How Can I Start Trading?

Before you begin trading, you need to find the right broker. After you’ve chosen your broker, it’s time to open a trading account; if your broker offers a demo account, try one of those first. The process of opening an account is typically very simple, and depending on the broker, may or may not require software installation.

If you’ve opened a demo account, practice making a few risk-free simulated trades and then open your real account when you’re comfortable with trading. After you’ve opened your trading account, you need to fund it from an approved funding source and then make your first trade.

Choosing the Right Forex Broker

There are some key considerations you need to take into account when choosing the right Forex broker for you. Remember that you are giving over real money into the care of your broker, and you should know what kind of recourse you have should they prove to be untrustworthy. It is also important to work with well-recognized and reputable market maker and ensure that their servers exhibit high stability and are subject to regulation in at least one, and preferably two, countries.

A reputable broker will ensure the security of your investment and a jurisdiction for handling appeals, should the broker become bankrupt. Keep in mind that brokers with a large number of employees will be better able to meet your needs when you place a phone order. The most important consideration for choosing a broker is their legitimacy; don’t jump on board with fly-by-night operations. After you’ve identified which brokers meet these initial requirements, then consider any perks or other offerings which would give you more value for your investment. Choose a broker with an easy-to-understand platform and the features in which you’re most interested.

Automated Forex Trading

This type of trading allows you to trade currencies using analysis-based software which are designed to help you make decisions about buying and selling various currency pairs. You have to teach your automated trading software how to decide when to trade based on signals that come from technical tools and analysis.

This gives the software “signals” to look at, just like a binary option robot does, and when the signals point the same way, the software makes a decision about buying or selling that specific currency pair. Keep in mind that when using automated trading software, you’re removing your instincts and intuition from the trade. Even the most accurate automated trading system still makes mistakes and can misread data that you might take as significant because of other knowledge available to you.

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Forex Demo Accounts

Demo accounts are an excellent way to learn the basics of Forex trading without risking your investment. A demo account is very much to your advantage; it is a useful way to acquaint yourself with the trading platform and its features. You’ll also be able to test out some different trading strategies to find which style suits you best. Nearly all demo accounts offer full functionality and real-time market prices, without any risk to your investment while you’re practicing trades. Demo accounts give you an opportunity to familiarize yourself well with the Forex market in a safe and risk-free manner.

Video – Forex Trading for Beginners

Transaction Basics

Forex trading is based on buying and selling pairs of currencies. If you were buying the currency pair EUR/USD, you would be buying the first (EUR) and selling the second (USD). If you were selling the same pair, you’d be selling the first (EUR) and buying the second (USD). As demand grows for buying the pair, the euro gains strength, while the dollar loses strength. Conversely, if the demand to sell the pair grows, the euro gets weaker while the dollar gets stronger. These movements cause the exchange rate to increase or decrease accordingly.

Currency Names & Symbols

Currencies are designated using a three letter abbreviation. The letters denote which country the currency originates in, as well as the name of the currency. For example, USD stands for “United States Dollar”. AUD would denote Australia Dollar, while CAD is indicative of the Canadian Dollar. In the Forex market, there are some currencies which are the subject of more intense trader focus.

These currencies are called “majors” and are the most widely traded of all currencies. Relative to the Forex market, the “major pairs” are not to be confused with the “majors”; the major pairs are those pairs which include USD and a secondary currency. Pairs without USD are not considered major pairs. The first currency in a pair is typically called the base currency.

Longs and Shorts

In the most basic terms, if you make a trade based on the assumption that the currency pair’s price will rise, you’re trading on the long position; conversely, if you’re trading based on the assumption the price of the pair will fall, you are trading on the short position. The two ways of profiting in the Forex markets are therefore known as the “longs” and the “shorts”.

This position is established when you initiate the trade. If you’re buying, you’re taking the long position; if you’re selling, you’re taking the short position. An easy way to keep this straight is to remember that “sell” and “short” begin with the same letter. Buying and selling can be confusing in the Forex market, because it’s easy to mistake one for the other. In order to keep it straight, remember that the “buy” and “sell” positions are based on the first currency in the pair; for EUR/USD, you are either buying or selling the euro (while simultaneously doing the opposite with the dollar (i.e., either selling or buying, respectively).

What is Leverage?

Using leverage in the Forex market involves borrowing the initial capital for an investment. Instead of raising capital, borrowers get it from others instead of using more conventional means to raise the initial investment amount. When used on the Forex market, it is typically capital borrowed from the broker.

Forex trading is especially good for offering higher leverage from the viewpoint of preliminary margin requirements; traders have the ability to build and maintain control of large sums of money. If you’re looking to calculate leverage based on the margin, simply divide the transaction value by the margin amount required from you. Leverage may be used by individual investors or corporate investors and can greatly increase the available returns for an investment.

Interest Rates

An interest rate is an amount that is being charged for the use of money. In the Forex market, interest rates can impact trading pairs because when the rate of return is higher, so is the interest that is accrued on invested currency. This, in turn, raises the profit realized from the investment.

This makes this type of Forex trading essentially an exercise in buying currencies with a low interest rate in order to buy the currencies with higher rates; doing this is known as “carry trading”. When you use the carry trade strategy, there are risks associated with the fluctuation of currencies that could offset the rewards gained on the interest. This happens when the currency that has a higher rate suddenly falls below the rate of the other.

Stock Market and Forex Correlations

Financially, correlation is typically considered to be a statistical measure indicating how two different securities are moving with relation to one another. In the Forex market, correlation is used to help figure the correlation coefficient, which has a value ranging from -1 to +1; a +1 coefficient is incredibly rare and is the result of perfect positive correlation, meaning that as one security increases or decreases in value, the other will follow suit every time. Conversely, a perfect negative correlation, denoted as -1, will ensure that the price of one security increases or decreases in perfect opposition to the other.

Correlation coefficients of 0 indicate that movements are completely random and have no correlation. Perfect correlations hardy ever occur in securities. Correlations should not be exclusively relied upon for buy and sell signals; instead, correlations should be considered in tandem with other market indicators.

Trend

The general direction in which an asset or market is moving is called a trend. Trends may be short-term or long-term; trends may also be mid-range, or intermediate, in length. If a trend can be identified, it can be very profitable because trader can then “trade with the trend” to maximize returns.

Generally, trading with the trends tends to be the easiest and most profitable strategy of Forex trading. If the market or asset is on a generally-upward trend, it’s not wise to invest in that trend being reversed. Trading with the trend may be one of the most effective strategies for Forex trading and is especially useful for novice traders.

Support and Resistance

When a stock or price repeatedly fails to rise above a certain point, this is known as the level of resistance. The level of resistance may also be referred to as the ceiling, because prices appear to be trapped underneath it. Prices that do not fall below a certain point are referred to as support. This may also be referred to as the floor, because it acts to prevent the price of an asset from being driven down past a certain point.

Both ceilings and floors are important indicators for the price of an asset, but should be taken into consideration with other indicators for the asset’s potential future price and market movement.

Moving Averages

In technical analysis, the moving average is a useful indicator that helps to smooth out the action of a price by acting as a filter to remove the background noise of randomly fluctuating prices. Moving averages are lagging indicators that follow trends based on previous prices.

There are two different types of moving averages that are used most commonly; these are the simple moving average, or SMA, which makes simple averages of securities over a specifically defined amount of time periods, and the exponential moving average, or EMA, which uses a formula that gives additional weight to the most recent prices. Moving averages, or MAs, are commonly used to identify the directions of trends, as well as determining the level of resistance and support.

Relative Strength Index (RSI)

The relative strength index, or RSI, is a technical indicator of momentum which makes comparisons between the extent of recently-made gains versus recently-made losses in an effort to determine whether various assets are being overbought or oversold. Traders who make use of the RSI should keep in mind that large price surges and price drops for any asset can cause false buy and sell signals to be generated.

It is a good complementary tool to be used in conjunction with other tools to choose stocks. Some of the indicators which should be considered in tandem with the relative strength index are the support and resistance levels and market trends.

Basic Trend Trading Strategy

Trading with the trends is a strategy for trading that seeks to increase returns by analyzing the momentum of a particular asset to determine its direction. To trade with the trend, traders should enter the long position when the price is trending upward and the short position when the trend is downward. The strategy works on the principle of asset prices continuing their upward or downward motion over a short period, an intermediate period or over a longer term. You can try this with binary options brokers like 24option.

Once a trader assumes the long or short position, they will retain that position until the trend begins to reverse. When trends begin to reverse, traders should take precautions to ensure their investment is not lost.

Carry Trading

Carry trading involves selling specific currencies due to their lower interest rates and buying other currencies due to their high interest rates. The trader profits by capturing the difference between these rates, which has the potential to be a substantial sum, especially given various types of leverage that may be used. The risks associated with carry trading typically center on the uncertainty presented by exchange rates.

If one of the pair of currencies falls below the value of the other, the trader stands to lose their investment. Carry trade transactions are usually carried out using quite a bit of leverage, meaning that even small moves in the rates of exchange may end up translating into huge losses unless the position has been properly hedged.

Managing Risk

In the Forex market, managing risk includes identifying, analyzing, and accepting or mitigating the uncertainties of the decision-making concerning the investment. This is an essential part of the transaction for serious investors and fund managers because it is an attempt to quantify potential loss and taking (or not taking) action according to their objectives for investing and tolerance for risk.

Insufficient risk management can lead to excessive losses and consequences which are very severe for both companies and individuals. The 2008 recession owes some of its roots to insufficient risk management associated with extending credit to borrowers who were not properly qualified. Managing risk consists of two distinct steps; first, determine which risks are inherent in the investment, and then implementing strategies which are suited to your specific objectives.

References and Further Reading

1. A neural network and web-based decision support system for forex forecasting and trading (KK Lai, L Yu, S Wang – Data Mining and Knowledge Management, 2005)

2. Autonomous forex trading agents (RP Barbosa, O Belo – Advances in Data Mining. Medical Applications, E- …, 2008)

3. Designing a hybrid AI system as a forex trading decision support tool (L Yu, KK Lai, S Wang – … Intelligence, 2005)

4. A Forex trading system based on a genetic algorithm (L Mendes, P Godinho, J Dias – Journal of Heuristics, 2012)

5. A case study on using neural networks to perform technical forecasting of forex (J Yao, CL Tan – Neurocomputing, 2000)

6. Multi-Agent Forex Trading System (RP Barbosa, O Belo – Agent and Multi-agent Technology for Internet and …, 2010)

7. Application of neural network for forecasting of exchange rates and forex trading (N Maknickienė, A Maknickas – The 7th international scientific …, 2012)

8. The distribution of first-passage times and durations in FOREX and future markets (N Sazuka, J Inoue, E Scalas – Physica A: Statistical Mechanics and its …, 2009)

9. Trading volumes and transaction costs in the foreign exchange market: evidence from daily dollar–yen spot data (P Hartmann – Journal of Banking & Finance, 1999)

10. Short-term predictions in forex trading (A Muriel – Physica A: Statistical Mechanics and its Applications, 2004)

11. Systems Design, Process Performance and Economic Outcomes (P Davamanirajan, RJ Kauffman… – … , 2006)

12. Interday foreign exchange trading using linear genetic programming (G Wilson, W Banzhaf – Proceedings of the 12th annual conference on …, 2010)

13. On the utility of trading criteria based retraining in forex markets (A Loginov, MI Heywood – 2013)

14. FOREX trading strategies and the efficiency of sterilized intervention (C Kubelec – Department of Economics (mimeo), …, 2004)

15. Do Reuters spreads reflect currencies’ differences in global trading activity? (P Hartmann – Journal of International Money and Finance, 1998)

16. Evolving Chart Pattern Sensitive Neural Network Based Forex Trading Agents (GI Sher – arXiv preprint arXiv:1111.5892, 2011)

17. Toward a theory of marginally efficient markets (YC Zhang – Physica A: Statistical Mechanics and its Applications, 1999)

18. Analysis of hybrid soft and hard computing techniques for forex monitoring systems (A Abraham – Fuzzy Systems, 2002. FUZZ-IEEE’02. Proceedings …, 2002)

19. Forex Trading Using Intermarket Analysis (LB Mendelsohn – 2006)

20. Forex Revolution: An Insider’s Guide to the Real World of Foreign Exchange Trading (P Rosenstreich – 2005)