What is forex trading?
The strongest structure anchors on a strong foundation. In the same breath, let us begin this adventure by building a strong foundation. Forex trading entails the buying and selling of currency/currency pairs in the forex market. The market is the place where people, businesses, and governments exchange foreign currencies.
Retail participants in the forex market make trades via a forex broker. Primarily, forex trading entails exchanging one currency for another to profit from the difference in opening price and closing price.
Forex trading comes in different styles and types. In the forex market, one is investing, day trading, or swing trading.
Let us describe each style:
- Also called intraday trading.
- It entails opening positions and closing them before the trading day ends.
- The primary trading strategy in day trading is scalping.
- The pace of trading is fast, and it involves small but incremental earnings
- Traders hold positions longer than day traders but shorter than position traders.
- Entails holding a position with a view on exploiting sudden price swings
- It is a generic term that might refer to day trading, swing trading, and more.
- They are usually applied to long-term position trading because it entails holding trades for extended periods to gain from the long-term value.
It matters what trading style one selects because it will determine one’s profitability. Each style has unique characteristics in terms of risks and rewards. Above all, whether one is a professional trader or not, success comes only when utilizing a reliable broker.
Basics of orders in forex trading
Forex trading takes place via orders. To enter a position, a trader opens a market order that the forex broker then executes. A market order is the most basic and commonplace of all forex order types. The name derives from the fact that one enters the market at the prevailing market price. Also, a market order is closed at best possible market price.
Other forex order types include:
A limit order is a pending order type where the broker settles a trade at the specific price specified by the trader. A limit buy order tells the broker to buy an asset below the prevailing market price. Contrarily, a limit sell order asks the broker to sell at a price above the current market price.
On the other hand, stop order stops a broker from executing a market order until it reaches a pre-selected price called stop price. It is a risk mitigation play that ensures certainty in a volatile market. A buy stop order tells the broker to execute the trade above the market price. On the other hand, a sell stop order tells the broker to sell at a preselected price below the prevailing market price.
Seven Tips of How a Beginner Can Become a Pro
1. Start with a plan!
Forex trading is a severe income earner for many professional traders. Before one gets there, many things have to happen. First, one needs a plan. But what is a forex trading plan? A trading plan is a tool for making decisions for professional forex traders. It includes the trading strategy/trading system, risk management procedure, motivation for trading, record keeping strategies, capital available for trading, and more.
Why do you need a trading plan? Forex market is fast-moving, and it can move against your position fast without warning. With money on the line, the emotional toll is unbearable when a trade is slipping through your fingers. A trading plan, therefore, ensures that you remain rational in such moments. A trading plan instills the right discipline that results in a forex trading pro.
To come up with the right trading plan, be sure you know why you want to trade first. Find out the amount of time per day you can allocate to trading. Additionally, delineate your goals, develop an ideal risk-reward ratio, find out how much money you can start with, learn about the forex market, and record your trading activities.
2. Define an ideal risk-reward ratio
Admittedly, we are all in forex trading for the reward but without forgetting the immense risks involved. The good thing is that just as you can decide the amount of reward you want, you can also choose the risk amount. Risk-reward ratio analysis should be a cardinal point in your trading strategy.
Let us first understand what the risk-reward ratio stands for. The risk-reward ratio refers to the percentage of profits you aim to earn in relation to the percentage of loss you are willing to suffer. Always ensure that the risk level is lower than the reward level.
Professional traders prefer rewards to be at least three times the risk level. It is to say that if one can lose 1 pip, then one should regain by at least 3 pips. The wisdom behind this thinking is that the profit level expands faster when, for every 1 dollar lost, one can regain three. It ensures that your profits expand faster. It will take ages to grow profits if you take two steps ahead and one backward.
3. Analyze your performance, and do it honestly
It is where the diary in your trading plans comes in. As part of your trading plan, always note down the good and the bad trades. Include the details about the circumstances surrounding the trades. If you remained disciplined and followed pre-set strategies to make trades, then you will know what strategies did not work and why. Also, you take note of the winning strategy and whether there is room for improvement.
Ensuring honesty when analyzing performance implies noting gains and losses without favor. Taking note of all sides of the trading coin shines a light on your capabilities. Performance analysis details the missteps you have taken and what led to the missteps. If it is your analysis, then noting the activities surrounding the trades will pinpoint exactly what went wrong. This way, you can easily fix the problem in readiness for better and profitable trades in the future.
4. Learn charts and forex charting tools
As part of the forex trading plan, we already specified that learning about the market is critical. The forex market is wide, and it entails loads of information. However, the basics that every trader must understand include charts, how to read them and, how to use various charting tools to develop a winning strategy.
A forex chart is a visual representation of the behavior of the price action of the asset in question. The chart below shows the behavior of the EUR/USD price from June 26, 2020, to date. Notice the red and green bars – called candlesticks.
The candlesticks chart is the most popular in the market because of its detail. It shows the highest price of the currency pair, the lowest price, the opening price, and the closing price during the trading session. To become a pro, you must learn to watch such a chart. For example, you must learn how to identify chart patterns and trends.
5. Take note of your psychology as a trader.
Popular wisdom among professional traders is that one is not ready for forex if one’s adrenaline is insufficient. Forex trading takes a huge emotional toll on investors because of the pace of price movement. It gets worse when you participate in a volatile market.
Psychology matters in forex trading entail the fear, the excitement, the anger, greed, and all the other feelings you have when entering and exiting trades. These feelings contribute immensely to the outcome of your trading decisions. When making the decisions, there is always a psychological bias based on the most potent feelings.
Therefore, it follows that one is better off learning about one’s psychological biases. Are you driven by greed or fear? These feelings are not always useful. Desire, for instance, might lead you to lose profits because you wanted unrealistic gains. Anxiety, on the other hand, could make you forego a great chance to earn huge profits. To help mitigate the human factor, traders can choose to use forex trading robots to automate decision making.
6. Do not overtrade
The question one must answer here first is, what is overtrading? Overtrading refers to traders opening too many positions with a view on striking a quick fortune. Many times, this belief turns out wrong, and it precipitates a massive hemorrhaging of funds from traders’ accounts. Common sense demands that one exercises moderation with an eye on consistent returns.
Admittedly, opening many trades makes sense, but only when the strategy behind it is reliable. However, it would be impossible to develop more than three winning strategies within a day. Instead, one is likely to repeat one mistake in all the trades hence exposing oneself to immense risks.
Overtrading could also imply overleveraging positions. Similarly, the idea here is to strike a fortune in the shortest time possible. In the same way, overleveraged positions expose traders to more significant risks. Instead, always stay true to your trading plan. Ensure you follow the strategies developed in the plan.
7. Be pragmatic
Pragmatism in forex trading refers to traders adapting to the fast-changing nature of the market. A pragmatic trader has quick instincts, which means the traders also trust his/her instincts. Instinct is the extra line of defense against losses. Others include a trading plan, robust trading strategies, and discipline. It is to say that you are free to follow your guts even after soaking in loads of information concerning the market during analysis.
Professional traders boast of long and checkered experience. Most of them have scars that remind them of the numerous mistakes they made on their way up. What does this mean? Pragmatism entails making mistakes, getting hurt by those mistakes, but later pulling yourself up.
As a pro trader, you will look at your scars and appreciate the process that made you successful. In conclusion, we emphasize that Pros do not only trade because of the profit potential. Pros love what they do, and they are willing to take unthinkable risks to attain their goals.