As a beginner in any field, the first thing you need to do is get familiar with the basic concepts and study various associated theories. After this, you can get into the details of these concepts and learn further by diving deep into the advanced topics. This study method applies to all subjects, and you can follow the same for forex trading as well. Today, we will introduce you to the 5 most basic forex market concepts that every new trader should know before entering this dynamic space.
- Get to Know the Trading Instruments
Once you have set your mind to be a part of the forex world as a trader, you can start learning the first and foremost lesson, which is about the trading instruments of the currency market. You won’t be able to move forward without this piece of knowledge. As you may already know, the forex market moves based on the exchange rate fluctuations of currencies and here, trading is about buying and selling of currencies.
The trading instruments in the forex market are referred to as currency pairs, as 2 international currencies determine the exchange rate. The first currency in a currency pair is the one being bought or sold, and its value is stated in comparison to the 2nd currency of the pair, which is referred to as quoted currency because the price of the base currency is always quoted against the 2nd currency. If all of this sounds a bit confusing to you, then you should open a demo account with your broker and start trading there to understand how things work with currency pairs. Place dummy trades and see how you perform before diving into real trading.
Which Types of Currency Pairs Are There?
Basically, 3 types of currency pairs are traded in the forex market. The pairs generating the most trade volume are major pairs formed with the US Dollar and another major currency. A major pair will always have USD as the base currency or quote currency and other majors like the Euro, Great British Pound, Canadian Dollar, Japanese Yen, Australian Dollar, New Zealand Dollar and Swiss Franc.
The major currencies always contribute to the forex market’s total trading volume as they are the safest bet for any trader. They belong to the strongest economies or financial markets on a global level, which gives them a higher value than other currencies. Trading with major pairs also minimises your trading costs as they have the lowest spreads due to high liquidity.
The next group is cross pairs or minor pairs, which involve a major currency other than USD quoted against another major currency. Cross pairs come 2nd when it comes to trade volume, and they are also a bit more volatile than major pairs. The spreads are also a little higher, but still, they are most liquid after major pairs.
The last group is exotic pairs, where a currency from an emerging or developing economy will be paired with a major currency like USD or Euro, resulting in a dynamic combo. Exotic pairs have features like high volatility, low liquidity and higher spreads, but they are explored by traders who are willing to take higher risk for higher profit potential.
- Anticipating Currency Price Fluctuations
The next basic forex concept you need to learn about is anticipating currency price fluctuations. Being a trader is all about benefiting from favourable price movements of the chosen instrument. You can either buy the instrument or sell it based on the ongoing trend with the anticipation of the price movements resulting in profits by the end of the trade.
The majority of the trades in the forex market happen on a spot basis, as only a minor percentage of forex futures are traded. In the case of spot trading, you have to analyse the market situation and anticipate the direction in which the prices will move for the chosen pair. In other words, you rely on technical or fundamental analysis to spot the ongoing or upcoming market trends of the currency pair being traded.
Technical analysis is done by taking the historical price movements and real-time price movements as the base. You try to recognise the price change pattern to assess the trend or range within which the fluctuation happens. On the other hand, fundamental analysis revolves around economic data and global events influencing the forex market. You can also use a combination of both analysis types, which is an ideal approach to making accurate price predictions.
Then, you have to decide the type of trade that will allow you to profit from this price change and execute the same after logical calculations. You can use forex calculators to perform all trade-related calculations easily. Forex brokers offer a set of trading calculators to make the calculation process faster and easier for all with the most precision.
- Trading Platform and Trading Style
The next concepts are less theoretical and more practical as they are essential to get started with the actual trading process. The first and foremost requirement for trading forex is a feature-rich platform which provides seamless connectivity to the currency market in real time. The platform is a trading software where you will place and execute trades with your forex broker’s backing.
You need to sign up for a trading account with a trusted broker to go live on the platform. You should develop a solid strategy or trading plan to follow, as that allows you to spot the best trade setups and place trades that are likely to hit your profit targets while staying in line with your risk profile. You also have to choose the trading style, which demands an understanding of trading concepts.
Forex traders can follow any strategy and adopt any trading style that works for them. Short-term strategies like scalping and day trading or medium-term strategies like swing trading. Some traders also prefer to follow long-term strategies like positional trading. Another option is profiting from interest rate differences with strategies like carry trading.
So, there are a lot of trading styles and strategies with profit potential, and you need to choose the one that fits well with your knowledge and skill level. Coming back to the platform, choosing a modern trading platform like MT5 would be ideal for traders who are interested in exploring innovative trading techniques like automated trading. The MT5 platform is the perfect place for algo trading, making it a top choice among advanced traders.
But for those who want to go down the traditional route first, MT4 can be a considerable option as it is one of the most beginner-friendly trading softwares you can find. Being the predecessor of MT5, MT4 also has features like automated trading and is the most preferred forex trading platform to date.
- Leverage in Forex
The next basic concept you need to learn and apply in forex trading is leverage. Leverage is actually a powerful yet dangerous tool that allows you to trade on a larger scale. Leverage is said to be powerful as using borrowed funds increases your trade size and profit potential. But it is also dangerous as this acceleration is not just limited to profits but losses as well. Basically, the amount of leverage you use for trading will significantly impact the trade’s end results. So, you must learn to use optimal leverage as it allows you to grow your account with less capital.
- Managing the Risk
The last but the most important concept related to forex trading is risk management, as every trade puts you in a risky position no matter what. You need to take this risk to make profits, but you also need to manage it so that you won’t lose a lot, even if the market doesn’t favour you. The risk can never be eliminated because the forex market is very volatile.
The only thing you can do here is manage your risk and be prepared for the worst-case scenario, as your predictions and anticipations can always go wrong. The currency market can sometimes be unpredictable, and risk management will be your key to unlocking trading success within a safe zone.
We have covered the five most basic forex concepts a beginner should know about before trading. But what you just read is only the tip of the iceberg, as you still need to study each concept in detail. Going into details would be easier once you set the foundation right. So, take your time to research, learn and practise these concepts.