This article will cover forex trading basics and all you need to know about forex trading for beginners.
Quick Facts about Forex
- The forex market is the largest financial market in the world, with an average daily trading volume of over $6.6 trillion.
- Forex trading is decentralized, meaning that it takes place globally and is not restricted to a single exchange.
- Unlike the stock market, the forex market is open 24 hours a day, 5 days a week.
- The most actively traded currencies in the forex market are the US dollar (USD), Japanese yen (JPY), British pound (GBP), Chinese renminbi (CNY) and Swiss franc (CHF).
- Because of the vast size and liquidity of the forex market, it is considered to be highly efficient, meaning that prices reflect all publicly available information at any given time, which makes it hard to consistently beat the market by using insider information or other forms of market manipulation.
What is Forex Trading?
Forex is the short form for Foreign Exchange. Forex trading is the process of gambling or speculating on currency prices in order to make a profit.
Currencies are traded in pairs. A forex trader buys and sells currencies on the speculation or chance that one currency will rise or fall in value against the other.
What is the Forex Market?
The Forex Market or FX market is where currencies are traded. It is the largest financial market in the world both by volume and liquidity. The market is continuously in motion since exchange rates fluctuate by the second.
How Forex Trading Works
The value of every currency is always changing and this is what forex traders try to take advantage of by buying low and selling high.
For example, let’s say that you speculate the value of the U.S. dollar (USD) will go up compared to the value of the Japanese yen (JPY). You could buy dollars and sell yen in the fx market. If you are right and the value of the dollar goes up, you will have made a profit because you can now sell the dollars you bought for more yen than you paid for them.
It is similar to the stock market, where you buy shares of a company in the hope that the value of the company will increase, and then you can sell the shares for a profit. But in forex trading, you buy and sell different types of currencies, instead of shares of a company.
The FX market is open 24 hours a day. In Nigeria, forex trading for the week opens at 11:00 pm on Sunday and closes at 10:00 pm on Friday. In contrast to stocks, all forex trading is over-the-counter (OTC). This means currencies are bought and sold through a network of banks and other financial organizations instead of on a central exchange.
Find out more about Stock Exchanges.
Forex Trading Strategies
1. Trend Trading
Trend is when the price is moving in one main direction, whether up or down. Trend trading is a strategy forex traders use to get profits when a currency has an upward trend.
2. Position Trading
Position trading is a long-term forex trading strategy. It involves keeping trades open for an extended period of time such as months in order to make gains.
3. Range Trading
Range trading is an active trading strategy by fx traders to buy low and sell high over a short period.
4. News Trading
News trading is a strategy that is based on breaking news about currencies, stocks and other financial markets.
5. Swing Trading
Swing trading is a forex trading strategy that holds the position of a given currency for more than a day. Here, fx traders try to capture short- to medium-term gains within this period.
Scalping is a trading strategy that involves trading currencies based on brief periods of time throughout the day.
7. Day trading
Day trading means buying and selling currencies within a day, or even within seconds.
8. Retracement Trade
Retracement trades are short-term periods of a downward trend, for instance, followed by a return to the previous upward trend.
Popular Charts Used in Forex Trading
1. Line Chart
Line chart uses a simple line to display the currency pair’s price points over a specified period.
2. Bar Chart
The bar chart displays the four prices of a pair, from highest to lowest and opening to closing. Each bar on the chart represents a specific time interval, such as an hour, day, or week, and the length of the bar indicates the price range for that interval.
Each candlestick on the chart represents a specific time interval, such as an hour, day, or week, and the body of the candlestick represents the range between the open and close prices for that interval. The top of the upper shadow represents the highest price, and the bottom of the lower shadow represents the lowest price.
The colour of the candlestick can indicate whether the currency pair closed higher or lower than the opening price. If the close price is higher than the open price, the candlestick will be green or white, and if the close price is lower than the open price, the candlestick will be red or black.
There are also less popular charts like Heads and Shoulders, Triangles, Englifing Pattern, and Ichimoku.
How To Start Trading Forex in Nigeria
1. Choose a Trustworthy, Online Broker
The broker is the firm that will link you to the fx market to buy and sell foreign currencies. Do your research and start with demo accounts.
2. Open and Fund Your Account
Once you’ve decided on a broker, open an account by following that broker’s instructions. They will confirm your identification, and your bank account will be connected. Afterwards, you fund your forex account with a credit card, a debit card, a cheque, or a third-party bank.
3. Install Your Trading Platform
There are tons of trading platforms, but brokers have their trading platforms. Some feature services from outside vendors. You will download the trading software and through the interface, you can trade on the market.
Online Forex Brokers in Nigeria
Advantages and Disadvantages of Forex Trading
Below are the advantages and disadvantages of Forex Trading:
|1||High liquidity||High risk|
|3||24/5 trading||Lack of regulation|
|5||Flexibility||Emotion-based decision making|
|6||Potential for high returns|
Advantages of Forex Trading
High liquidity: The FX market is the largest financial market in the world. This means you can buy and sell currencies easily and quickly.
Global market: Forex trading is decentralized. This means it is not restricted to a location or a single exchange.
24/5 trading: The forex market is open 24 hours a day, 5 days a week, which allows traders to react to breaking news and events as they happen.
Leverage: This allows traders to control large positions with a relatively small amount of capital.
Flexibility: Forex traders can trade on different markets at the same time and adapt to changing market conditions.
Potential for high returns: Forex trading has the potential for high returns, but it also carries a high level of risk.
Low costs: Forex trading has very low costs including fees and commissions.
Disadvantages of Forex Trading
High risk: Forex trading is risky and can result in significant financial losses.
Volatility: Currencies can fluctuate rapidly and unpredictably, which can make it difficult to manage risk.
Lack of regulation: Forex market is not as regulated as other markets, and some brokers may engage in unethical practices.
Complexity: Forex trading can be complex and difficult to understand, especially for beginners.
Emotion-based decisions: Forex traders can be influenced by emotions such as fear and greed, which can lead to poor decision-making.
5 websites to learn Forex trading as a beginner
Can I teach myself forex?
You can learn forex on your own if you’re willing to put in the work. Sharpen your skills by researching trustworthy sources of information like those listed above and practising with a demo account. You might eventually even create your own trading method.
How much should I invest in forex as a beginner?
You can start trading with as little as $10 and work your way up. The more you invest, the more potential returns.
Which forex currency is best for beginners?
The Euro and US dollar: EUR/USD. It is the most straightforward and stable currency pair to trade. It is moderately volatile and supported by a stable economic environment. The GPB/USD is another good starting pair.
It is important to note that forex trading is risky and can cause huge financial losses. Hence, it is recommended to consult professionals and do your research before investing anything substantial.