With a global daily trading volume of around $6.6trn, forex is considered to be the largest and most liquid asset market available to traders today. It is no surprise, then, that new investors see the buying and selling of currency as a viable and potentially lucrative career path.
What are the benefits of forex for beginners?
The forex market has a few characteristics that make it well-suited to traders with less experience. Accessibility is chief among them as newbies can partner with a broker and begin making trades on margin without a large initial investment. Leverage is a very popular concept and one of the reasons why beginners look to get started in forex before branching out to other assets.
If you want to select a broker to use leverage and make your venture into forex trading easier, reading an FXTM broker review will give you a clear idea about what to expect. Here, you can also compare forex brokers to find the best third party for your financial requirements – before opening a demo account with the broker that is right for you.
The vast number of feature-rich brokers, platforms and mobile apps available online is one of the reasons why forex has exploded in popularity recently. The tech advancements in the industry have made it incredibly easy for traders to track and manage their portfolios across a range of devices.
Because transactions are conducted over-the-counter (OTC) with the assistance of a broker, traders can also enter and exit the market 24 hours a day. The round-the-clock nature of forex, which kicks off in the UK late on Sunday in Sydney and concludes at 10pm on Friday in New York, gives new traders ample opportunity to buy and sell during the week.
Compared to stocks, it is also easier to build a strategy around popular currencies. There are only four ‘major’ currency pairs: GBP/USD, EUR/USD, USD/JPY and USD/CHF. These currency pairs generate huge trading volumes, with EUR/USD the most popular overall, accounting for around 20% of all transactions.
This is a great place to start as major pairs have smaller spreads compared to ‘exotic’ pairs due to the higher volume of trades, which reduces the chances of ‘slippage.’ The four major pairs are inherently lower risk and can be used as part of a cautious yet creative strategy for new investors.
Other benefits of forex trading include its low transaction costs based on pips, its higher levels of liquidity, and the ability to both buy and sell pairs depending on what is happening in the market. Having the option to go both long and short allows you to benefit if you think that a base currency is going to either rise or fall in value. This flexibility is unique to forex.
Finally, you can also get a head start on potential movements in the market by keeping track of external factors such as economic news and trade deals. When combined with fundamental analysis, you can enter and exit the market based on solid, relevant insights and data, which will improve your decision-making and chances of success.
Are there any tools or strategies that can help new traders?
Risk management should be a top priority when you start trading as you want to ease yourself into the process of buying and selling currency without the fear of losing your account during the early stages. There are several types of risk associated with forex, including market, leverage, interest rate and liquidity risks. It is important to be aware of potential pitfalls and to use the tools available to you to mitigate risks.
Education and demo accounts
As noted earlier, there are demo accounts available that give you a platform to develop your trading skills using virtual funds. Because everything happens within a simulated market environment, you will be able to recreate the feeling of trading for real money. This will allow you to test different strategies to see what works best for you and, perhaps most importantly, make mistakes and learn from them without the risk of losing actual money.
Brokers also offer educational services that help you to get up to speed with the different aspects of forex trading. The information gleaned from courses and training can be applied immediately – even if you are only using a demo account.
A critical tool in a new forex trader’s armoury is the stop-loss order. This tool will protect your investments when unexpected market movements occur by closing them at a predefined price. You always enter trades with the intention of making gains, but if an asset drops in price quickly, a stop-loss will limit your losses.
Experienced traders often use stop-losses to prevent them from losing more than 2% of their current trading balance. There are several different types of stops that can be deployed in forex, including equity, chart, margin and volatility stops. You can even use protective stops to shore up profits before market corrections. Learning how to use stop-losses is an important step for new traders as they are among the most effective safety nets.
Automated systems and trading ‘robots’ have made the task of implementing strategies easier for investors in recent years. Automation does carry a certain degree of risk as it relies on a set script of actions, but there are benefits in that this style removes personal emotions and mistakes.
Trading platforms now also allow new traders to copy trading patterns from other more experienced traders. Copy trading is part of a new wave of social features that are available at some brokerages. While these features can be invaluable for beginners, you must approach them with caution and ensure that they are right for your financial requirements.
Short-term and long-term mindsets
Forex is geared towards short-term mindsets, with both scalping and day trading among the most popular styles deployed by traders. Day trading is probably best if you are new to forex – it is more laid back and less stressful than scalping as you can make trades and hold on to your positions for several hours rather than aggressively pursuing short price movements.
Being able to read charts and patterns and conduct a fundamental analysis is a skill that new traders should attempt to learn quickly. You need to analyze different technical indicators such as moving averages and candlestick patterns to decide exactly when to enter a market.
Fundamental analysis in forex also uses economic health and factors such as interest rates and GDP to gauge whether a currency’s price will go up or down. Beginners should therefore monitor all major news releases using an economic calendar as these updates can have a profound impact on movements in the market.
Finally, soft skills also factor into the daily life of a forex trader. You need the right motivation, attitude, and personality to respond to setbacks and manage your account balance effectively over time. You should also try to maintain realistic profit expectations while controlling your emotions and adopting a positive, long-term mindset where possible. With all of these tools and the right broker, a beginner can soon become a more experienced, successful forex trader.