Have you heard of forex (FX)? It stands for foreign exchange. As more people are learning to generate passive income and secondary income, forex trading has become increasingly popular among new and veteran investors. However, beginners may find it challenging to enter the forex market due to its high technicality. But this short forex guide will help you start with the right foot.
How Does Forex Work
Like most trading systems, your goal is to buy low and sell high, so you make a profit. After years of development, forex is now the biggest marketplace in the world. Unlike other assets, currencies are highly volatile and have extremely high liquidity. The price can change multiple times throughout the day and it is critical to support your trading decisions with ample research.
Forex Trading Basics
So, let’s start with basic terms and definitions you need to learn to become a forex trader.
Finding a Broker
A reliable broker will be your partner in trade. So make sure you choose the right one. After doing some research, evaluate your potential brokers by looking into their credentials, licensing, and third-party reviews.
Start trading with a demo account that doesn’t work with real money so you can familiarize yourself with the workflow. This takes monetary loss away from you so you can focus on learning and analyzing without getting carried away by stress and emotions during the early stages.
Forex trades between a chosen currency pair. A currency strength meter can help you determine the strongest pairs in the market, but the meter alone isn’t enough to make a trading decision. You must combine the currency strength with their in-market trends before buying or selling.
A spread is the difference between your bid price (selling) and asks price (buying price). In a spread, your base currency is shown on the left, and your quoted currency is shown on the right.
Pip is a term you will often encounter during trading. It is the tiniest unit used to indicate a change in price. In a quotation, the pip is the last number shown. 10 pips equal one point.
Building a Strategy
Once you’ve learned the basics, it’s time to build a strategy. Determine if you want to be an active day-trader or aim for long-term positioning. Then, evaluate your risk tolerance and understand your trading style, which is often driven by your personality. Always create an exit strategy and a stop-loss to manage risk and avoid yourself from getting greedy.
Like all other types of investment, forex trading is all about research and education. Look for a digestible forex guide to learn the basics, then dive into more advanced learning materials such as textbooks and online training programs. Because the forex market is highly volatile, it comes with plenty of risks as well as profiting opportunities. Forex trading relies on strategies, technical analysis, and rational decision-making. Therefore, the more you educate yourself, the better you can trade for a profit.