Want to learn how to trade forex, but not sure how to start? In this article, we cover the basics of what you need to know to get started trading in the forex (FX) market. From analysing the forex market and reading FX quotes, to a step-by-step guide on how to start trading in the forex market. We will cover all this and more, to get you started on your forex trading journey.
In order to understand how to trade forex using derivative products such as spread bets and CFDs, it helps to understand the background of the market. The forex market is the largest and most liquid market. A large proportion of the forex market’s activity is dominated by currency exchanges between large international banks. However, a small minority of the market’s activity is utilised by forex traders who attempt to take advantage of the price fluctuations that exist between currencies, with the hope of making a profit. Forex currencies are traded like any other asset class such as commodities, equities, indices and cryptocurrencies.
When learning how to trade forex, it is essential to understand how to analyse of the forex market, whether from a technical or fundamental viewpoint.
There are two types of analysis that traders may use when analysing the forex market: technical analysis and fundamental analysis. Technical analysis is the study of past prices and patterns to determine future price movements, whereas fundamental analysis is the study of the factors that drive valuation such as economic and political trends.
Both fundamental and technical analysis should be understood when learning to trade forex. Both of these disciplines, in addition to a trading plan, are key to learning how to trade on the foreign exchange market.
Fundamental analysis involves studying economic indicators and government policies to determine the intrinsic value of a currency. Once determined, you can make a trade based on whether you think a currency is undervalued or overvalued.
Common economic indicators that are used to analyse the forex market include:
A country’s current account, inflation rates, and interest rates are among the main factors that drive foreign exchange currency valuation. There can be a considerable and immediate market impact when news and other economic data is released. Many traders utilise fundamental analysis to predict price movements and thus, inform their trading decisions.
Fundamental analysis factors in the forex market
Technical analysis involves the study of price and other data over time, to try and predict future price movements. Some common technical analysis strategies include traditional charting patterns, moving averages, stochastics, point and figure charts, Elliot Wave Theory and Fibonacci retracements. Our articles on technical analysis contain more information about each of these theories, all of which can be applied when learning to trade the forex market.
Technical indicators for forex
An exchange rate is one currency’s value measured against another currency. So, if the EUR/USD is 1.35, 1 EUR will buy you 1.35 USD.
When spread betting or trading CFDs on the forex market, the base currency is always quoted first. In the case of the EUR/USD, the Euro is the base currency and the US dollar is the secondary currency (also known as the quote or counter currency).
Similarly, when expressing the Australian dollar against the US dollar (AUD/USD), the AUD is the base currency and the USD is the counter currency.
Follow our how-to process to cover all the necessary knowledge to start trading forex. You can choose between two products: spread betting, which is tax-free in the UK and Ireland*, and contracts for difference (CFDs), which are available globally.
Due to the emotional stress that is natural in any speculative trading situation, successful forex traders have a pre-set method of operation that includes rules by which they operate.
It is important as a successful trader to adhere to your pre-set rules. This will help to protect you from yourself. Very often, your emotions will tell you to do something controversial or contradictory to what your trading plan states. Traders that adhere to their trading plan are better able to resist the emotional temptations that are present in speculative markets. Following a trading plan can also help you to reduce stress, maintain objectivity and learn from your mistakes when learning to trade forex.
When designing a forex trading plan, make sure it answers the following:
Our article on creating a trading strategy template can be useful to give you a start on creating a trading plan. However, please note that this article is not exhaustive and should be used in conjunction with other resources to create a fully comprehensive trading plan.
The most common mistake made by FX traders is not following a risk management plan. The volatility that exists in the currency markets can have a strong influence on a trader’s emotions. This emotional volatility can result in a lack of objectivity and poor decision-making.
When learning to trade forex it is important to devise a systematic trading approach that covers in detail a risk-management system. Under such a system, profits, and in particular losses, are defined and stop-loss orders are placed.
When reviewing your risk management system check:
For a more information on risk management, see our money and risk management in trading guide.
In foreign exchange trading, there are winners and losers. Successful forex traders shift the balance in their favour by continually gaining knowledge about the forex market. Knowing the market’s characteristics and the foreign exchange currencies you are trading can help to shift the odds in your favour. However, due to the complexity of the forex market and individual currencies, it could take years to gain this level of knowledge.
Before placing a forex trade, ask yourself:
When starting to learn forex trading you should have covered the basic principles outlined in this article. This includes a sound trading plan that covers how to manage money and risk, and current knowledge of the currency pairs you are trading.
You can practise trading forex on a demo trading account firstly, to test your strategies success and familiarise yourself with our trading platform. Then, when you are ready, you can deposit funds into your live spread betting or CFD trading account and trade the live markets.
If you need some more time learning how to trade FX, additional information can be found on our forex trading for beginners article.
*Tax treatment depends on individual circumstances and can change or may differ in a jurisdiction other than the UK.
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