Currency trading for beginners
Currency trading happens on the global foreign exchange (forex) market. This market is the biggest market in the world where trillions of dollars are exchanged every workday. It is a worldwide market and everyone can get access to it through a forex broker. The most important thing that beginners must learn about currencies trading is that it won’t make you rich. It is a market for rich people to make some additional income and not the other way around.
However, currencies trading still might be a hobby for people who are not ready to invest a lot of money in trading. This is a very interesting profession and by becoming a speculator you’ll become a lot smarter as well.
Currencies are traded in pairs, for example, eur/usd and usd/jpy. You can buy eur/usd or sell it. But actually, when you sell eur/usd, it’s the same thing as buying usd/eur. Further, you need to make an opposite transaction to close your trade. So, when you close your eur/usd buy trade, euros are exchanged back into dollars. That’s why markets react to closing trades with the same power as to opening them.
Forex brokers allow you to buy Euros or US dollars regardless of currency in which you provided your initial capital. They have access to the necessary liquidity so you don’t have to worry about it. However, when you leave your trades overnight you have to pay the swap commission. This is the payment for borrowing money for more than one day. Moreover, from Wednesday to Thursday night, swap cost is tripled. This happens because on this night you need to pay the borrowing cost for weekends. The thing is that all real transactions in the forex market happen with 3 days delay so this shift in commissions gets reflected on Wednesday.
Currency trading is mostly done with a leverage. A forex broker provides you with free loans which can be used to trade with bigger amounts of money than you have deposited. Your capital becomes your pledge. So, if you lose more than you can afford to lose, a so-called margin-call happens and all your trades are automatically closed. If you win, you get high returns that would be impossible without a margin (or leverage).
Marginal trading should be done with caution. Many brokers can give you up to 1:500 margin level or even more. It’s nice but not really necessary. You should never open trades with a much higher amount of money than you have because otherwise your trading would just turn into gambling. I hope you don’t want to gamble in the currencies market but instead want to make steady profits. Luckily, it is possible.
When you open a new trade, you have to pay the spread. It’s the commission that forex brokers take for opening a new trade in the forex market. All currency pairs have Ask and Bid prices. You pay Ask price for buying and Bid price for selling. The difference between them is the spread. The size of spreads is crucially important for intraday trading strategies and other high-frequency strategies. But anyway, the lower the spread, the better. If the spread is high, intraday strategies might just work in a break even instead of profit.
However, if you want to trade like most of the pro traders, you’ll need to use many different currency pairs on daily or at least 4-hour charts. If your trades go live for at least a few days then the size of spreads won’t be that important.
There are many different strategies for currency trading. But no matter what method you’ll choose, you won’t be able to be right in more than 60% of times. If it would be possible, we would see a lot of forex millionaires all over the place. In reality, it just doesn’t happen. If someone have won a lot of money in forex you should understand that it was either pure luck or insider trading. If you hope on luck, you are gambling. If you want to make consistent profits, you’ll need a trading system that is thoroughly backtested on historical forex charts.
Currency trading can be done with the help of charts analysis, news (or fundamental) analysis or statistical analysis. Statistical analysis is generally used by trading robots (expert advisors). Charts and news trading are mostly traded by hand. Moreover, some forex brokers have an option to allow you to copy trades of other traders automatically and for free. Generally, it’s a great way of trading for beginners.
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