Table of Contents
Summary:
Starting forex trading means learning about the market, using analysis, managing risk, knowing market hours, and practicing before using real capital. These steps are crucial for beginners to build a good foundation and increase the chances of success.
Main Points
- Understand the Market: Learn about currency pairs and market dynamics.
- Use Analysis: Combine fundamental and technical analysis.
- Know Market Hours: Trade during peak activity periods for better opportunities.
- Risk Management: Implement a risk management strategy, like the 2% rule.
- Practice First: Conduct practice trades before investing real money.
The foreign exchange market (forex) is active, unique, and very large.
In fact, forex is the largest market in the world. It’s also very liquid. That means many chances for traders who know the market and how to work with it to find good returns. That’s not a guarantee of success for every trade or every trader, of course. It’s just a brief explanation of why so many traders like forex.
If you’re just starting to learn about forex, you may have lots of questions. Keep reading for tips about forex trading for beginners.
Tip No. 1: Take the Time to Understand the Forex Market
Still learning how forex works in the big picture? This brief review of forex for beginners can help. There’s plenty more to learn about this market, but these details will help you build a knowledge base.
The forex market is all about trading pairs of currencies. The pair concept itself is pretty simple.
Every trade on the forex market involves two currencies matched together. For example, the US dollar and Japanese yen pair is USD/JPY. These pairs show the value of one currency as compared to another (i.e. the value of US dollars as compared to Japanese yen).
As USA Today explains, the quote — the number after the six-digit pair — shows the cost to buy one unit of the first currency with the second currency. If the quote of USD/JPY is 155.2, it means 1 US dollar ($1) is worth 155.2 yen.
Traders work through technical and fundamental analysis to find price changes in one currency as compared to another. The basic idea is to buy pairs where the first currency rises in value more than the other currency. That type of growth allows traders to sell their assets for a positive return.
The forex market also contains commodities, indexes, cryptocurrency, and more, as Investopedia points out. A variety of spot markets and derivative markets are available, too.
Tip No. 2: See the Value of Fundamental and Technical Analysis in Forex Trading
Fundamental analysis is all about finding and reviewing news related to the currency pairs you want to trade. Technical analysis is all about charting asset movements and predicting future price action based on those movements.
Both types of analysis have their place in forex trading, and certainly in forex trading for beginners. Fundamental analysis is useful because many news events and financial forces can majorly impact the value of a currency. Technical analysis is important because previous activity can show what a currency might do in the future.
It’s up to you to find the mix of analysis that best supports your goals and overall approach to trading forex.
Tip. No. 3: Keep Forex Market Hours in Mind
Forex traders on the retail level (i.e. single traders like you) can trade currencies five days a week. The market opens to such traders Sundays at 5 p.m. (Eastern Time) and closes on Friday at 5 p.m.
However, more market activity means more chances to earn positive returns. There are four major trading times. These are the times when most traders are active in Tokyo, London, New York, and Sydney.
The periods when these sessions cross over have very high rates of trading, meaning lower slippage and tighter spreads.
Tip No. 4: Make Risk Management in Forex Trading a Top Goal
No trader wins every single one of their trades. Instead, they build a good trading strategy and follow it over time, even after they lose out on one or many trades. Over time, traders who follow this system can win many more trades than they lose.
Trading based on emotion, or in response to a recent loss, can often lead to more failure. Analysis and reasoning are key to finding good trades on the forex trading market and acting on them.
One general, widely followed rule for risk management is to limit the impact of any single trade. The 2% risk management policy says to never risk more than 2% of your total account value on a single trade. For forex trading beginners, a 1% risk policy can help to get a better feel for the market without risking too much sudden loss.
Putting this limit on your trading activity acts as a helpful guardrail. It can stop you from trading just to make up for a loss.
It’s a natural reaction to want to go “on tilt,” trying to earn back the funds lost on a trade. When you have a clear rule to control that reaction and commit to following that rule, you can easily improve your risk management.
Tip No. 5: Practice Forex Trading Before Diving into the Real Thing
The concepts of the forex market — how it works, the basic idea of currency pairs, the influence of large market players — is crucial to being an informed trader. However, learning how the market works on a daily basis is just as important.
Resist the urge to jump right in and use your own capital to start making trades. Instead, consider dry runs and practice trades. Use your analysis, apply your trading strategy, and track the results. You can chart your performance on these dry runs to figure out your returns had you used real funds.
Wondering how to start trading forex for beginners? Once you have a strategy that works, consider prop trading as your next step. Prop trading platforms might be the best forex trading platform for beginners. Why? For one simple reason: You don’t have to risk your own funds with each trade. You can also try to test your preliminary strategy in the FundedNext Free Trial Account.
Prop trading is a great way to gain experience, improve your forex trading approach, and earn real-life returns while limiting your own financial risk exposure.
The Evaluation Challenge at FundedNext is the perfect starting point for forex beginners. Achieve your goal in 2 phases with very realistic profit targets to start trading. Learn more and sign up now!
