Forex Trading Essentials: A Beginners’ Guide

Forex trading has grown immensely with the development of online trading, with a large number of online forex brokers providing competitive solutions and tailored resources for both beginners and professional traders. There are two main types of brokers offering access to the marketplace for retail traders and these are the market makers and Electronic Communication Network (ECN) brokers. Market makers determine their own bid and ask prices, whereas, ECN brokers use the best available bid and ask prices for inter-bank institutions at any given time. If you are just starting in online trading, ensure that you do so with a reliable and transparent broker that is regulated across different regions and will provide all the essential tools to help you trade securely and efficiently.

Opening a Trading Account

There are three main types of trading account available: a standard, a mini and a micro account. The main differences usually from one account to another is the level of fund investment needed, the size of the currency amounts that can be traded and the risk associated with each trade.

• A standard account is the most popular account that offers access to standard size lots of currency ($100,000), using leverage of 100 . It normally requires the trader to have an available minimum capital of $1,000. With leverage, you can boost your trades but at the same time it can quickly lead to losses if the market moves against you.
• Mini trading accounts are usually accounts with a smaller capital required to fund them, and traders can trade mini lots with less exposure to potential gains or losses. Mini accounts can be funded with minimum $500 or less and leverage can be 400. Such accounts are good for beginners as they can try and test strategies with less capital.
• Micro trading accounts are usually offered as an incentive to encourage traders to trade forex with low levels of risk. A micro account offers traders the opportunity to trade in micro lots of $1,000, which means less capital is needed to begin trading.
• Brokers provide managed accounts which means that a trader does not need to trade themselves, as they have the option to be assigned to a master account, which can then manage trades on their behalf.

Pips, Leverage and Lots

Pips are used to determine changes in the value of currencies as they go up or down. For example, if the value of the currency pair GBP/USD is 1.5125 and it then goes to 1.5126 then the specific change represents one pip. It is the movement of the fourth decimal place digit that is equal to one pip. Brokers usually calculate the pip value on your behalf, but it is useful to understand how this works and how the number of pips will eventually decide how much profit or loss you had.

Leverage is considered to be a blessing and a curse in some ways. On the one hand, it offers retail traders the possibility to profit from currency movements as prices move up or down, but this can be negative if prices move against traders and they incur substantial losses that exceed their initial investments. Understanding how leverage works and learning to manage it in a way that will allow the trader to make profits while reducing risks is important. Leverage should be used as a tool that allows individuals to borrow funds and in this way control larger amounts of collateral, using only a small amount of their personal investment.

Lots is another essential part of trading as once you start placing orders you will come to realise that the forex market is traded in lots: standard, mini, micro and nano lots made up of different amounts of currency units. For example, a standard lot is made of 100,000 units, a mini one of 10,000, a micro of 1,000 and a nano of 100 units. For example, a standard lot of 100,000 units can be equal to a monetary value of $100,000 and so on.

Starting to trade: Going Long or Short

Every forex trader wants to profit on prices going up or down. When a trader makes a trade they are essentially taking a position. If the trader is speculating that the price of a currency will increase over the duration of the trade, then we say that they are taking a long position or going long. If, on the other hand, a trader speculates that the price will decrease, then this is called taking a short position or going short.

As we proceed, we will make sure to include more key terms and forex basics in our educational forex trading articles, so every trader has a comprehensive idea of forex trading before they cut their teeth with real funds in the world of trading.

DISCLAIMER: This information is not considered as investment advice or an investment recommendation, but is instead a marketing communication.