therefore, overall, the broker you use must be safe. Asafe broker, for instance, will allow you to overseeyour deposits and withdrawals. It is your hard-earnedmoney and profits after all! Hence, no broker shouldrob you of them. Finally, you must ensure that thebroker you settle for uses an award-winning andreliable Real Trading Terminal and Platform.

Diversit-e Smart Trade College’s Real Trading Terminaland Platform is the world's most popular of its kind.With 30 technical indicators and nine-time frames, ithas a highly user-friendly interface supporting anenvironment of powerful analytical and trading tools.The Real Trading Terminal and Platform has a dynamicsecurity system and pioneered the automated tradingarrangement known as Expert Advisors (EA). What ismore: the Real Trading Terminal and Platform areavailable in mobile form, thereby enabling our clientsto monitor the market on the go.

Conclusion

There you have it, the Ultimate Guide to Forex Tradingfor beginners. At this stage of your trading career,those are the essential details you need to know. Youraim should be internalising them so that you willbecome better for it.

Happy trading,



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