Forex Trading Learning Guide for Beginners
Are you looking for a business that can be done from home with low capital? Forex trading is one option that should be chosen. However, many things need to be learned first before you invest in forex trading. First of all, you need to know what forex is and how it works.
Forex is short for “foreign exchange” which if translated into Indonesian will be “foreign exchange”. In terms, forex means currency trading that takes place outside the exchange (over-the-counter).
Today, forex is the largest and most liquid financial market with a daily trading volume of more than 5 Trillion US Dollars per day. It’s fantastic, isn’t it!? Due to its enormous scale, forex has emerged as a popular alternative to earn money online. Every day, hundreds of people join in the hope of profiting from forex.
Some of the advantages of forex trading include:
- Forex market opening hours last 24 hours from Monday morning to Saturday morning, so traders can trade at any time according to their own spare time.
- There are no heavy requirements to start trading forex. You only need a laptop or cell phone and an internet connection. The initial capital is also very affordable, you can start with only 100 US Dollars (or around Rp. 145 thousand based on the current Dollar-Rupiah exchange rate).
- No one can manipulate the forex market. Even city brokers can only tinker with their own trading platform, so traders are free to compare prices with other brokers, then switch to more bona fide brokers.
- Forex trading liquidity is very high, so we don’t have to wait a long time to execute buy or sell orders.
- Forex trading fees are very low. Brokers charge three types of trading fees, namely spreads (difference in selling/buying rates), commissions (fees per trading volume), and swaps (interest for trading positions left open until past midnight). But the intense competition between brokers often makes them free one of the fees. Traders can look for commission-free brokers, swap-free brokers, and zero-spread brokers.
Forex Market Opening Hours
In the above review, we mentioned that the forex market lasts for 24 hours. Do you know how it happened?
Forex trading takes place off the exchange (over-the-counter). Trade takes place in a global-scale interbank network that is not in physical form, but through an electronic network (internet). Buying and selling take place continuously during bank hours in different time zones. Therefore, 24-hour trading is created which is divided into four forex trading sessions:
- Australian session (Sydney) from 5 am to 2 pm (WIB).
- Asian Session (Tokyo) from 7 am to 4 pm (WIB).
- European Session (London) from 1 pm to 10 pm (WIB).
- American Session (New York) from 8 pm to 5 am (WIB).
You can choose to trade forex at any time, but you must understand the different characteristics of each session. For example in the Australian and Asian sessions, the Australian Dollar (AUD) and Yen (JPY) will be more heavily traded than the Pound (GBP) and Euro (EUR). However, all currency pairs will be heavily traded in the American session, as some exchanges take place versus the US Dollar (USD). Most forex traders prefer to trade on the European and American sessions.
How the Forex Market Works
Traders in the forex market mainly trade the currencies of the world’s largest countries which are most widely used in export/import transactions and cross-border money transfers. We all know currency rates fluctuate. Well, forex traders try to analyze the movement of currency exchange rates to benefit from these changes.
The picture is similar to a foreign exchange. When you estimate the US Dollar exchange rate will strengthen against the Euro, then you will buy US Dollars now. Then after the US Dollar exchange rate really strengthens, you can use the US Dollar to buy Euros.
The difference with ordinary forex exchange, forex trading is done based on standard currency pairs. Some of the popular currency pairs include EUR/USD (Euro-US Dollar), GBP/USD (British Pound-US Dollar), AUD/USD (Australian Dollar-US Dollar), USD/JPY (US Dollar-Japanese Yen), USD/CHF (US Dollar-Swiss Franc), USD/CAD (US Dollar-Canadian Dollar), and NZD/USD (New Zealand Dollar-US Dollar).
So when you expect the US Dollar to strengthen against the Euro, you will sell the EUR/USD pair. Meanwhile, when you expect the Euro to strengthen against the US Dollar, you will buy the EUR/USD pair. If your prediction is correct, the difference between the selling price and the buy price of EUR/USD will be your profit.
Buy and sell transactions will be carried out through software or application that becomes a forex trading platform. In short, some of the initial capital for forex trading include a minimum of 100 USD, a laptop or cellphone, an internet connection, and the ability to analyze the market. You also need the patience to wait for the results of your analysis to materialize and make a profit.
Forex Business Advantages and Risks
The profit potential of forex trading is huge. As stated above, forex business can be done anytime and anywhere as long as there is an internet connection. Professional traders can earn between 10-30 percent per month from this business. However, these advantages are not results that can be obtained instantly.
There are several forex business risks that prospective traders need to consider:
- Exchange Rate Risk: Remember, forex trading aims to profit from changes in currency rates. If the trader’s prediction about the change is correct, the trader will make a profit. But if the prediction is wrong, then of course the trader will lose.
- Market Liquidity Risk: Not all currencies are suitable for trading all the time. The most popular currency pairs such as EUR/USD, GBP/USD, AUD/USD, and USD/JPY are always busy being traded. But if you choose the wrong currency that is not popular, then the trader will have difficulty getting the selling/buying price that matches the prediction.
- Leverage Risk: Leverage is a feature that can be used by traders to increase their purchasing power. For example, a trader has 100 USD of capital and uses 1:100 leverage, then he can buy/sell as if he had 10,000 USD. Where did this money come from? This is a feature provided by the broker based on the concept of margin trading (margin trading). This leverage feature is free and can be used by anyone. But the trader’s profit and loss will be adjusted in proportion to the leverage he uses as well. So, traders need to use leverage with caution.
- Online Transaction Risks: You will trade forex through an online trading platform. Like the software and mobile applications in general, the platform is also prone to errors from time to time. If you are not careful, sometimes traders can also mistype or order wrong. Therefore, you should study the instructions on how to use the platform properly.
- Forex Broker Risks: The forex market is not located in a specific location, but takes place in an electronic international interbank system. You need a platform from a forex broker to connect to the system. Forex brokers also provide leverage, trading deposit, and withdrawal facilities, etc. So be careful in choosing, so that you get the best and most trusted forex broker.
Well, after knowing the various risks, are you still interested in forex trading? You need to know, many people succeed in forex trading because they learn and practice first. Any risk can be overcome with adequate knowledge. The important thing is, don’t be careless as long as you deposit capital without knowing the ins and outs of trading.
Important Terms Related to Forex Trading
Before learning how to start trading forex, you need to be familiar with the following terms:
- Quotes: These are the exchange rates listed on the forex trading platform. Some brokers provide 4-digit and 5-digit quotes according to the number of numbers written after the comma. 4-digit quote for example 1.0500. While the 5-digit quote is for example 1.05005.
- Pip: A pip is a fractional measure of changes in currency rates in the forex market, calculated based on a 4-digit quote. For example, the EUR/USD currency pair increased from 1.0500 to 1.1500, meaning EUR/USD has gone up 1000 pips.
- Bid/Ask: This is a term that refers to the buying and selling rates prevailing in the forex market. The bid is usually lower than the current rate, while the ask will be more expensive than the current rate. For example, the EUR/USD rate is currently at 1.0500, the bid may be 1.0495, and the ask is 1.0505. When you buy EUR/USD, you use ask 1.0505. Meanwhile, when you sell EUR/USD, you will use a bid of 1.0495. The difference between the bid and ask of 10 pips is the spread that is part of the broker’s profit.
- Lot: Lot is the smallest trading volume in forex trading. Each broker can provide a minimum lot that varies between standard lots (equivalent to 100,000 USD per lot), mini lots (equivalent to 10,000 USD per lot), micro-lots (equivalent to 1000 USD per lot), or nano lots (equivalent to 100 USD per lot)…
- Bullish: The movement of currency rates tends to rise or strengthen.
- Bearish: The movement of currency rates tends to fall or weaken.
- Margin Requirement: A certain amount of money that must be deposited with a forex broker for you to take advantage of leverage. The margin is following the leverage ratio that you will use. For example leverage 1:100, then the margin is 1%. This means that if you want to trade as if you have a capital of 20,000 USD with a leverage of 1:100, then you must deposit a minimum capital (1% * 20,000 = 200 USD).
- Margin Call (MC): A reminder that the broker will give you when the margin stock in your balance has reduced to barely enough to trade anymore. If this message is not responded to, the broker can execute a Stop Out, i.e. forcibly closing all your trading positions even if you are in a loss condition.
- Stop-Loss (SL): One type of order that can be placed on the platform so that your trading position is closed automatically if you experience a loss exceeding a certain threshold of the exchange rate.
- Take Profit (TP): One of the types of orders that can be placed on the platform so that your trading position is closed automatically if you have made a profit (profit) up to a certain exchange rate threshold.
Still, confused about forex trading procedures? There are many online forex trading learning guides that you can follow, either in the form of articles, e-books, or video tutorials. Forex trading seminars and training are often held in various big cities, which can be attended for free or paid. You can also join online forex trader forums such as ForexFactory.com and MQL5 Community to discuss with more experienced traders.
How to Start Trading Forex
Your journey to forex trading success starts with learning about the basics of forex, then proceeds to the following five steps:
- Choose the Best and Trusted Forex Broker
Tons of forex brokers promise the best and most transparent services, but you shouldn’t just trust their promotions. Make sure you only choose a regulated forex broker that already has official permission from the authorities. It is also a good idea to consider broker facilities such as spreads, commissions, swaps, leverage, minimum capital requirements, etc. You can find out other traders’ testimonials via Google if necessary.
- Open Demo Account
After finding the best broker for you, sign up to open a demo account with that broker. What is a demo account? A demo account is an account that allows you to simulate forex trading with virtual money (not real money) for free. Exchange rate movements in the demo account correspond to real forex market conditions, making it suitable for practicing forex trading. If the virtual money supply on your account runs out, you can request a refill from the CS broker.
- Download Forex Trading Platform
If your demo account opening has been approved by the broker, then you will get access in the form of a link, username, and password for the forex trading platform. Most forex brokers provide a trading platform called Metatrader 4 (MT4) or Metatrader 5 (MT5), but many are now developing other forex trading applications. Beginner traders are advised to start forex trading with a platform for desktops (laptops), to practice market analysis better. But you can also directly use the mobile application. Most importantly, practice using the platform until you become proficient on a demo account first.
- Create a Mainstay Forex Trading System
Many novice traders lose because they just buy-sell carelessly without any analysis. In order not to have the same fate as them, you must be able to analyze and create a reliable trading system first based on the results of the demo account practice. A good forex trading system consists of at least: the currency pair you want to trade, the trading timeframe, the indicators used for analysis, the buy rules, the sell rules, as well as profit and stop-loss targets. If you don’t understand everything, don’t rush into real trading.
- Open Real Account
Well, if you can create a reliable system, then you can open a real trading account at your favorite broker. Start forex trading by depositing the amount according to the minimum deposit first to your broker. Do not rush to deposit large amounts of money, because you need to adjust your psychological state in dealing with the different nuances of a demo account and a real account.
How to Analyze Forex Market
One thing you need to know before jumping into the forex market: there are many forex market participants. Starting from the government, central banks, commercial banks, hedge funds, multinational companies, and small forex traders like us. Their behavior and point of view will all affect currency rates in the forex market. We ourselves may not be able to move the exchange rate in the direction we want, no matter how much capital we have.
So, how to profit from the forex market? You have to analyze market conditions and current currency rates, then predict the direction of the next exchange rate movement.
There are two (2) most popular ways of analyzing the forex market, namely technical analysis, and fundamental analysis. Here is a full explanation.
- Fundamental Analysis
Fundamental analysis focuses on what factors cause changes in currency rates. The factors that traders observe include economic data from the country of issue of the relevant currency, government policies, central bank policies, and geopolitical conditions.
Seven economic data often affect the exchange rate, namely Gross Domestic Product (GDP), unemployment rate, inflation rate, retail sales, economic sentiment (business), industrial production, and trade balance (export-import). Among them, there are high, medium, and low impacts. Everything can be followed by traders by monitoring the forex calendar.
If economic data shows better performance than expected, the exchange rate will tend to strengthen. Meanwhile, if economic data deteriorates, the exchange rate will tend to weaken. In addition, it is also important to consider the central bank’s interest rate policy. Currencies that have high-interest rates will tend to strengthen against currencies with lower interest rates.
The following is an example of a forex calendar that traders can access via forexfactory.com. There are several schedules for publication of economic data and important events such as the Fed Announcement (US Central Bank Announcement), Retail Sales (Retail Sales), Unemployment Rate (Unemployment Rate), and so on.
Currency exchange rate movements can be very intense after these events, so many traders tend to avoid trading for about an hour before and after. After an hour has passed, search for news related to the event to find out how the event will affect the exchange rate of the currency you are trading.
- Technical Analysis
Technical analysis focuses on monitoring historical charts of currency rates to predict future trends. Technical analysis aims to find out the best points to buy, sell, and close trading positions in the future. As a result, this type of analysis is the most widely used among forex traders.
Technical analysis can be done simply by monitoring candlestick charts, adding technical indicators, or drawing certain patterns. Forex trading platforms generally already provide several types of charts, technical indicators, and drawing tools that traders can immediately use.
As an example, consider the candlestick chart of the EUR/USD pair below which has been fitted with two Moving Average indicators with period 100 (yellow line) and period 50 (purple line):
The candlestick chart above the Moving Average line indicates that price movements tend to be bullish. However, the direction of movement of the candlestick on the far right side is even lower. It is also seen that there is a cross between the 50 MA line and above the 100 MA line on the right side of the chart which is a bullish signal. What does it mean? At a glance, we can read that the current trend of EUR/USD is indeed declining. However, the movement of EUR/USD has the potential to rise again, so this is an opportunity to place long positions.
The signal rules for each type of technical indicator are different. Every trader is free to want to analyze the market using whatever indicator he feels is the most accurate. But, you must first learn how to use it and practice applying it on a demo account.
How to Apply Analytics for Profitable Forex Trading
After reading the previous reviews, you might think you can choose one way of analysis. Yes, you can only choose to focus on fundamentals or technicals. But actually, the most successful traders don’t just rely on one analytical technique. They study fundamental and technical analysis, then combine it in three simple steps:
- Use fundamental analysis to find out long-term trends: Analysis should mainly focus on GDP, interest rates, and inflation rates. For example, if the US central bank (Federal Reserve) begins to raise interest rates, the US Dollar will be stronger in the future than other currencies. Look for which currency has the largest interest rate differential with the USD, as the USD’s long-term trend is likely to be the most bullish against that currency.
- Use technical analysis to determine buy/sell points: Just predicting future trends is not enough. You also have to know the right buy/sell point. Use indicators such as the Moving Average, MACD, or the Relative Strength Index (RSI) to find precise buy/sell signals at a given exchange rate.
- Make a weekly market review: If you analyze the market daily, then you will often be disturbed by unnecessary noise. For example, EUR/USD tends to be bullish but weakened first because it was disturbed by rumors which later proved to be untrue. Therefore, it’s a good idea to compile a weekly market review every weekend (when the forex market is closed).
The weekly review will help you find a broader analytical picture, as well as plan your trading for the week ahead. In this weekly review, note things like:
- The fundamental events that moved the market last week and which ones will have an impact until next week?
- What fundamental events will happen next week? Are there certain times that you need to avoid so as not to be exposed to unexpected fluctuations?
- How about technical analysis on the daily timeframe chart (Daily)? Does it tend to be bullish or bearish?
Even if you choose to trade daily or only focus on technicals, a weekly review like this will be very useful to get a more accurate analysis.
Well, what do you think after listening to this forex trading learning guide? If it still feels abstract, it’s a good idea to just choose a forex broker and register for a demo account. Everything will look more real when practiced on a demo account simulation.