This is sponsored content by PropCompanies.
Want to know how to trade forex but don’t know where to start? Today, I’ll go through the fundamental steps you must take to trade forex and share my tips to help you get started.
Learning how to trade forex
Learning to trade forex before you begin trading with real money is important because the forex markets are complex and risky. If you rush into trading without understanding the basics or a trading strategy, then you are likely to lose money.
Forex trading can be an excellent skill to learn for it’s profit potential but you need to learn how to trade right and protect your risks first. Once you grasp how to trade, you will have gained valuable experience that will transition to your live account so you can start growing your capital.
- Why you should learn trading fundamentals before you trade forex.
- Choose a broker that is regulated and that suits your trading style.
- Technical and fundamental analysis help you find trading ideas.
- Risk management tools can help limit your risk of losses.
- Develop a trading strategy before you start.
Getting started with forex trading
Below, I have laid out the 9 steps you should follow to trade the forex markets:
1. Research brokers
Before starting, you need a broker that meets your trading needs. Questions to ask yourself before you trade on foreign exchange markets include:
- Who is the broker regulated by? As an Australian trader, you should ensure your broker is regulated by the Australian Securities and Investments Commission (ASIC).
- What are the broker’s fees? The spread is your cost
- What trading platforms do they have? You should choose a broker that has the forex trading platform you prefer.
- What CFD trading products do they offer? Do they offer a full range of contracts for difference products like forex CFDs or stock trading markets.
2. Open a demo account
A demo account is an excellent way to practice your currency trading strategies without risking real money. These accounts are usually free and fast sign up and don’t need you to provide funding details.
3. Choose a trading platform
Most brokers have a good selection of trading platforms to choose from; the best forex trading platforms include:
- MetaTrader 4
- MetaTrader 5
When choosing a forex trading platform, you might want to consider the following
- Ease of use: Does the platform have an easy-to-use interface to forex trade?
- Charting and technical indicators: How many charting tools and analytical tools does the platform come with? Can you create your own indicators?
- Trading tools: Does it come with any? Can you backtest on the platform? Can you automate trades?
4. Sign up with the broker and fund the account
You will need to apply for an live account with your chosen broker, this mean providing some documentation of who you are. Approval should take 24 to 48 hours. .
So that you can trade, you will need to fund your account. Most brokers accept a number of funding methods, including credit card and bank transfer, to fund your account.
5. Research trading opportunities
There are many ways to trade the markets and succeed, but everyone has their own strategies that work for them. You can use technical indicators to find new trade ideas visually or use fundamental analysis to find weaknesses (or strengths) in countries to take advantage of.
When trading forex, I use both technical and fundamental analysis to help give me an overall trading bias while using my technicals to time my trade entries and exits.
6. Place an order on your first trade
To place a trade is the same on most CFD trading platforms; you just need to select the following details:
- The currency pair you want to buy/sell
- The type of order you want to place (market order, limit order, or stop order)
- The size of your trade
When the details you’ve placed are correct, you can send your trade to the broker, who will execute it on your behalf.
7. Define your stops
You can add a stop loss and take profit orders that help you control your risk and profit without monitoring your position all day.
The take profit order will exit your trade when you reach a profit you set. These orders are placed above the open price if you are in a long position or below the open price if you are shorting the foreign exchange market.
On the other hand, the stop loss is simply the opposite and is used to exit your trade when you want to cut your losses. Stop losses are essential to limit your account’s exposure to the markets.
8. Monitor your positions
If you added your stops from the previous step, you will now have a maximum loss and profit potential, so there is no need to monitor it tick by tick.
Alternatively, you can monitor the markets and see if the markets will continue in your favour. For example, if the markets are trading near your take profit level, then you can move your take profit level and your stop loss to lock in profit.
One rule I always stick to is never move the stop loss further from your initial position. Avoid risking more than your intended amount on the same trade if the forex market goes against you.
9. Close your trade
When you want to close your position, most platforms have a simple icon that indicates to close the trade. It’s usually a cross or has the word “close” next to it.
After you’ve closed your trade, you can see in your order history the trade details, including the profit or loss.
Things to know when forex trading
Below are a few extra points you should know about when trading forex:
Fundamental concepts of forex trading
Currency pairs and how exchange rates work
Unlike the stock market, where you buy and sell a single asset, with the foreign exchange markets, you buy one foreign currency and sell another simultaneously. In the forex markets, these are called currency pairs and are quoted as a base currency over quote currency.
For example, the AUD/USD currency pair consists of the Australian dollar (AUD) as the base currency and the US dollar as the quote currency. This means that the AUD/USD tells you how many US dollars are needed to buy one AUD (the exchange rate).
A currency’s price movement is affected by the country’s economic health, and if the country is doing poorly and the GDP is shrinking, then this is a signal to sell or short the currency. Likewise, if the GDP was expanding, this is seen as a signal to buy the currency.
There are many data points released each month that affect currency prices. Most commonly, they are interest rate, inflation, and economic growth indicators like non-farm payroll data.
Leveraging in forex trading
One of the main mechanisms that allows forex traders to trade forex is leverage. Brokers offer leverage so you can control a large position while only putting up a small margin to trade. This tool is also known as a double-edged sword in FX trading because it can amplify your profits and losses, so you must practise risk management.
Most brokers offer leverage at 1:30 on forex CFD for retail traders. For every $1 you have in your account, the broker will loan you $30 to trade. So, if you wanted to trade with $100, you’d control $3,000.
The foundation of any successful forex trader is the ability to manage their risk during profitable and bad times.
I always recommend you use stop-loss and take profit orders as a beginner trader because you do not have enough experience to understand the currency market movements to re-analyse your positions successfully. Another good tool is a guaranteed stop loss order.
Using these orders will remove your actions and turn the trade into a binary win/lose outcome based on your original analysis.
Developing a forex strategy
A trading strategy is a set of rules you’ve created that you use to enter and exit trades. In this section, I’ll go through developing a forex strategy to give you an idea so you can do it yourself.
Importance of a trading strategy
Having a trading strategy should be your number one priority, and there are several essential reasons to have one; these are:
- Helps you avoid over-trading, one of the deadliest mistakes beginners make.
- Gives you a sense of confidence when a trade idea meets your rules.
- Helps you manage your risk – strict position sizing, stop loss and take profit orders are crucial to protecting your capital.
- Helps you replicate success easily – if the strategy is working and the rules work, it’s easier to follow and find new trading ideas.
Technical analysis and indicators
This type of analysis can predict the future direction of a currency pair by analysing its past price movements. There are thousands of ways to trade the markets, so it’s up to you to find what works best for you. Below is a brief list of some of the most popular ways to do technical analysis:
- Moving averages
- Ichimoku Kiko Hyo
- Relative Strength Index
- Support and resistance levels
- Chart patterns
- Candlestick patterns
You have various methods to choose from, but not all may suit you. Use your demo account to practice these techniques and focus on what works for you.
Fundamental analysis and economic factors
Fundamental analysis is the use of analysing economic factors such as interest rates, inflation and GDP to forecast the future movement of a forex pair.
Alongside technical analysis, I think fundamental analysis is important and should be included in everyone’s trading strategy.
Some of the significant economic factors that impact all currency pairs are:
- Interest rates: When interest rates rise in one country, the higher rate currency attracts foreign investment, stimulating the country’s currency with increased capital flow.
- Inflation: When inflation is high, the currency price will decrease because foreign investment is more likely to liquidate, causing money to flow out of the country.
- Economic growth: Data points like the GDP, which is an overall gauge of a country’s economy, are important to follow as they can give early signs of a weakening or weakening of a currency pair.
Although the above can show positive signals, every financial market isn’t as binary as the above because other non-economic factors, such as political instability, could influence a country’s price.
Developing a forex trading strategy
When developing your forex trading strategy, you need to consider your own trading style and risk tolerance. You also need to decide what technical indicators and if you will use economic factors to make your trading decisions.
After you have made your strategy, the first thing you should do is back-test the strategy. It’s essential to be honest here because if you are generous with your rules while backtesting, you’ll have a rude awakening when it’s your actual money you are trading.
After you have tested your trading strategy, you should start implementing it on a live account. To help you ease into the strategy, I recommend starting with micro-lot trades to build your confidence and experience with live trading your strategy.
Overall, this article outlays the basics for learning to trade forex and develop a robust trading strategy tailored to your style and risk tolerance. While online resources have made learning more accessible, the key to success remains discipline, patience, and continuous self-evaluation of your trades.