Forex Trading For Beginners
Currencies are one of the most popular assets traded by investors around the world. With trading available 24 hours a day, five days a week, opportunities for success are around every corner. And if you’re thinking about diving into the forex market, you’ve come to the right place.
Read on to learn more about trading with forex for beginners.
What is forex trading in Australia?
Forex trading refers to the process of buying and selling currency pairs to try to make a profit. Traders apply technical analysis to predict the value of one currency compared to another.
The forex market is one of the most active financial markets, with more than 5 billion daily forex transactions, or an average of $220 billion an hour! This makes for the perfect learning ground for beginner traders looking to develop their skills.
Several global banks also run the forex market across the four major trading centres: London, Sydney, New York and Tokyo. And unlike shares or other traded commodities, forex trading occurs between two parties on an over-the-counter market (OTC).
Forex trading for beginners — what you need to know
From keeping up to date with the last financial news to test-driving forex trading strategies, understanding forex trading in Australia as a beginner is no mean feat. As you begin trading and get comfortable with how the market moves, your skills will continue to grow.
But before you start making waves in the market, you’ll first need to get your head around the basics.
How to read currency pairs
One of the first things you will need to understand before forex trading in Australia is reading currency pairs.
AUD/USD is an example of one currency pair, which involves buying or selling the Australian dollar against the US dollar. Within a currency pair, there is the base and quote currency. The base currency is the first currency listed in the pair representing the currency you are buying or selling during the transaction against the quote currency which is the second currency listed in the pair.
The classes of currency pairs
In addition to reading currency pairs, it’s also important to understand the different classes of currency pairs, which can help you determine currencies to trade in and establish yourself as a trader. The three common currency pairs are:
- Major pairs — These are currency pairs that feature the Australian dollar, British pound, Japanese yen, Swiss franc, Euro and US dollar. Major pairs experience high trading volume, making them an excellent choice for beginner traders learning the ropes.
- Minor pairs — These are currency pairs that involve major currencies outside the USD and are an alternative to reading major pairs. AUD/NZD is an example of a minor currency pair.
- Exotic pairs — These are less traded currencies from emerging economies paired with the US dollar. Naturally, these currency pairs experience high volatility and unpredictability, which means greater profit or loss opportunities. USD/TRY is one example of an exotic pair.
The types of forex markets
Beginners trading in forex will also need to research the different types of forex trading styles to determine which best suits their trading preferences. The three types of forex trading styles are:
- Scalping — This is a trading style that specialises in profiting off of small price changes and making a fast profit. Scalping requires a trader to have a strict exit strategy because one large loss could eliminate the many small gains the trader worked to obtain.
- Swing trading — This is a style of trading that attempts to capture short- to medium-term gains over a period of a few days to several weeks.
- Intraday trading — Intraday trading means buying and selling currency pairs on the same trading day. Intraday trading is also known as day trading. Currency prices keep fluctuating throughout the day, and intraday traders try to draw profits from these price movements by buying and selling currency pairs during the same trading day.
Leverage and contracts for difference (CFDs)
While it is possible to trade forex on the above markets, trading with forex for beginners can also occur through contracts for difference (CFDs). CFDs are derivatives that allow you to track and speculate on the value of underlying currency pairs in a spot market without purchasing and holding the currency.
With a CFD, traders only have to pay the price difference from when they open a trading position to when they close it. CFDs also allow you to employ leverage, a trading strategy that allows you to increase the size of your position by using capital from a broker — ideal for beginners who do not have sizeable capital to start with.
Three reasons why forex trading is great for beginners
While there are many assets to trade on the market, forex trading for beginners boasts some excellent advantages, including:
- Highly liquid market — Millions of transactions happen daily on the forex market, so you can almost always find someone to trade with, especially if you’re trading major currency pairs like AUD/USD, USD/JPY, and EUR/USD.
- 24-hour trading — Unlike other market exchanges, the forex markets are open 24 hours a day, five days a week, allowing traders to jump in and out of the market as they see fit.
- Not as easily manipulated — Unlike other markets where financial institutions or companies can control asset values, the forex market is not as easily manipulated.
Trading with forex for beginners — building a solid foundation
One thing you will need to focus on before you begin trading is understanding the importance of building a solid foundation. Building a solid foundation comes from understanding the order of importance of psychology, risk management and strategy.
- Psychology — This is the emotional component of a traders decision-making process which may help explain why some decisions appear more rational than others. Trading psychology is characterised primarily as the influence of both greed and fear. Greed drives decisions that appear to be too risky.
- Risk management — The key to surviving the risks involved in trading is to minimise losses. Risk management in forex trading begins with developing a trading strategy that accounts for the win-loss percentage and the averages of the wins and losses. Moreover, avoiding catastrophic losses that can wipe you out completely is crucial.
- Strategy — What is a trading strategy? A trading strategy is a plan that employs analysis to identify specific market conditions and price levels. While fundamental analysis can be used to predict price movements, most strategies focus on specific technical indicators.
Charts, indicators and trading platforms, what you’ll need as a beginner trader
Forex trading requires tactical and planned movements with zero room for emotion.
That’s why many traders implement technical analysis and various trading tools and indicators as part of their trading strategy to maximise profits and gain insights into the forex market.
These resources take the guesswork out of forex trading and help you forecast upcoming risks, giving you a head start to exit a trade and minimise your losses. Trading analysis styles are often split into two categories:
- Fundamental analysis — This involves looking at news reports and other economic information to predict events or announcements that can impact the value of specific currency pairs.
- Technical analysis — This involves using charts, like line bar or candlestick charts, market indicators and volume data to predict the price movements of currency pairs. Technical analysis allows you to assess how a market is moving or may move based on reading a chart.
Forex Platinum Trading — your go-to for expert forex market knowledge
How do beginners trade in forex?
Before you can start trading on the foreign exchange market, it’s important to understand the basics. This includes but is not limited to learning how to read currency pairs, apply risk management processes and research trading styles and strategies to determine which aligns best with your trading goals.
What is the best time frame to trade forex for beginners?
The best time frame for forex trading will depend on your trading style. For instance, day traders may benefit from any timeframe within the 5-minute and 1-hour during a trading session. Swing traders, on the other hand, may experience better success within the 4-hour to the daily one in any timeframe.
Which trading strategy is best for beginners?
This will depend on your trading style. If you are looking to trade rapidly and receive smaller profits to build over time, scalp trading may be ideal. On the other hand, swing trading may be more suitable if you don’t want to spend time analysing charts and economic news.
How much can you start trading forex?
There is no definitive answer to this, as every trader’s goals and financial circumstances differ. Though it’s worth noting that the more capital you have to start with, the greater your chances are maximising profits.