Forex is among the most popular and rapidly growing financial markets with over 5 trillion dollars of daily turnover. All world currencies are traded here similar to stocks on the stock exchange. If you already trade CFDs, forex trading can become a good extra income source in your investment portfolio. Before you create a demo account, learn the essential theory.
Currencies on forex are always presented in pairs. There are 3 main categories of pairs:
- Major pairs – these include currencies traded against the world’s reserve currency, the USD. The examples are USD/JPY, USD/CAD, USD/GBP;
- Minor pairs (cross pairs) – less liquid pairs that don’t trade against the USD;
- Exotic pairs – pairs related to the currencies of developing economies, such as South Africa or Brazil.
The spread is the difference between the asking price (sell price) and the bid price (buy price). Here is an example for better understanding. Imagine that the sell price of a pair is 1.3207, while the buy price is 1.3200. The spread will be 7 pips. By the way, pips are low increments on the fourth decimal place.
The general rule says that the more common a currency is (USD, GBP), the lower the spread and vice versa.
Margin refers to the amount of cash you have on your trading account each time the trade opens. When you are ready and want to make a good profit on this business, you have to have a high-volume margin. If you cannot make it big enough for any reason, you can take leverage from your broker. However, you shouldn’t take more than you can cover in case of a loss.
The leverage lets you trade with a bigger amount of money than you actually have on your trading account. It can multiply both profit and losses, depending on your bet. For example, you have $100, but with a 10x leverage, you can trade with $1,000. Now, your buy order can be worth $1,000 and bring you 10 times more income from any price increment.
If the positive growth is 3%, you earn $3 from a $100 investment or $30 with a 10x leverage. If your pair faces the same negative growth, you lose $3 or $30 with leverage. To protect yourself from debts, make sure that your broker has a negative balance policy and use it to protect your account from moving below zero.
Main Trading Strategies
The choice of forex trading strategies is wide, but the main options to start with in 2021 still include:
- Currency Scalping – it involves buying and selling currency pairs in short time gaps that may last from seconds to a few hours. This strategy lets you accumulate multiple micro profits in order to gain considerable income by the end of the day;
- Intraday Trades – a conservative beginner-friendly approach that involves focusing on 1-hour and 4-hour trends during the main sessions;
- Swing Trading – involves focusing on price movements that are bigger than that for the previous 2 strategies. It lets you keep trades open for several days or even weeks.
Trade & Learn
By reading this guide, you have made a considerable step towards forex trading. Now you know the essentials that are applicable to practice. The best step to make next is to train your brain on a demo account to get ready for real trading as soon as possible. Practice is the only way to master anything. Always start real trading with a small part of your capital to have a safety cushion that will save you from bankruptcy in case of a big loss.