Forex trading explained, avoid the pitfalls

Starting a career as a forex trader is not trivial, especially if you want to be successful and earn money in the stock market over the long term. Above all, the approach contains many pitfalls that discourage many novice forex traders.

Learn the basics of forex trading here, to understand trading, understand forex and how to progress and make money in the long-term financial markets.

What is forex?

Basically, the forex market is where banks, corporations, governments, investors and traders come to trade and speculate on currencies.

Forex is also called the “FX market”, “currency market” or “foreign exchange market”. It is the largest and most liquid market in the world, with an average daily trading volume of nearly $ 4 billion.

The forex market is open 24/7. Unlike stocks, it is a decentralized over-the-counter (OTC) market.

To get started, you need to master the forex jargon and terms most used in the currency market:

  • Base Currency: Currencies are quoted on the stock exchange in pairs, for example in the form EUR / USD for the euro against the dollar. The base currency is the first mentioned, here the EUR. It is the currency that the forex trader buys or sells and always has the value of 1.

  • Estimate currency: This is the counter-currency of the base currency. In the above example, it is the USD. The value of the base currency is expressed in terms of the quote currency. If EUR / USD costs 1.1200, it means that 1 euro is worth 1.1200 dollars.

  • Offer price (sale): This is the price your broker is willing to “bid” to “buy” the base currency you hold. It is therefore the selling price of the currency for the forex trader.

  • Asking price (buy): This is the price your broker “asks” of you in exchange for buying the currency of your choice. It is the purchase price of a currency. The purchase price is always higher than the selling price.

  • Difference: This is the difference between the purchase price and the sale price. In reality, it is the broker’s fee that the trader pays.

  • Foo: The smallest measurable value of the currency movement. The word “pip” stands for “percentage in points” and a pip is equal to 1/100 of 1% of your currency. For example, if the value of the EUR increases by only one pip, it means that its value has increased by 0.0001, going for example from 1.1200 to 1.1201 dollars.

Once you know the jargon, you can read some forex books and take online trading courses.

What is Forex Trading?

Trade explanation. Forex trading as far as retail traders are concerned is speculation on the price changes of one currency against another.

Trading in the currency market is an investment activity in the stock market, which allows you to earn money by buying and selling currencies, to take advantage of rising or falling prices.

For example, if you think the euro will appreciate against the US dollar, you can buy the EUR / USD currency pair at a low price and then sell it at a higher price to make a profit in forex.

Of course, if you buy the euro against the dollar and the euro loses value, you will make a loss. It is therefore important to be aware of the risk associated with forex trading and not just focus on potential gains.

How to start trading Forex?

To start trading forex, all you need to do is open a trading account with a forex broker.

Find the best forex broker for you, it must be regulated in your region and offer competitive (cost) spreads. If you are a novice forex trader, make sure your online broker offers rich training and education content on forex and trading.

When you open a forex trading account, your broker will offer you to download a trading platform. This is the interface from which you follow stock prices, perform your graphical analyzes and enter your trading orders.

Before opening a trading account with your own money, it is strongly recommended to start with a demo account, which is a virtual account with virtual money, but in real market conditions.

The demo account will allow you to practice and gain risk-free experience before starting forex trading.

Skills required to be successful in Forex trading

Forex trading attracts people because it is not necessary to take college courses or obtain diplomas to be successful.

It is an activity open to everyone a priori, but the vast majority of retail traders lose money on forex.

Indeed, while diplomas are not required, learning and understanding the basics of the stock market and trading are essential for success in the Forex market.

It is therefore still necessary to spend a lot of time and effort to learn how to trade on the financial markets. It’s not easy to get there, but if you are determined and disciplined, you can get there.

In addition to the theoretical and practical knowledge of the stock market, here is a non-exhaustive list of the skills you will need to achieve your goals in the forex market:

  • Self-control: Accepting a loss without getting nervous
  • Self-confidence: Believe in yourself and your trading strategy and don’t be afraid
  • Dedication – to become the best forex trader possible
  • Discipline – staying calm in a realm of constant temptation (the market)
  • Flexibility: to successfully negotiate changing market conditions
  • Organization – to form and strengthen positive business habits
  • Patience: wait for the trading signals with the greatest chance of success
  • Realism: To keep goals achievable and not be disappointed, don’t think you’ll get rich quick

It should be noted that discipline and organization are often the missing factors for forex traders losing money in the stock market.

Some rules to avoid the pitfalls of trading on the currency market

Here are some basic rules to follow in order not to be kicked out of the forex market before you start making substantial profits.

  • Don’t overlook the importance of training – every new career starts with training. Take the time to train in forex trading and master the different concepts and strategies.
  • Practice on a demo account: Start by practicing on a virtual trading account to test the platform, get used to analyzing charts and placing stock orders. This step shouldn’t take more than a few weeks or a few months, it’s only used to master the basics.
  • Start real trading smoothly: you can deposit your money and start trading forex, but only with small positions. Starting in real life is the hardest step, because the confidence gained in the demo is confronted with a new parameter, psychology. The skills mentioned above come into play at this stage and are the key to the success of the forex trader. Starting with small positions allows you to make rookie mistakes without consuming all your investment capital.
  • Expand the size of the position over time – the more you trade, the more experience and trust you gain. You can then start gradually increasing the size of your positions and aim for bigger gains.
  • Adopt strict risk management rules: Even after years of experience and earnings, every forex trader must maintain risk management (money management) rules to avoid losing too much. For example, do not risk more than 2% of the principal in a single position, or more than 5% of the principal in one trading day. Stop trading for a while after a three-game losing streak …

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