How to Start Trading on the Forex Market?

How to Start Trading on the Forex Market

Starting to trade on Forex should begin with a detailed study of theoretical material, mastering the trading platform, and a specific strategy. It’s equally important to choose a reliable broker and understand the rules of risk distribution. However, the most crucial condition is regular practice and a high level of trader discipline.

Any business starts with theoretical issues, and Forex is no exception. Studying basic concepts, modern market perceptions, and price analysis methods is a mandatory condition for all beginners. However, the good news is: you can get a general understanding in just a few days, as the total amount of theoretical knowledge is small. The main focus should be on practical skills.

10 Basic Concepts

Almost every broker’s website has a special section with the basic concepts of the forex market, listed in alphabetical order. Usually, traders are offered to study several dozen concepts, but the most important are:

Forex – a market for exchanging international currencies, the price of which is formed by market methods (depending on supply and demand at the moment).

Asset – any financial instrument used for trading operations. Along with currencies (e.g., EUR/USD or GBP/CHF), these can be stock indices, company shares, and other instruments. General trading principles are the same, but strategies may have their own characteristics depending on the price behavior of a specific asset.

Trading strategy – a system of rules (principles) based on which a trader decides to enter the market, i.e., open a sell (SELL) or buy (BUY) position. Strategies are often based on technical analysis principles, less often – fundamental.

Buy order – a deal to acquire an asset at the lowest possible price, hoping it will subsequently rise. Thanks to this, the asset can be sold at a higher price, earning the difference.

Sell order – the exact opposite. The trader sells the asset at the highest possible price, expecting it to then go down. Earning profit again is based on the resulting difference.

Broker – a company (legal entity) acting as an intermediary between the trader (client) and the market. Brokers bring deals to the market, for which they charge a small commission. However, companies often operate as closed “kitchens” and work on a casino principle: funds are paid to winning clients at the expense of the losers.

Point (pip) – the minimum change in currency price. Usually, it’s about a change in the rate by one unit in the fourth decimal place, for example: it was 1.1001, and it became 1.1002.

Spread – a small commission that the broker takes from each deal. It’s determined by the number of points – usually 3-5. For example, if a trader opened a winning deal, and the price as a result went through 100 points, he will receive only 95, as 5 will go as a commission to the broker.

Lot – a unit of measurement for the volume of one trading operation. 1 lot is considered to be 100,000 units of the base currency. The base is considered the one that stands first in the record. For example, in the USD/CAD pair, the base will be the US dollar USD. Therefore, 1 lot will be equal to 100,000 dollars. Since private traders often don’t have such funds, brokers allow trading not a whole lot, but its fractions – tenths and hundredths.

Trading platform (terminal) – a special program where traders open and close orders, as well as analyze the market situation. Today, most brokers offer to use the classic MT4 terminal or its improved version MT5.

Fundamental Analysis

Market study for the purpose of creating a strategy for stable profit is called analysis. The main task of analysis is to get accurate forecasts about price movement in the near future (minutes, hours, days, weeks, etc.). In practice, there are 2 types of analysis – fundamental and technical.

Fundamental analysis considers the influence on prices of economic and political factors. These include various indicators and events occurring in a specific country, region, or corporation (when trading stocks):

  • Unemployment level;
  • Currency reserves;
  • Value of the key rate;
  • Inflation rate;
  • Change in oil reserves;
  • Change of power as a result of elections;
  • Statements of political leaders, and many others.

Usually, only financial analysts and other experts deal with the study of these factors. Traders prefer to follow economic news, which significantly affects the market at least in the coming hours and days, less often – for months and years. Beginners are recommended to start studying the market with more understandable technical analysis.

Technical Analysis

This type of analysis involves studying the market based on specific mathematical and graphical indicators:

  • Indicators (calculated based on certain mathematical formulas, which the trader doesn’t necessarily need to know);
  • Japanese candlestick patterns (price action – price behavior);
  • Support and resistance levels (usually built visually);
  • Fibonacci levels (built based on the famous sequence of numbers);
  • Elliott waves (a complex theory that requires a separate study).

The main task of technical analysis is to identify the current trend (price movement direction) and predict its change. The main principle of technical analysis is that history repeats itself. Therefore, if a certain pattern led to a price increase in the past, it’s likely to happen again in the future.

Choosing a Forex Broker

Even a well-chosen trading strategy doesn’t guarantee success, as it’s crucial to select the right broker – the company through which a trader will open positions and withdraw profits. When choosing a specific company, several important criteria should guide your decision:

  • Possession of a license from a well-known financial regulator.
  • Authorization documentation from the country’s Central Bank and other bodies.
  • Positive customer reviews (analyzing as many sources as possible, including personal recommendations from fellow traders).
  • Acceptable trading conditions – attention is paid to the minimum deposit size, the availability of a demo account, the size of the spread and commissions, and leverage.
  • Availability of educational materials and courses, videos, webinars, e-books – this condition is especially important for beginners.

Mastering the Trading Terminal

Another essential condition is mastering the trading terminal, where the user will:

  • Open orders (trades);
  • Close orders;
  • Monitor the market situation and make corresponding decisions.

Most brokers offer their clients the opportunity to operate in the MT4 or MT5 terminal (their interfaces and functionality almost entirely coincide). It’s a convenient program, which isn’t difficult to master. Beginners are advised to set up a demonstration account and get to grips with the terminal in practice. The main working skills are:

  • Opening and closing a trade;
  • Opening any asset;
  • Inserting any indicator;
  • Applying a template to an asset – i.e., a set of indicators previously saved as a whole.

Opening a Demo Account

Almost any broker allows you to open a demo account completely free of charge, and in most cases, clients can use it indefinitely. It’s very important for a beginner to start trading with practice, as understanding trading is only possible in practice. A demo account offers the user several advantages:

  • The opportunity to quickly master the MT4 trading platform;
  • Understanding how to open and close orders;
  • Testing a specific strategy or indicator for its profitability.

Trading on a demo account takes several months; and only after achieving successful statistics, i.e., consistent profits (approximately 10%-20% of the deposit per month), can a trader move to a real account.

Choosing a Trading Strategy

The trading strategy is the trader’s main working tool. A strategy is a system of rules that determine when to enter the market and when to exit. The rules should be specific and objective, i.e., the occurrence of a situation can be easily identified on the chart (based on indicator readings, support/resistance levels, etc.).

Today, more than 100 strategies have been developed, working with varying degrees of efficiency. It’s important for a beginner to understand that they should not just take a ready-made option, but also adapt it to their style, i.e., determine:

  • The specific assets to apply the strategy to;
  • The percentage of profitable trades it provides;
  • The time frames it works best on (minute, hourly, daily, weekly, etc.).

Strategy testing is always first carried out on a demo, and then on a real account. The system’s rules should specifically answer questions like:

  • When to enter the market (list of conditions for opening a position).
  • When to exit the market (at what point to take profit, i.e., take profit).
  • When not to risk (for example, during news releases, in a flat market, i.e., in the absence of a clear trend).
  • What to do in case of an unsuccessful forecast (what size of loss is acceptable). Usually, this is no more than 2%-3% of the deposit. For example, a trader has $1000 in their account. Therefore, with each trade, they can afford a loss of no more than $30. If the price went in the opposite direction and reached this level, the position needs to be closed immediately (this happens automatically thanks to the stop-loss tool setting).

Any strategy usually relies on several tools – indicators, support/resistance levels, and candlestick patterns. There are also news trading strategies, but beginners are better off starting with simple technical analysis tools listed above.

Opening a Real Account

After choosing a broker, mastering the trading platform, and studying a specific strategy or set of strategies, a trader can move to real trading. Account opening starts with registering on the broker’s website and verifying data with documents.

It’s important for a beginner to understand right away that real trading and trading on a demo account are two different psychological states. In the first case, the “money” is virtual, so even a total loss, as well as profit, doesn’t evoke particularly vivid emotions, as it does when trading with real funds.

Therefore, the main requirement for a trader is constant adherence to risk management rules and intelligent planning of their trades. Understanding all this is necessary in advance, but a final understanding can only come with experience. Therefore, the main condition is making sensible decisions and regular practice.