Trading in forex for beginners

  • Mar 24 2022
  • by
  • Analyst AZA
Trading in forex for beginners

Trading in forex for beginners

Forex trading is an act of exchanging one currency for another with the expectation of generating a profit from the price difference. When you buy the Euro against the US dollar, and the price of the Euro appreciates more than the dollar, you have made a profit. In contrast, if the price of the Dollar performs better, you will lose a portion of your funds or potentially even all of the capital if you don't manage the risk. Participants in the foreign exchange are in a hierarchy form. The biggest players are the central banks, which are responsible for the amount of money circulating in the economy. The next in line is the institutional banks/investors, who find liquidity (the ability to enter and exit a position ) through the interbank. At the bottom of the hierarchy, we have retail traders.
Retail traders have little impact on them on market prices when compared to the other players. During the past two decades, markets have experienced a surge in the number of retail traders, mostly due to technological advancements. The following sections will attempt to give the reader tools that are necessary to be successful as a trader. This is not a guideline for making a quick buck, but to encourage the profitability of a trader. Since most of the movements are caused by institutional investors, it would be advantageous for a retail trader to pay attention to the actions executed by them. In the FX market, we have major, minor and exotic currencies. Major currencies are those of developed nations like Japan, Switzerland, Canada, etc. Major currencies are free-floating currencies, meaning the market is responsible for determining their market value.
Minor currencies are those derived from major currencies. For instance, GBP/JPY is derived from the Pound and the Yen, CHF/CAD is derived from two major currencies. Exotic currencies are those of emerging economies like South Africa, India, Brazil, etc. Most of the exotic currencies are pegged with a currency of a major economy. For example, if the Mexican Peso is pegged to the Canadian dollar, the Mexican central bank will have to take appropriate measures whenever the pair starts to trade out of range. If the Peso trades considerably above/below the range, the central banks might be subjected to purchase or sell their foreign or domestic currency to return the pair to acceptable trading ranges. A trader must know and understand different types of analyzing the markets. The types of analysis that will be covered are technical, fundamental, sentimental and transcendental analysis, although the latter might be considered uncommon.
Technical analysis is the study of the previous market movements as an indicator to make predictions on the future path of the market.
It's based on the belief that markets tend to repeat their past performance. For example, when price trades for an extended period on a particular zone, the zone can be seen as significant. Technicians utilize indicators like Stochastic, RSI, Bollinger bands, etc. Candlesticks are one of the indicators presently used by many traders. They provide a trader with information about the past performance of the market. For instance, when a candlestick engulfs the previous one, that can be seen as an indication of a reverse. When three large candles are in succession with one another, they can be signalling that the trend is strong. A beginner should study and understand various types of candlesticks and the patterns they form.
Technical analysis is mostly used by traders who enter and exit a trade within a day, but it is also applicable on longer timeframes. Fundamental analysis is based on the acquisition of statistical data or news to make trading decisions. More than technical analysis, fundamentals are the prime movers of the markets, largely owing to their higher usage in the institutional trading arena. Fundamental traders/investors use the economic data of the country and make extrapolations on how the currency can be impacted. For instance, Australia is a commodity-oriented country because it is one of the biggest exporters of commodities, especially precious metals. When commodity prices increase, they reflect the increase in their demand. When other nations buy these commodities, they have to exchange their domestic currency for the currency of the country that is selling them, in this case, the Australian dollar. This will eventually result in the appreciation of the Aussie.
Australia is one of the main trading partners of China. A shock in the economy of China can adversely impact the Australian economy. Geopolitical factors can also influence the fundamental view towards a currency. When a net oil-producing country participates in a war, that kind of situation tends to have a positive impact on the US dollar, because the United States are also the net exporter of oil. The monetary policy implemented by the central banks will contribute to the strength/weakness that can arise in the economy. When they hike interest rates, that will foster a carry trade situation, whereby investors are investing in a higher-yielding currency (currency with a higher exchange rate). The housing sector can be a reliable indicator of the strength of the economy. A robust housing sector is a reflection of a well-oiled economy, thus a strong currency.
Treasury yields are one of the most closely watched financial instruments as they serve as an indication of the flow of money into/out of the economy. When investors are risk-averse (having a low tolerance for risk), bond yields might experience a surge in demand, but when investors are a risk on, the treasury yields might depreciate. Political actions also play a huge role in the forex markets. The government will influence the economy through fiscal policy. Fiscal policy does not directly influence the forex market but is transmitted through other economic agents. These kinds of policies are suitable for long-term traders rather than day traders. correlation between currencies or correlations between currencies and instruments of other markets can be rewarding if used correctly and understood. The Canadian dollar and Brent crude oil have a positive relationship but sometimes the correlation is broken and that can provide trading opportunities.
Sentimental analysis is based on the outlook of broader market participants, basically the bias toward a specific currency. When the price of Gold is appreciating due to a consensus that inflation is increasing, without any fundamental proof whatsoever, we refer to that as investor sentiment. When sentiment is moving the markets, fundamentals are less effective and when fundamentals are a catalyst, the technicals are less impactful. The previous statement makes a trader be able to gauge which type of analysis is suitable for their trading style. The sentimental view is very important and should be treated as such. The last type of analysis is transcendental analysis, which is based on the notion that when a trader is gaining experience, over time they will be able to recognize patterns intuitively. Therefore, this kind of analysis cannot be taught, but can only be acquired through experience.
Trading forex provides both risks and opportunities. Successful traders have a common trading objective of managing their risk, whereas losers tend to be reckless in their trading by not mitigating risk. Managing risk can help a trader to average winning trades by cutting losses and letting winners ride. For instance, let's say you are trading a $10000 account and you are willing to lose only 1% of your capital on a single trade. This implies that you will have to place a stop loss and a profit target on every trade you take. In this case, if you lose ten times without a winning trade, you will still be having 90% of your capital. Managing risk is not limited to only the start of the trade but managing the position as the trade plays out, like placing a trailing stop as the trade goes in your way. In this article, I will share a trading secret that can be profitable if applied with enough understanding.
This secret does not guarantee you success but gives you a clearer perspective of the markets. The basis of the secret is on the belief that markets trade in zones. There are trending zones and bracketed zones. A bracketed zone is where the market spends an extended period. And a trending market is when the market is making new highs or new lows. Therefore, knowing what kind of a market you are trading in gives you an extra advantage. Remember, trading helps to build character but most importantly it instils discipline. Thanks for reading and good luck.

This article takes a newcomer into the exciting world of trading by outlining some basic concepts


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