This post is aimed at people who are newcomers to forex trading, and it contains recommendations of topics to learn if you want to learn - what is forex. Let us begin by looking at what this industry entails. Forex is a form of speculative investment. Trading includes purchasing contracts for difference (CFD). Once you open a forex trading terminal or application, you will see forex pairs made of two currencies, each in the format EUR/GBP, USD/JPY, GBP/CHF, and others. What happens is that you predict whether the price will rise or fall, and when you purchase a 1.0 lot contract, you gain or lose 1 unit of balance (That is, $1 if you have a balance in USD and 1 ZAR if your balance is in South African rands) for each point the pair moves. For example, let's say you have a USD balance in your trading account. If you open a buy order on the pair EUR/USD at 1.06868 using a 1.00 lot size, after which the currency pair's value rises to 1.07830, you gain a profit of $962.00. The profit is calculated by multiplying the lot size by the number of points the pair has moved. If you had placed a sell order at 1.06868, you would have lost $962.00 by the time price hit the level of 1.07830. The two parameters, lot size and points (pips), whereby the latter is the number of points the instrument (forex pair price) has moved, determine profit or loss. To further illustrate the working of CFDs, let us look at another example using a different lot size (also called volume). If you place a buy order for the pair EUR/USD at 1.06751 using a lot size of 0.20 and the price of the pair rises to 1.07830, then you gain a profit of $215.00, which is equal to 0.20x(107830-106751). The pairing EUR/USD=1.07830 means that if you exchange 1 EUR for dollars, you end up with 1.07830. Buying EUR/USD at 1.06751 with a lot size of 1 means you have purchased 100,000 units of EUR at the current price. Therefore, if the price goes up and you close the position, you will have liquidated the 100,000 units at a higher price, whereby the EUR will automatically be exchanged for dollars and then converted to your account balance. The tricky part is determining whether the pairs' values will rise or drop. A correct prediction involves analyzing the price chart, which you can do using technical analysis techniques. The following are recommendations for foundational knowledge in technical analysis, which is necessary for beginner forex traders.
Market Structure
As the name suggests, market structure details the structural formation of the price chart. As the price moves, it forms peaks and low points on the price chart. The peaks are known as swing highs, and the lows represent the swing lows. The swing lows and highs follow one another in a sequence whereby the following points are higher when the price is trending upwards and lower when the price is trending downwards. A trader analyzing market structure will conclude that the price rises when they witness a series of higher highs and higher lows. If they observe a sequence of lower highs and lower lows, then they determine that the price is in a downward trend. Profiting using this technique involves following the current trend until you see a contradiction between the highs and lows. For example, if you sell and later see a higher high and a higher low forming on the chart, you should close your position and keep your profits because the change in characteristics of the market structure signals a change in trend. The technique is simple and a suitable approach to trading forex for beginners. Market structure (highs and Lows) is responsible for forming structural patterns.
Structural Patterns
Studying structural patterns is essential for learning what is trading in forex. Looking for patterns on price charts is a simple way to analyze for bias and profit from forex markets. Some patterns indicate price reversal (change in trend) or trend continuation. Examples of chart patterns include double tops and bottoms, head and shoulders, flags, quasi-modo, and others. Please make a point of studying patterns and using them as an edge in trading. It is impossible to cover them in this post, as illustrations are necessary to grasp the concepts better. Structural patterns are a standard go-to forex trading for beginner's approach aimed at profitability outcomes. All a trader has to do is identify a pattern forming and align their trading activities to what follows a given pattern (reversal/continuation of trend). Also, make a point of studying Ms and Ws as part of structural patterns.
Support and Resistance
These are levels at which the price reverses as it fails to advance further in the dominant trend. They are points of interest as buyers enter the market at support levels, while sellers look for selling opportunities when the price hits resistance and starts dropping. The knowledge of S&R will enhance your trading experience as a novice trader, especially when combined with that of psychological zones.
Candlestick Patterns
Price movement on the chart can be represented using candlesticks. They tell the behaviour of price within a given unit of time. Candles represent an opening price, peaks (highest/lowest price attained), and the closing price. Studying candlestick patterns is essential in anticipating future price behaviour or action. There are bullish (uptrend) and bearish (downtrend) biased candlestick patterns. The former indicates that a trader should open a buy position, and the latter signals them to open a sell position on the specific forex currency pair under analysis.
Market Cycles
Price is always ever in one of three stages of the trading cycle. That is contraction, expansion or in the trending phase. In contraction, the price moves within a minimal range, and there is no clear direction of the price as it goes back and forth, which means there is no incentive to buy or sell. In the expansion phase, the price manipulates traders and targets their stop-losses using false signals. Once the expansion phase is complete, the price starts moving in a clearly defined trend which is when traders should place orders in line with the new trend.
Other Techniques
Beginner traders should also be interested in studying: -
- Channels
- Fibonacci Strategies
- Divergence
- Order Blocks
- Fair Value Gaps
- Liquidity Grabs
- Harmonic Patterns
- Risk Management
- NOTE
- Most beginners fall into the trap of relying heavily on indicators as a trading edge. I do not forbid using indicators, but it is essential to know that most are lagging and may not be relied upon to predict future price movement. In simple terms, indicators get their data from price, and as such, they are always behind. If indicators signal a potential buy, then the price will have already risen, and you will be taking a late-entry trade if you buy based on the indicator in question. However, indicators are only somewhat helpful. For example, divergence trading requires using stochastic indicators in combination with price, which is safe because price movements are factored in this type of analysis.
- Once you have studied the fundamentals recommended in this post, you may look for the best broker account and launch your trading career. The knowledge applies to forex pairs and trading bitcoins as well. Also, the best trade platform offers reliability and favourable trading terms. Good luck with your trading!
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