Getting Started in Forex Trading
Over time, as I talk to more and more people, I realize that a lot of people are interested in trading. After all, I understand those people. The idea that you could make money at any time during the day and that you do not have to be managed by a boss all the time is really attracting to me. Most people wish they had the freedom to do whatever they want from their days. They wish they could live abroad or simply live the life they want without worrying about money.
Although I’m not totally there yet, I can help you take the first step in living the life you want or earning additional income through Forex trading: getting started.
In this article, we’ll go over the key things you’ll need to start trading Forex in terms of software, hardware, and basic knowledge.
What do you need?
Trading is appealing to a huge amount of people because it’s so easy to get started. The only things you need, literally are an internet connection, a computer, a broker, and the software provided by your broker. As simple as that. Let’s breakdown each element so I you can still get a better idea.
Nothing special to mention here. As long as you get a good-enough internet connection, you’ll be good for the next steps. Make sure that the speed is reliable, because the last thing you want is being stuck with several open trades and no internet connection.
Mac, PC…? It does not really matter. Most brokers will support both operating system. However, you may not get access to some trading platforms such as MetaTrader on Mac. MetaTrader is really worth using. If you end up buying a Mac, or if you already have a Mac, I recommend using Bootcamp or Parallel to run Windows.
Also not necessary but recommended is a big screen. Looking at charts on a small laptop screen, although doable may get harder over time. A nice screen with a good display can make all the difference. Your charts will look even better.
A broker is the company between you and the particular currency that will actually buy the currency for you. In other words, the broker will charge you a small fee on each trades to execute the transaction. Back in the days, those wanting to buy or sell a currency needed to call at a brokerage office to execute the transaction. Fortunately, it is possible to complete everything online these days for a lower fee.
You must be careful with the broker you choose. Some traders will charge lower fees but will offer no support. On the other hand, some brokers will charge a slightly higher fee, but will offer webinar, courses, and a good customer service.
It depends on what you want and where you are located. For instance, since I live in Canada, most brokers based in United States will not allow me to open an account with them.
Another important, some brokers require a minimum deposit and allow you to trade a minimum of 1,000 units at all time. Other brokers let you do whatever you want. Even if you trade 1 unit at a time, some brokers will support you.
Lastly, some broker, especially European ones such as FXCM, offer very high leverage (up to 1:500). That means for each $1,000 you have, you are allowed to trade smoothing worth $500,000. Be cautious with leverage though. Often, 1:20 or 1:50 is more than enough.
Based on the elements above, I opened an account with Oanda, a Canadian broker which satisfies my criteria. They offer a 1:50 leverage, no minimum deposit, and you can trade any number of units. I’m satisfied with their customer service and the multitude of trading courses offered.
In order to embrace your learning curve, I strongly urge you to open a free practice/demo account before a live one. I do not want you to take any trade with your own money until you are excellent with a demo account.
A trading software
Based on the broker you choose, you will get a trading software or application specific to your broker. In addition to that application, there are a few other common trading software that you should be aware of. These common trading softwares work with several brokers. The broker customizes the software slightly and offers it to brokers. Common names are MetaTrader, TradeStation, TradeInterceptor and NinjaTrader. I would say the most common one is MetaTrader. The current popular version is MetaTrader 4 while MetaTrader 5 is being offered by a few brokers only. I strongly choosing a broker compatible with MetaTrader as this trading platform is very robust, packed with features, and easy-to-use. Please note that MetaTrader runs only on Windows.
What do I need to know?
Now we looked at everything you needed. However, we are still missing a good part of it. What do you need to know before taking a first trade? We’ll explore that in just a moment. This part is much more important than the previous one. Entering your first trade will be very exciting. However, if you want to make sure you start right, I encourage you to start on the right foot by gaining a bit more knowledge about Forex overall.
I will assume that you use MetaTrader 4 because it is the only platform I use consistently. If you do not use this platform, it is still going to be similar. Only the design may be different. You will need to open your trading platform/software before reading on.
First, once your trading software is open, take a few minutes to look around. You’ll see many charts, buttons, and numbers but try to make sense of them. Be careful not to enter any trades.
What are orders
In Forex, you can either buy (long) or sell (short) a currency pair. When you enter a long position, you expect the price to increase and when you enter a short, you expect the market to go down.
When you create an order, you can either create a market or limit order. Simply put, a market order will be executed at whatever the price is when you submit the order. A limit order will be executed only when the price reaches a specific number you set. Depending on your strategy, you may use only one or both types of orders.
That’s about all there is to know about orders. Are you ready to take your first trade? There are a few things you still need to know.
If you are interested to start trading Forex, you probably heard more than a thousand times “Forex is risky”. It is true. Fortunately, there are a few tools you may use to control the risk or lock gains once you enter a trade. We’ll look only at the basic ones.
Upon creating an order, you’ll likely see the words lot size, stop loss and take profit. Those are they two key elements of risk management.
Lot size: this represent the number of units you are going to trade. As a general rule, a lot size of 1 represents 100,000 units of a currency pair.
Stop loss: it is a price at which you want to cut your losses on a trade you took. Without a stop loss, you could lose all of you account’s money if the market goes against you. If you enter a long, the stop loss will be below the entry price. If you enter a short, the stop loss will be above the entry price. Get it? One of my best piece of advice to you: always use a stop loss and do not change it, unless you want to lock in profits.
Take profit: it is the opposite of the stop loss in the sense that it is the price at which you want your trade to close automatically and put the profits into your account.
For the next section, please refer to this screenshot. You will see where to click to get what you need:
Trading using indicators
Now it looks like you know how to trade. The question now is what/when to trade. You’ll accomplish this part by yourself.
In MetaTrader 4, you can add indicators on your chart by clicking the button shown below. Open a 15-minute chart of any currency pair. I want you to add indicators one at a time and see how you could buy or sell the currency pair based on them. You could try the Bollinger Bands, the 20 or 50-period Simple Moving Average, or the Relative Strength Index (RSI). Just try it. If you do not see any patterns, move on and try another indicator.
Once you think you have a good pattern, wait until the next occurrence and buy or sell the currency pair based on it.
More strategies will be provided in other articles, for now, I want you to take a trade with your demo account. Place your stop loss where you think it has to go and place your take profit on the opposite side by doubling the distance between your entry and your stop loss. To get a clear and simple strategy you can start trading Forex with, check out A Simple Forex Trading Strategy For Starters.
I hope you enjoyed this article. Please comment below with the outcome of your first demo trade. This is your first step as a Forex trader. I wish you will enjoy the process of getting started in Forex trading.
Please share with your friends. They might be interested and that helps my blog a lot. If you have any question, you can contact me using the contact page.