If you’re curious to know more about learning forex trading, you’re in the right place.
If you’re considering venturing into the exciting world of trading currency then it’s essential you familiarise yourself with what forex trading is and how exactly to do it before you dive right in – as this will not only ensure you’re operating best practices, but also help to minimise any associated risks. Luckily for you, this article will give you a forex trading education you won’t want to miss, providing you with nuances, technical terms and more so you can comprehend how best to learn forex trading before parting with your hard-earned cash.
Like most business ventures, it pays to learn your trade before you get started – after all, any well-executed business investment requires thorough planning, research and a clear understanding of the risks, rewards and all other factors involved. Forex trading is no different, and in this guide we aim to give anyone interested in learning forex trading all the essential information they need.
What is forex?
The first stage of your journey to learn forex trading starts with knowing exactly what forex is. Also referred to as FX, foreign exchange and foreign currency, forex is simply an amalgamation of the two words foreign currency and exchange, which refers to the process of exchanging one currency for another.
Most commonly, forex trading is common practice for commerce, international trading and tourism and it’s value can be impacted by a wide variety of factors, such as geopolitical concerns, interest rates and a country’s economic strength.
It’s also important to keep in mind that foreign currencies are always shown as paired rates – as you’re trading one currency against another. For example, GBP/ EUR (British Pound/Euros). This may sound like an obvious point, but this is a fundamental part of getting to grips with forex trading terminology.
This foreign currency is traded on the forex exchange market, which is the cornerstone of global business and trade as, of course, there isn’t one common currency that every country uses. For instance, if a British company buys certain products from Spain, they wouldn’t be able to pay for those products in Pounds as the company trades in Euros. Therefore, they would need to exchange the required value in Euros to pay for the products in the local currency. When it comes to learning forex trading, the same basic principles apply, as you’ll be exchanging one amount of currency at an agreed price for a different currency – the difference is you won’t be doing it to exchange actual goods, just the cash.
Understand the market
The forex market can be incredibly complex, so it’s always advisable to know what you’re getting into before you part with any money. Unlike the FTSE or New York Stock Exchange, the global foreign exchange market isn’t regulated by a centralised marketplace. Instead, currency trading takes place electronically via broker-dealer networks that operate an Over-The-Counter (OTC) network for buying and selling currency.
Forex trading takes place in the world’s major financial markets in New York, London, Zurich, Tokyo, Frankfurt, Hong Kong, Singapore, Sydney and Paris. This makes it possible to trade on the markets 24-hours a day, five and a half days a week – as when one market closes, another one in a different time zone will begin trading.
Within the forex market, companies and brokers can choose from 3 different markets to trade in: the spot market, the forwards market and the futures market.
The spot market acts as the core of all these markets operating with deals that buy and sell actual currency which is sold at its real-time value. These exchange rates are calculated by supply and demand in the market, as well as other factors like local and international political issues and how a country is performing economically.
The spot market is also what the forwards and futures markets base their trade deals on and is typically the preferred choice for individual traders. The name of this market derives from the term ‘spot deal’ which is when a trade deal has been finalised, with both involved parties delivering their agreed currency exchange rate amounts to one another. For example, one broker agrees to sell 100 USD at a rate of $1 = €0.90 to receive in exchange EUR 90. As this is likely to be your preferred trading market, it could be beneficial to give yourself a more in depth view of spot markets.
The forwards and futures markets differ in that they don’t actually trade physical currency, but instead operate by buying and selling contracts for currency at specific rates and quantities with a future expiry date that’s agreed on by both parties. These markets are typically used by large international companies to minimise the risk of fluctuating rates when buying large values of foreign currency as they can buy at a particular rate in advance.
As an independent trader, it’s likely you’ll only really need to know the specific nuances of the spot market, but it always helps to realise the bigger picture too. To help you differentiate between these two markets and the real-time spot markets, this resource offers an informative definition – giving you greater knowledge before you get stuck into trading for yourself.
Familiarise yourself with currencies you trade
If you want to truly learn forex trading, you should definitely learn more about the currencies you’re trading in by keeping abreast of global political and economic news at a minimum. As a novice trader, it can be tempting to jump straight in and trade on the first thing you see that’s looking like a decent deal – but you should always have an eye on the bigger picture.
The global political and economic climate and other domestic social factors for a specific country have a continual impact on the value of its local currency, so rather than just immersing yourself in the trading world, we’d also advise you to keep a keen eye on the overall world news and economy, as this will help you to make more informed forex trading decisions. While a currency may be showing signs of increasing it’s value on the face of it, there could be other factors involved that may cause a sudden drop in value – this could lose inexperienced traders money.
To minimise the risks involved we’d also suggest you specialise in certain currencies – after all, with hundreds to choose from it can become overwhelming. Instead, hand pick a few different currencies that don’t necessarily have any correlation with one another and concentrate on those specifically. Not least, starting small will make it easier to keep track of any important economic or political factors that could impact rates, but it will also give you a more manageable way to gain valid experience in trading forex.
As you hone in on specific countries, take an interest in what’s happening within the country locally, as well as the bigger global landscape. Start by setting up local news alerts for your relevant countries which will keep you well-informed on any economic, political or even social concerns that could affect the exchange rates you’re trading in.
Open a demo account
For many of us, learning from experience is the best way to really gain a full understanding of what you’re doing. With a solid theoretical foundation in place, opening a demo trading account is likely to be your next step if you want to learn forex trading.
You can do this on your own or seek the expertise of seasoned traders to show you the ropes, but the beauty of a demo account is that it will give you a real insight into how the market operates, how to make trades and give you a technical education on using a specific trading platform – all with no risks involved. With the ability to make dummy trade bids, you can afford to make mistakes and learn from them, while stamping out any bad habits with no financial risk.
However, the greatest lesson to be learned from using a demo account is to control your emotions. Inexperience and a blind faith that a currency rate will climb back up could easily see your forex trading career fail before you even get off the ground, but with a demo account you don’t have to learn this the hard way as you can practise before you dive into the live markets.
The next step
Of course, you’re not going to make any money from your demo account, so the next step for learning forex trading is to set up a real, live trading account. To ensure you don’t run before you can walk, we’d suggest you start out with a micro forex trading account. These types of accounts allow you to trade smaller amounts with a lower risk which, in turn, means decreased losses.
When considering the type of forex trading account, you should always do due diligence on the brokers you choose to trade with. The spot market is unregulated and unfortunately not all is as it seems with certain broker deals, so make sure you opt with a reputable broker that also meets your other requirements for trade. One sign to look out for is a broker who also operates on the stock exchange as this marketplace is well-regulated across the globe.
If you’re serious about venturing into the world of forex trading, why not enrol on one of our award-winning courses to learn forex trading? With structured guidance from our professional forex traders on the practical and technical facets of this fast-paced marketplace, you’ll be armed with the right level of knowledge and experience to get your forex trading career off to a flying start.