The world of forex trading is intimidating. With nearly $7 trillion changing hands every day, the foreign exchange market generates numerous opportunities for traders to generate profits. But conditions can change just as fast. This is why gaining proper knowledge and following the right steps is critical.
Here are five key steps you should follow before making your first trade in the foreign exchange market:
Know What Forex Trading Is
The first logical step is learning what is forex trading. It involves buying and selling currencies in the global market. Unlike the stock exchange, where shares of companies are traded, forex trading involves currency pairs. In simple terms, a participant buys one currency and simultaneously sells another.
The foreign exchange market is decentralised, which means all trades are over-the-counter (OTC). The market is open 24 hours a day, five days a week. This makes FX trading highly accessible for beginners and busy professionals.
The FX market is highly liquid, offering numerous opportunities for generating substantial profits.
Choose Currency Pairs to Trade
Next, choose which currency pairs you wish to trade. Beginners are recommended to start with major currency pairs, which include:
- EUR/USD
- USD/JPY
- GBP/USD
USD is the world’s primary reserve currency and is involved in almost 90% of foreign exchange transactions. All major currency pairs are highly liquid and have low spreads. You will find ample information, strategies, and tools to understand the factors that control major currency pairs.
You can also trade minor and exotic currency pairs, such as:
- EUR/GBP
- AUD/CAD
- GBP/JPY
- NZD/JPY
They are less liquid and have wider spreads. However, they can be beneficial for long-term investment.
Create a Forex Trading Strategy
Starting forex trading without determining a strategy is like playing a video game without knowing the rules. A trading strategy gives direction and allows you to enter and exit positions at strategic times.
Common forex trading strategies include:
- Scalping
- Day trading
- Swing trading
- Price action trading
- News trading
- Position trading
- Mean reversion
Assess your capital amount, risk tolerance, and long-term financial goals to choose a trading strategy that works best for you.
Choose a Reliable Broker
Once you’ve created a robust trading strategy, it is time to choose a broker. A reliable forex broker offers the following features:
- Variety of trading instruments
- Compliance with regulatory financial bodies
- Minimum deposits
- Tight spreads and minimum commissions
- Availability of educational resources
- Responsive trading platform
- Positive customer reviews
Experts recommend using a demo account before investing real money. It will help you understand the live trading environment, test your trading strategy, and identify weaknesses.
Build Emotional Control
Forex trading is a high-paced venture. Currency prices fluctuate in the blink of an eye, leaving you feeling uncertain and even hopeless. Many beginners end up doing emotional trading, losing their capital.
Practice emotional control and learn to stick to your trading strategy. Implement Stop-loss orders, keep a trading journal, and take frequent breaks to reassess your moves.
