Trading from scratch and Forex strategies for beginnersPaul Roberts 08 / March / 22 Visitors: 234
Forex trading for beginners can be especially challenging. This is mainly due to the unrealistic expectations that are common among novice traders. However, we will try to help you understand all the intricacies of trading in the foreign exchange market and give you an idea of how to start trading Forex from scratch.
If you are wondering “Is it possible to learn trading by yourself?” - you've come to the right place. In our article, you will learn about the basics of trading, which platform to use for trading, how to make trades, the best trading strategies for beginners, and much more. So, let’s immediately briefly answer the questions “What is trading and how to start it?”
Trading (or trading) is the execution of transactions for the purchase and sale of financial assets through a trading platform offered by a financial intermediary - a broker.
Thus, in order to start trading, you must have access to a trading platform (provided by a broker) and have a certain amount of funds.
If both conditions are met, you can start making transactions. To do this, you first need to decide what type of transaction to make (open a short (sell) or long (buy) position), how much it will cost and how big the spread (the difference between the bid and offer price). Knowing these factors will help you decide which trade is worth placing in the market.
Below we describe each of these aspects in detail.
Price and quote
When you trade Forex, you see Ask and Bid prices in the trading platform.
Remember that the Ask price is the price at which you can buy a currency.
And the Bid price is the price at which you can sell it.
Always remember that you can trade both long and short positions, ie. you can open both buy and sell positions, however, you must be aware of the risks associated with trading complex products.
Trading Long Positions
This is the purchase of a currency with the expectation that its value will increase, which will bring you a profit in the form of the difference between the purchase and sale price.
Trading short positions
You sell a currency with the expectation that its value will fall and you will be able to buy it back at a lower price, capitalizing on the price difference.
The price at which a currency pair is traded is based on the current exchange rate of the currencies in the pair or the amount of the second currency in the pair that you would receive if you exchanged for a unit of the first currency in the pair (for example, if you exchanged 1 EUR for 1.68 USD, the price the buy and sell that your broker provides will be on either side of that number).
If brokers profit from the difference between the buying and selling price of currency pairs (i.e. the spread), the next logical question would be: how strong can a particular currency move? It depends on how liquid the currency is or how much it is bought and sold at the same time.
The most liquid currency pairs are those with the highest supply and demand in the Forex market. Demand and supply are generated by banks, companies, importers, exporters and traders.
The major currency pairs (aka the majors) tend to be the most liquid, with the EUR/USD currency pair moving 90-120 pips per day on average and therefore providing the most short-term trading opportunities. On the contrary, the AUD/NZD pair moves approximately 50 and 60 pips per day, while the USD/HKD currency pair moves only 32 pips per day on average (if you look at the value of currency pairs in the trading platform, most of them will be displayed with five digits after the dot, these are five-digit quotes).
Trading Basics: How to Read Forex Charts
An article on trading for beginners would not be complete without explaining how to learn to read Forex charts. To view exchange rates on Forex charts in real time, traders using the MetaTrader platform have three options available: line charts, bar charts (histograms), or candlestick charts.
The line chart connects the closing prices on your chosen timeframe (time period). So, when viewing the daily chart, i.e. Daily timeframe, the line connects the closing price of each trading day. This is the simplest type of chart used by traders. It is used mainly to identify trends in a broader perspective, but this is where its functions, by and large, end, unlike other types of charts.
Histogram (bar) chart
The histogram chart displays bars for the time period the trader is viewing. So, if you look at the daily chart, each vertical bar represents one trading day. A histogram is unique in that it offers much more information than a line chart, for example, one bar provides open, high, low and close (OHLC - open, high, low, close) prices.
The dash on the left reflects the opening price, and The dash on the right is the closing price. The top of the bar is the highest price at which the asset traded during the selected time period. The low point of a bar is the lowest price at which an asset traded during the selected time period.
Green bars are called buyer bars because the closing price is higher than the opening price.
Red bars are called seller bars because the closing price is lower than the opening price.
In any case, OHLC histograms help traders determine who is in control of the market - buyers or sellers. These columns form the basis of the next type of chart, called Japanese candlestick charts, which is the most popular type of Forex chart.
Japanese candlestick charts were first used by Japanese rice traders in the 18th century. They are similar to bars in that they also display the opening, high, low, and closing price values for a given period of time. However, in candlesticks, there is a rectangle between the opening and closing prices, also known as the "body" of the candle, and the lines below and above represent the minimum and maximum, and are called "shadows".
Many traders find Japanese candlesticks to be the most convenient when viewing Forex charts in real time.
Trading for Beginners: Forex Trading Systems
Now that you know how to start Forex trading, the next step is to choose the best Forex trading systems for beginners. Fortunately, banks, corporations, investors, and traders have been trading the markets for decades, so there is a wide range of different types of Forex trading strategies, which include:
Currency scalping is a type of trading that involves buying and selling currency pairs in very short periods of time, usually from a few seconds to several hours. This is a very practical strategy that involves the trader making a small profit from a large number of transactions and accumulating them.
Intraday Trading: Forex intraday trading is a more conservative approach that may be suitable for beginners. It focuses on four-hour or one-hour price trends. Trades can remain open from one to four hours. As a rule, they are held during the main trading sessions.
Swing Trading: Swing trading is a medium-term trading approach that focuses on larger price movements than scalping or intraday trading. This means that traders can keep a trade open for a few days or a few weeks. This type of trading is a good option for those who are engaged in trading for additional income, in addition to their main job.
How to Start Forex Trading from Scratch: 3 Forex Strategies for Beginners
Below you will find explanations of three Forex strategies for beginner speculators:
1. Breakout / Breakout
This long-term strategy uses breakouts as trading signals. Prices sometimes trade within a range between support and resistance lines. This is called consolidation. Breakout (breakout) is a situation when the price goes beyond the boundaries of consolidation, reaching new levels of highs or lows. When a new trend (up or down) forms in the market, it is always preceded by a breakout. Therefore, breakouts are considered by traders as possible signs of the start of a new trend. However, the problem is that not all breakouts lead to the start of new trends. Using a stop loss can help you prevent losses.
2. Moving average crossover
Another Forex strategy uses the simple moving average (SMA). Moving averages are an indicator that uses more historical price data than most strategies and moves slower than the current market price.
When the short-term moving average moves above the long-term moving average, it means that newer prices are higher than older prices. This indicates an uptrend and can be seen as a buy signal. Conversely, when the short-term moving average falls below the long-term moving average, this indicates a downtrend and can be considered as a sell signal.
Moving averages are often used not only to generate Forex trading signals, but also as a confirmation of the overall trend. This means that we can combine these two strategies using moving average trend confirmation to use breakout signals more efficiently and accurately. With this, we can ignore breakouts that are not in line with the general trend indicated by the moving averages.
For example, if we get a buy signal from a breakout and see that the short-term moving average is above the long-term moving average, i.e. indicates an uptrend, we can place a buy order. If not, it's better to wait.
3. Donchian channels
The Donchian Channels indicator was invented by Richard Donchian. You can change the parameters of Donchian channels as you wish, but for this example we will consider a 20-day period.
The indicator is generated based on the highest high and lowest low for a user-defined period (20 days in this case).
A breakout of the Donchian channel gives two options:
- Open a buy position if the market price has risen above the highest high in the last 20 days.
- Open a sell position if the market price falls below the lowest low in the last 20 days.
That's not all! There is another trading tip that will help you filter out breakouts that go against the long-term trend.
Look at the moving average for the last 25 and the last 300 days. The direction of the short-term moving average determines the acceptable direction. Therefore, you can open a position:
- Sell: If the 25-day moving average is below the 300-day moving average.
- Buy: If the 25-day moving average is above the 300-day moving average.
Closing these positions is similar to opening, but using the breakout of the last 10 days. This means that if you go long and the price drops below the 10-day low, it is best to close your position and vice versa.
How to Get Started in Forex Trading: Best Trading Platforms for Newbies
Let's take a look at some of the best Forex trading platforms for beginners. Before you start trading with a broker, you should research the currency trading software and platforms they offer. The trading platform is the central link in trading and your main working tool in Forex. When considering a trading platform, especially if we are talking about trading for beginners, make sure it meets the following points:
Do you believe that your trading platform will help you achieve the expected results? The accuracy of quoted prices, the speed of data transfer and the fast execution of orders - trust in these aspects is essential in the implementation of successful Forex trading. Especially if you plan to use short-term strategies, such as scalping.
The information must be available in real time, and the platform itself must be constantly available during the operation of the Forex market. This will give you a guarantee that you will be able to take advantage of any opportunity that presents itself to generate potential profits.
Will your funds and personal information be protected? A reputable Forex broker and a good Forex trading platform will do their best to keep your information safe and back up key account information.
It will also hold your funds in segregated accounts i.e. separately from own funds. If a broker cannot take steps to protect your account balance, it is best to find another broker.
Self account management
Any Forex trading platform should allow you to manage your trades and your account on your own, without having to ask your broker to take action on your behalf.
This ensures that you can immediately react to any market movements, seize opportunities as they arise, and control all of your open positions.
Does the platform offer built-in analysis or provide tools for independent fundamental or technical analysis? Many Forex traders trade using technical indicators and tend to trade much more efficiently if they have access to this information within the trading platform itself rather than somewhere else. This includes charts that are updated in real time and access to up-to-date market data and news.
Auto trading features
One of the advantages of Forex trading is the ability to open a position and set an automatic stop loss and take profit level, upon reaching which the transaction will be closed. This is a key moment for those who are learning trading from scratch. The very best platforms should be able to execute your trading strategies once you have set the parameters.
How to trade in the Forex market?
You have learned what trading is, what you need to start trading Forex from scratch, and what strategies even beginners in trading can use, now it's time to move on to the more interesting practical part, namely to start real Forex trading.
You can do this in just three steps:
- Open an account for trading.
- Download the trading platform.
- Open the New Order window and make your first trade!
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Paul Roberts 51 years old Born in Edinburgh. Married. Studied at University of Oxford, Department of Public Policy and Social Work. Graduated in 1997. Works at Standard Life Aberdeen plc.