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Forex 101: The Ultimate Guide to Forex Trading in 2020

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Guide to FX trading

What do you expect from currency trading? A lot of people will think “easy money” or “instant riches”, but that’s not the way it goes. Of course there is money to be made – that’s why FX is the biggest marketplace in the world – but success is in no way guaranteed, nor does it happen overnight. To be a successful long term trader takes skill, patience, education and application.

That’s why, before you go anywhere near making that first forex trade, you need to be aware of the key facts about the forex market to help you navigate it.

In this article, we’ll give you useful and actionable information about:

FOREX BASICS

Knowing the basics of the forex market will give you a solid foundation where you can build your skills, trading strategies and even work towards a successful FX trading career – so let’s dive in!

What is Forex trading?

The forex market is recognised as the largest and most liquid financial market in the world. The average daily forex transaction is now estimated at around $5.3 trillion, according to the most recent Triennial Central Bank Survey of FX and OTC derivatives markets.

If you are new to trading the FX market, one big difference you will notice when trading currencies is that you trade them in pairs. Unlike when you trade shares that you buy or sell the same stock, trading forex means selling one currency and buying another currency in return.

The best example to illustrate this is when you’re going on an overseas trip. You want to buy the currency of the country you’re visiting. So what you have to do is to buy that currency using the currency of your home country.

For example, you want to go to the US and you’re based in Australia. You will need to buy the US dollar (USD) using Australian dollar. This transaction is represented in the symbol AUD/USD.

FX Market vs other markets

When can I trade Forex?

The global FX market is also known as a market that never sleeps. This is because forex markets operate on a 24-hour, 5-day cycle that operates in three major forex centres – i.e. Japan/Asia, UK/Europe and the US (North America). So, wherever you are in the world, you can trade forex almost any time of the day as long as you have access to an online trading platform and a reliable internet connection.

Global FX sessions

FX PRODUCTS AVAILABLE FOR YOU TO TRADE

How to trade FX?

Forex trading always involves a currency pair, so when you trade forex you’re effectively exchanging one currency for another. For example, if you trade long EUR/USD, you’re buying the EUR and selling the USD.

What instruments to trade?

While there are hundreds of forex pairs represented in the global FX market, there are five main FX groups that you need to know as they tend to be the most liquid and heavily traded forex pairs.

Forex majors – this represents the most traded currency pairs and is responsible for an estimated 85 per cent of the global FX market transactions. Forex majors include:

  • EUR/USD – this is the Euro against the US dollar
  • USD/JPY – this represents the US dollar against the Japanese Yen
  • GBP/USD – this is the symbol for the Great British Pound vs the US dollar
  • USD/CHF – this represents the US dollar against the Swiss Franc
  • USD/CAD – this is the symbol for the US dollar vs the Canadian dollar
  • AUD/USD – this represents the Australian dollar against the US dollar
  • NZD/USD – this is the symbol for the New Zealand dollar vs the US dollar

FX majors are identified with the world’s largest and most stable economies like the US, Great Britain, Japan, Europe, Canada, Australia and New Zealand.

Forex crosses – this refers to FX pairs where the US dollar is not involved. You may have noted that in the Forex majors group, the US dollar is always the counter currency. The forex crosses bypass the US dollar. Some of the major forex crosses include:

  • EUR/CAD
  • EUR/GBP
  • EUR/JPY
  • EUR/AUD
  • GBP/AUD
  • GBP/JPY
  • GBP/CAD
  • AUD/CAD
  • AUD/CHF
  • AUD/JPY

Exotic currencies – this refers to thinly traded currencies with low liquidity and low transaction volumes. These currencies are usually associated with emerging markets or developing economies and their currencies are not in great demand nor traded globally.

Some of the currencies in this group include:

  • Thai Baht
  • Turkish Lira
  • Danish Krone
  • South African Rand
  • Swedish Krona

Commodity bloc currencies – this is the group of currencies from countries that are rich in natural resources including Australia, New Zealand and Canada. This forex group is usually affected by the price fluctuation in commodity markets. Whether you’re an FX, Commodities or CFD trader, it’s wise to monitor the correlation and price movements of the commodity bloc of currencies and the associated commodities that affect them.

Safe haven currencies – while this is not an official or formal FX group, a few currencies are considered safe haven when trading the foreign exchange markets. Currencies in this group include the Japanese Yen, the Pound Sterling (GBP), the US dollar (USD), the Euro (EUR) and the Swiss Franc (CHF).

Why safe haven? Because traders view these currencies as stable and will most likely retain their value compared to other currencies during volatile market conditions. Similar to gold, which is considered a safe haven asset, currencies in this group will attract more trading activity – particularly when there’s a high level of market volatility.

THE COSTS OF FOREX TRADING

Like any business, trading requires some capital to get started. Similarly, like any business, simply investing that capital doesn’t mean it’s guaranteed to make you more money.

However, one of the benefits of trading forex in the global market is that you can start with a relatively small amount of capital. This is particularly important if you’re new to trading and want to test strategies or learn more about the markets without a significant outlay.

But it’s also important to understand that the amount of trading capital you have to use will play an important role in the way you trade and will help determine the viability of your long term strategy.

How much do you need to start trading Forex?

Trading forex with any significant success takes more than money. You need patience, skill, emotional control and an ability to look at your mistakes and improve on them (yes, there will be mistakes!). But when it comes to considering the bottom line, there are some fundamental things to consider, including leverage, spreads and other trading costs.

What is leveraged trading and why does it matter?

In trading, leverage means you only put a percentage of your trading capital up front to open a trade. In practice, this means you don’t need a lot of capital to get started – an amount as low as $10 in your trading account, combined with sufficient leverage, can be enough to get you going. Here’s how that concept works in an example.

At AxiTrader you can get access to various levels of leverage of up to 1:500 which means that for every $1 in your trading account, you can open a position of up to $500.

While that opens the potential to make a lot of money in a short space of time, you must remember that higher leverage also means a higher risk of losing money if the trade goes against you.

As a beginner you won’t want to be trading at such high levels of leverage straight away because, on balance, the level of risk is too high compared to your market knowledge and trading ability. Instead, you might prefer to minimise your exposure by trading micro or mini positions:

  • Micro – $1,000 (0.01 lot)
  • Mini – $10,000 (0.1 lot)
  • Full lot – $100,000 (1 lot)

To get a feel for how this works in action, use a Demo trading account and try some test trades.

For example, by taking a micro position of $1,000 (considered a relatively small position), you can get some understanding of how wins and losses affect your account balance and appreciate how small trades could potentially allow you to lose ten trades in a row and still leave your account in credit.

The important thing to always remember about leverage is that it can be a double-edged sword. It can magnify both wins and losses in a trade. So, use leverage to your advantage by using the most appropriate level according to your skills and available trading capital.

What are spreads and why are they important? 

If you’re trading the currency market, spreads refer to the price difference between the currencies you are buying and selling – the ASK and the BID price. The size of the spread is a very important consideration in your trading decisions because it can represent the difference between making a profit, a smaller profit, or even a loss.

Technically, the spread is the cost that you pay the FX broker to make the transaction: the tighter the spread, the less you pay. Another thing worth remembering is that the wider the spread, the more the price has to move in order to result in a profit or loss on a trade.

Before you trade, it’s a good idea to check the live pricing, compare the spreads and see where you’ll get the best value for your trades.

Are there any other costs to trading?

For most standard forex and commodities trading, commission fees are either waived or already built into the spread price you pay on an individual trade. This helps make trading a transparent process.

There are, however, certain products such as Futures that incur additional “swap” or “rollover” fees due to their longer timeframes. If you choose to trade these types of products, be sure to find out exactly what extra costs, if any, you would be required to pay on open positions.

For more information on costs involved, refer to the AxiTrader Product Schedule.

RISK MANAGEMENT WHEN TRADING FOREX

Trading any market, including the forex markets, involves risks. That’s partly why most of the professional and successful traders in the world believe risk management is one of the most important factors in their trading success.

One good rule of thumb, especially for new traders, is to never risk more than 1% of your trading capital while in learning mode.

Let’s walk through the top 5 components of a risk management strategy that can help you with your forex trading.

  • Know your own risk profile: Are you a big risk-taker? Or do you want to take smaller and calculated risks? Knowing your own risk profile or appetite for risk is vital in managing forex trades. Depending on your level of risk-taking, you can adjust your trading strategy accordingly.
  • Position sizing: How much you allocate per trade can also have a big impact on your risk exposure. The bigger your position size, the bigger the potential win as well as losses. The reverse is also true. The smaller the position size, the more manageable the trade is, though it may mean smaller potential for wins and losses.
    The thing to remember is you need to manage your position sizes to ensure that you can preserve your trading capital for the long-term.

READ MORE: Top 4 Position Sizing Techniques to Boost Your Trading Experience

  • Stop loss: One of the benefits of modern trading platforms is that they give you the ability to set stop loss levels. Setting stop loss for each of your trades is one of the most effective ways of managing trading risks. Use stop loss to your advantage.
  • Leverage: Similar to stop loss, you can select and pre-set the level of leverage you want to use for forex trading. As a new forex trader, you may want to keep the leverage level to a minimum when you’re just starting out. Keep in mind that leverage can be a double-edged sword as it can magnify your wins as well as your losses.
  • Your own trading psychology: Like knowing your own risk profile, it is also important to know your own trading psychology. This means being honest with yourself when faced with big wins and losses in the markets. If you know your own psychology and how you deal with different market conditions, you will be in a great situation to prepare for various situations.

​READ MORE: How to Overcome Trading System Failure with Your Emotional Resilience

Now you know the basics, let’s do some practice…

Let’s say you place ten trades and lose them all (yes, every one), dropping 50 pips along the way. Given each pip is equivalent to $1, your account would be down $50 just like that.

That’s not going to be a good feeling. However, there are positives to be had, the main one being: what did you learn from your losses? Long term, it’s these early lessons that will be beneficial to your balance down the track.

If you trade once per day or, let’s say, 20 times per month, and each trade is one micro (0.01 lot), it means your total brokerage for the month will be 20 x $0.07 or $1.40.

On a $1,000 account size, you would need to make 0.14% per month to cover your trading costs.

You can see in the table below, how your account size affects the percentage gain you need to make each month just to break-even based on $140 per month in brokerage expenses.

Account size table

A good rule when starting is to never risk more than 1% of your trading capital in any one trade. Here’s a table showing what a 1% risk per trade looks like relative to your starting balance. If you’re risk-averse, you may want to go down to 0.5% risk per trade.

Risk table

Losing $2.50 to $5 per trade when starting should be within most people’s comfort zone. Losing is never nice, but by keeping the losses small you can get back on the horse and try again. Using that logic, an account with $1,000 is going to give your room to move if you’re only interested in trading micro positions and looking to risk no more than !% per trade.

Remember, your goal with an account this small is to build strategies and methods that have an edge and which allow you to scale up over time to a position size that could generate steady cash flow.

Another powerful way to track and manage risk is to keep a Trading Journal where you can record each trade including entry, exit, stop loss levels, profits and losses. If you want to know more about how to start a Trading Journal and how it can benefit your trading, check this out.

READ MORE: Why a Trading Journal Could Boost Your Trading Performance

What other factors affect currency prices?

In today’s world of an interconnected and globalised economy, prices of trading instruments including forex pairs are constantly moving and fluctuating.

Trading volume and transactions in the FX markets are always affected by supply and demand. And like any other financial markets, the higher the demand for a currency the higher its price move.

But there are also many other factors that can affect the prices of currency pairs. Here are some of the key factors to look out for when trading FX:

Central bank decisions – Central banks across the globe are responsible for setting interest rate levels for each country. When trading in the forex market, traders are attracted to currencies with high-interest rates compared to other currencies.

If you want to trade the forex markets, it is a good idea to keep an eye on the major central banks including:

  • US Federal Reserve
  • Bank of England (BoE)
  • Bank of Canada (BoC)
  • European Central Bank (ECB)
  • Reserve Bank of Australian (RBA)
  • Bank of Japan (BoJ)
  • Swiss National Bank (SNB)
  • Reserve Bank of New Zealand (RBNZ)

SEE ALL EVENTS: FX Economic Calendar

Economic data – Employment numbers, Gross Domestic Product (GDP) levels, inflation, business and consumer sentiments tend to affect the movement in currency pairs. Monitor the economic calendar and market news update on your online trading platform to ensure that you’re up-to-date with major economic data releases.

FX trading time zones – It’s commonly known that trading volumes and activities can be thin and slow during the market open in the Japan/Asia time zone. Trading volumes and activities usually increase when the UK/Europe session begins. Then liquidity will be at their peak towards the close of the UK and open of the US session. The London and New York sessions are usually the most active due to the time overlap of these major financial hubs.

Global FX sessions

Geopolitical factors – Wars, political crises, global unrest and other related events can also impact the foreign exchange markets. Some currencies tend to do well when there’s a high level of uncertainty in the markets, while other currencies go in the opposite direction.

EDUCATION YOU NEED TO TRADE FOREX

Trading forex involves daily learning and education. As markets move and present limitless trading opportunities, you as a trader need to be equipped with the right trading tools, information and strategies that can help you take advantage of any trading opportunity.

The beauty of today’s technology driven world is the availability of a wide range of free and online education and information materials at your fingertips.

Make sure you take advantage of the myriad trading education materials including video tutorials, webinars, seminars, ebooks and trading guides and manuals.

Check out the AxiTrader Education Centre to gain access to an extensive range of trading resources to enhance your trading skills. Access all our available educational resources including:

There’s no limit to what you can learn about trading and it can be hard to know where to start, but there’s no substitute for actually doing it! AxiTrader offers a Demo account where you can practice trading using virtual funds, with no obligation to trade your own money.

Just like our Live account, you can trade 140+ FX and CFD products – including metals, commodities, cryptocurrencies and indices – with spreads as low as 0.0 pips and leverage up to 1:500.

When you’re ready to trade, choose a trusted, regulated and multi-award winning broker.

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