30 September 2019

How to Trade Forex: The Fundamentals of a Trade

How to Trade Forex: The Fundamentals of a Trade

The first necessary step to having sufficient knowledge of how to trade forex is to ensure you understand the fundamentals of a trade. That’s why today, we’re offering up a complete guide to the basics of the foreign exchange market. Guiding you through both the theory and practice of opening a trade, we’ll ensure that you’re equipped with all the required knowledge to understand how to start forex trading and stand in the best possible position to profit from this potentially lucrative market.  

 

How to access the forex market

 

As the forex market deals with international currencies, market windows must subsequently be open during the operative business hours of all the world’s major time zones. As a result, the market is open 24 hours a day, 5 days a week, meaning it can be accessed at any time throughout the working week. What’s more, as a digital trading platform, the market is accessible from virtually anywhere through an array of different digital mediums. 

To obtain access, independent traders must utilise intermediaries such as a broker or leveraged trading provider. Rather than you having to deal with large financial institutions and banks (the market’s ‘big players’), these market access providers will act as a middle man – although direct market access (DMA) is sometimes available to more accomplished traders who wish to deal directly with market makers instead. 

 

How to open a trading account

 

Before opening an account with any broker or trading provider, we thoroughly recommend that you do sufficient research by checking out the reviews, services and track record of your chosen provider. This is because, as a digital over-the-counter market, the forex market is decentralised and, subsequently, lightly regulated. 

Once comfortable with your decision, the next decision is to pick your account type. You’ll often have an array of choices, each offering different features dependent on your levels of experience and how much you know about how to trade forex. Beginner accounts will typically offer smaller deposit requirements, while more advanced accounts will offer a greater variety of custom tools and specialist features to utilise. 

After picking the appropriate account type for your trading ability, you’ll need to fill out an online application form before receiving your account details – once these have been acquired, you’ll be able to access the online trading platform. You’ll then be able to immediately deposit your first amount into your account, usually through a range of payment options. 

 

How to place a trade

 

With funds now deposited into your account, you’re ready to start trading. There are, however, a number of further considerations that need to be made before diving into the market: 

 

How to decide on the type of trade

 

The market is primarily traded between large financial institutions and, as a result, trades often involve staggering amounts of money (for reference, there is a colossal $5.1 trillion traded on the market on any given day). As individual traders can’t compete with the sheer quantity of currency being traded in a single transaction, individuals will instead partake in either CFD (contract for difference) or spread betting – these both enable the trader to trade in percentage in points (pips), meaning they deal with small percentages of larger lots. 

 

What is CFD trading?

 

Contract for difference, or CFD trading, is a popular derivative trading method where a trader contractually commits to exchanging the difference in the opening and closing valuation of a chosen pair. In these instances, a trader will speculate the direction of a pair, open a long position with the hopes of profiting off a price rise or, contrastingly, open a short position with the desire to profit from a decrease in price. 

 

What is spread betting?

 

Spread betting is one of the most popular forms of forex strategy, with a trader predicting the direction of any given currency pair and placing their trade accordingly. The strategy is commonly called spread ‘betting’ due to the speculative nature of the approach, with a trader predicting the valuation of a currency to move one way or the other – the more a currency’s value moves in the predicted direction, the more profit is made. 

 

How to choose a currency pair

 

There’s a vast choice of currency pairs available, so picking which one you want to trade is worth some serious consideration. There’s a whole range of contextual factors that can affect a currency’s valuation at any given time – from changes in geopolitical tensions to sudden natural disasters – so it’s important to understand the volatility attached to each currency.

Novices are best sticking to the ‘major’ pairings – the 8 most popular currencies to trade on the market, constituting 80% of all forex trades across the globe. These currencies are: 

  • US dollar (USD)
  • Great British pound (GBP)
  • Euro (EUR)
  • Swiss franc (CHF)
  • Japanese yen (JPY)
  • Canadian dollar (CAD)
  • Australian dollar (AUD)
  • New Zealand dollar (NZD)

Understanding currency pairings is fundamental to knowing how to trade forex, so check out our dedicated blog post to spruce up your knowledge on currency pairs.

 

Decide on your trading platform

 

As a globally interconnected digital trading platform, the forex market is instantly accessible through a range of different platforms: 

  • Web browser
  • Smartphone apps 
  • Specialist platforms 

Each medium will offer different modes of interaction, so deciding on the right platform for you entails finding the one that is most user-friendly for your and your needs. For example, while specialist trading platforms such as MetaTrader 4 may be a bit overwhelming to the first-time user, trading veterans will benefit from a range of expert features such as VPS and timeframes. 

 

Craft a trading strategy

 

With all the aforementioned considerations now taken into account, the final step before making a trade is to craft and implement a comprehensive trading strategy. Ensure your plan is logical and informed to avoid risky decisions influenced by emotive, reactionary trading. 

There’s a whole host of analytical and technical instruments available to assist in the development of your strategy, so be sure to utilise these as and when you see fit. 

 

Open, monitor and close a trade

 

Once confident you’re ready to open your first trade, the last thing you need to consider before risking any capital is when the best time to place the trade is, as trading at an opportunistic time is the best way to maximise the possibility of profit. 

 

When’s the best time to trade forex?

 

The best time to trade forex depends on your chosen currency pairs, as currencies experience different volumes of activity at peak times. As a rule of thumb, look to trade during windows of overlap, as these periods often boast the highest price ranges. These overlaps are: 

  • New York/London (1pm-5pm GMT) – Lasting four hours, the New York/London overlap is the longest that occurs throughout the trading day. Volatility is typically very high, with 70% of all trades being placed during this time – making this overlap a very opportunistic time to trade
  • Sydney/Tokyo (7am-9am GMT) – Although not quite as profitable as the New York/London overlap, trading in this window’s primary currency (JPY) enables traders to capitalise on the heavy pip fluctuation 
  • London/Tokyo (8am-9am GMT) – This window sees the least amount of market activity, yet volatility is typically still higher than alternate times of the day

It’s best to trade during the primary trading hours of your chosen currency, as these periods will typically offer the best rates. To better understand how to capitalise on timing in forex, check out our blog post here.

 

Man with watch on laptop

 

After deciding on your optimal trading time, you’re finally ready to trade. When opening a position, you’ll find buy and sell prices immediately listed for your chosen pairing, enabling you to place your desired trade. As a reminder, you’ll want to ‘buy’ to open a long position or ‘sell’ to open a short position. 

As the world’s most liquid market, valuations can change quickly and unexpectedly. As such, it’s important you monitor your trades, tracking them with live market prices and profit/loss updates, along with keeping an eye on any contextual factors that may influence your trade. Then, when you’re ready to close a position, simply place the opposing trade to your original position.

With this handy, bitesize guide, you now have a thorough overview of all the fundamentals of how to trade forex, enabling you to place your first informed and considered trade. For more tips, tricks and information on how to trade forex, why not sign up to one of our free industry workshops right here?