Getting started in trading forex can seem extremely difficult; there are so many different things you have to learn about. Whether it is how to know if a forex broker is for you, figuring out what all the different forex terms & jargon mean, or simply placing your first trade, getting started trading forex can seem overwhelming.
This guide is aimed at a complete newbie to the forex world, and covers every step of the way from complete newbie to veteran trader. I recommend bookmarking this page and coming back to it every time you need some guidance on how to progress in your forex trading journey. Without any further ado, lets get started!
Step One: Get Familiar With Absolute Basics Of Forex
Before diving in to trade the amazing forex signals someone is selling you, or buying the miracle trading robot you’ve been looking for it is vital that you have your own understanding of the basics of the forex market.
What Is Forex
Forex, aka foreign exchange, is simply the act of selling one currency to purchase another. For example if I had ten Australian Dollar and changed it into United States Dollars this would be a basic version of a forex trade.This creates an exchange rate for the two currencies, as one currency may be in demand more than the other. With the example of Australian Dollars and US dollars, the United States dollar typically has more demand, meaning that the Australian dollar is worth less than a United States Dollar. For one Australian dollar you might be able to purchase $0.7 of US dollars.
Understanding Forex Trading
With the evolution of financial markets there are now a number of different ways to trade forex. The example of Australian dollars to United states dollars above is an example of a physical forex trade. A physical forex trade occurs when one currency is exchanged for another, such as when you travel to another country to spend money internationally, or when a you purchase something from an international business on your credit card, and then find out a week later that your bank has charged you a 5% conversion fee (I know, we’ve all been there).
The most popular forex market for people managing their own money is the CFD forex market. CFD means contract for difference, meaning that rather than trading a stock, bond, future, or in our case two currencies, you are buying a contract that makes you liable for the change in exchange rate between the two currencies. CFD contract specifications change based upon the asset they are written for (whether it is for stocks, futures, bonds, forex or cryptocurrencies), however typically one forex CFD contract is equivalent to 100,000 units of currency.
This concept was very confusing to me when I first started in FX (forex) trading, as I didn’t understand how I could trade the British Pound against the US dollar, given my account was in Australian dollars and I didn’t own any GBP. It’s fun to look back now and reflect on being a forex rookie, but getting started it was excruciating trying to find the right information! Lucky for you you’ve got me to help!
As i mentioned above, one contract is typically equivalent to 100,000 units of currency. This is also called a lot, and in a trading platform one lot looks like this: 1.00
Then there is a mini contract/lot, which is equivalent to 10,000 units of currency and looks like this in a trading platform: 0.10
There is also a micro contract / lot which is equivalent to 1,000 units of currency and (you guessed it) looks like this on your trading platform: 0.01
So when you trade a forex cfd what currency are you trading?
In financial markets different assets are given their own ‘symbol’ or ‘code’ to easily be referred to. For example, Amazon’s stock is given the symbol AMZN. In forex, a symbol is constructed from two currencies, such as the Australian dollar and the United States dollar, which is given the symbol code of AUDUSD. In forex, the first three letters represent the base currency and the last three letters represent the quote currency. What does that mean?
The base currency is the currency is the currency of the contract. If you were to buy 1.00 AUDUSD then you would effectively be trading 100,000 AUD.
The quote currency is what the AUD is being quoted in. Similar to when you get a quote from a mechanic to fix your car, the broker gives you a quote for the exchange rate for your AUD into USD. If the AUD is quoted at 0.70 USD then the 100,000 AUD is quoted at 70,000 USD.
How it works
Lets say your account is in British Pounds (GBP) and you wanted to trade AUD/USD. If you bought one AUDUSD contract (1.00) at the exchange rate of 0.7000 and the exchange rate changes to 0.71000 and you closed the trade you would have made a 1,000 USD profit. Your forex broker then converts the USD profit into your accounts base currency. If the USDGBP rate was 0.73 then your profit is worth 730 GBP, which the broker pays into your trading account!
Keeping up? If not, that’s ok! It takes most people a while to wrap their heads around the concepts.
There are a number of other concepts beginners to forex trading should get familiar with prior to starting, such as leverage, margin, pips, long and short trading. Won’t discuss all the different concepts here, but it is important to understand the basics of forex trading prior to getting started! Finance Magnates has a great article here!
Step Two: Open A Demo Account And Get Familiar With Trading
Before you even start trying to build a trading strategy you should open a demo account, that lets you trade pretend money! This is also known as ‘paper trading’. I know that as a newbie to forex you’re keen to dive right in and make some money, but getting familiar with how to actually place trades, select the right symbols and input position size correctly is so important. For your demo account it doesn’t really matter which broker you choose, this is purely to get comfortable with the act of placing trades, using stop losses, take profits, limit orders, stop orders & the trading platform you decide to use.
Once you’ve got comfortable with the process of placing trades and the forex basics its time to start figuring out your first forex trading strategy – DO THIS WHILE ON A DEMO ACCOUNT!
How To Build A Forex Trading Strategy
This sounds easy, but when you’re new to forex trading it’s difficult to know if you’re going in the right direction. There are so many companies trying to sell their forex trading strategy, however you should be wary of all of them! Many retail forex groups all teach to trade in similar methods.
My advice: think outside of the box!
Most groups teach strategies using trendlines, support or resistance zones, the RSI, and moving averages. Whilst traders can build a profitable strategy using these, the best forex traders think outside the box from what most are doing. For example, you could profit from arbitrage trading on swaps, finding opportunities to take an equal long & short position on one asset at different brokers, and both brokerages pay you to hold the position overnight. Another way to think outside the box is to find a losing strategy and then fade it (take the opposite trade).
The Most Important Thing To Consider When Building A forex Trading Strategy? Data.
The more data you put together on a trading strategy, the better. In defining the rules of your trading strategy being more precise allows you to measure more data. Below is an example of how precise you should be when defining your trade strategy. **This is not a trading strategy reccomendation, just an example of how to define a trading strategy**.
Forex Symbol: AUDUSD
Timeframe: 15 minute.
Stop Loss: 1 pip above/below the last 15m swing high/low.
Target Price: Set at 3x the ATR
Minimum Return: 1:1
- The PPO must be in a bullish cross for buys, must be in a bearish cross for sells.
- The RSI must be above 50% for buys, must be below the 50% for sells.
- Price must be above the 21 moving average for buys, must be below the 21 moving average for sells.
- Enter a buy when a bullish candle closes after a swing low, enter a sell when a bearish candle closes after a swing high.
Once you have defined your strategy it is important to backtest it. If you have been precise with defining the strategy there are systems that automate the backtesting easily, saving you the manual work.
Let’s look at two trades this system would’ve taken. Each trade conforms to all rules set by the strategy, allowing us to easily define when a trade should be taken, where to place our stop loss and target price, and what the minimum risk to reward ratio is.
Once you’ve got a very clear system the more trades the system takes the better idea you will have of how it performs. This is why backtesting is so important, as it allows you to measure a systems strike rate, profitability and resilience to different market conditions. You will be able to form an idea of expected returns, how many trades you can expect in a winning streak and how many you can expect in a losing streak. A benefit of defining your system clearly is that a clearly defined system is easily automated.
Some traders, especially longer term swing traders, tend to prefer a discretionary style of trading, basing their trade decisions on a range of varying factors, such as a multi timeframe analysis combined with fundamental analysis. The downside of such trading styles is that it is very difficult to automate discretionary trading.
Once you’ve found yourself a profitable trading system & you are comfortable taking your strategy to market it’s time to go live!
Step Three: Opening Your First Live Trading Account
Now that you’re familiar with forex and comfortable with the act of trading it, combined with having a system at the ready, it is time to take your trading live. After all, we are in the forex markets to make money, not to make pretend money!
Once you’re ready to trade forex on a live account a new set of problems approaches you – who is the best brokerage? There are so many different aspects to consider when selecting your broker, but what it really boils down to is trust and cost.
Can you trust the forex broker you’re trading with?
Most people suggest that trust is purely based on regulation, but this is misguided. Whilst regulation is an integral part of trusting a broker, traders should also consider their brokerages financial backing and insurance. From time to time even some of the largest brokerages go bankrupt or have their license frozen, meaning that their clients may lose their funds or have their funds frozen for a long time. These situations are rather unpredictable, however it is worthwhile performing due diligence on a broker’s resilience to these situations to best protect your capital. This is especially true if you are leaving large sums of money at one broker.
What are the costs of a forex broker?
Forex brokers make money through various different charges. The best way to improve your trading profitability is to find a broker with the lowest costs possible. Fusion Markets is an example of a very low cost broker.
Forex Trading Costs
The first costs to consider that are paid at a broker are the trading costs. This includes the commission (obviously), the spread (the difference between the ask and bid), and the swaps / overnight hold fees. All of these can add up, especially swap fees if you are holding positions for a long time.
Non-trading costs are all the charges you pay that aren’t directly involved in trading. These include bank charges, inactivity fees and any other costs that a broker may charge not related to trading. These can add up, so it is definitely worth finding brokers that offer none.
Now you’ve found your strategy and brokerage the only thing left to do is trade live and test how you and your strategy perform! This brings a whole new set of problems – are you disciplined enough to stay the course and profit?
Step Three: Intermediate Forex Trader – Optimising Your Trading System
So, you’ve traded forex for a while now and you know the ropes. Now that you’ve got some experience under your belt the key question starts to become “how can I improve my trading system?”. The trick is to take this part slow, and you want to ensure that you have extensive amounts of data on your current trading system. Some of the areas to record data on are:
- % of trades that go into drawdown immediately after opening?
- What % of trades that go into drawdown become winning trades?
- % of trades that go into profit but reverse before reaching the TP?
- Market movement after the trade closes – does the market continue, reverse or move sideways? If it continues, what’s the average move range?
These data points will help you to focus on where you can optimize your trading strategy. Maybe you find that the market continues to rally after most trades are closed, so you increase the distance to your TP. Or perhaps you find that you lose too many trades after the trade goes into profit, so you decide to test a trailing stop loss.
There are numerous different ways to optimise any trading system, however it is absolutely critical that these changes are tested one by one. Trying to change too many things at once means that you will not be able to accurately link changing data with one strategy change. Optimising your trading strategy should be an entirely data driven process, and doing so otherwise is counterproductive.
Another thing that may help you improve your trading system is negotiating your trading costs. If you are trading enough volume then you may be able to reduce your commissions by talking to your brokerage. Some brokers will happily provide you a better trading environment, whereas others make no change to their trading conditions. If you are able to successfully reduce your trading costs then kudos!
Step 4: Advanced Traders
So you’ve formed a profitable trading system, managed to make a great return continuously, and want to know what’s next? There are various different ways to scale your trading into something bigger, so read a few of my ideas below, and maybe even try to come up with some of your own!
- Join a Proprietary Trading Firm
If you can show a prop trading desk that you’ve been able to develop your own profitable forex trading system, many different firms would jump at the opportunity of funding with their own capital. Most operate with generous profit shares, such as a 70% split your way.
- Look for Private Investors
If you are able to prove a profitable track record with a greater return than the stock market, then there is no shortage of investors who will happily provide you with capital. This may require you to obtain a financial license, depending on where you are based. Axi has a system that puts capital managers in touch with investors.
- Manage FX Risk For Corporations
International businesses and corporations typically have to trade high volumes of currency, and are constantly seeking to minimise their exposure to fluctuations in exchange rates. This is a bit more complicated than the other two options, however can provide large amounts of capital.
Securing capital can be done in many different ways, but isn’t for everyone. Traders should continuously look to tweak and improve their trading system through the previously defined methods, as the forex market is dynamic and continuously changing in nature.
I hope this has helped you get your head around how to get started in the Forex Markets!