Trading currency for beginners: what you need to know before you start


This guide outlines what beginners need to know before they dive in to trading currency for investment.

Foreign exchange (forex) currency trading is an increasingly popular activity for those looking to earn some extra income. On the surface, it appears deceptively simple: the commodity being traded is money itself, something with which we are all familiar. Making a profit by exploiting the relative price difference between two different currencies seems straightforward enough. We’ve all exchanged currencies when traveling abroad, and shopped around to get the best deal, so on that basis, trading currency appears less daunting than getting into the stock market or trading in futures. This is not a false impression, but there’s a lot more to trading currency than just buying and selling different currencies.

To be trading currency successfully in the marketplace, you need to understand the in-house terminology of the forex sector and be able to use the technological tools at your disposal. As you will be competing against professional traders in a market where millions of dollars change hands every day (not to mention pounds, euros, and yen), you’ll need every advantage you can get if you’re going to make money long-term rather than lose it all overnight.

Trading currency for beginners

Education in trading currency 

A recommended first step is to take a free forex course that will help you understand the basics of trading currency. These forex courses are available online and, at the very least, should help you to decide if forex trading is for you. As well as becoming familiar with the language and the tools, you need to learn how to develop a strategy and how to manage risks. Be aware, however, that there’s no “one size fits all” solution to these challenges.

The forex trading methods you should use will depend on your personality and what you hope to achieve. Everyone has a different level of risk tolerance, and as with all forms of financial trading, the more you risk, the more you stand to profit with trading currency. But of course, the higher risk means you also have a greater chance of losing your initial stake. Looking at it in this way, trading currency sounds a lot like gambling. But proper understanding and education should help you see it as more like a science which, while not exact, is most effective when approached with discipline and analysis.

Types of currency

When trading currency, the currency is looked at in pairs: the currency you’re buying and the one you’re selling (that is, the currency used to make the purchase). While the relative value of world currencies is constantly shifting in response to geopolitical events and other factors, they are generally grouped into different types. These include the “safe bet” reserve currencies, commodity currencies, exporter currencies, and those defined as high risk. Knowing immediately which category your currencies fall into is essential for fast, effective moves in trading currency.

Order types in trading currency 

To trade in forex, you’ll need to place an order with your broker. Different types of orders are possible depending on what you hope to achieve and the risks you’re prepared to take in trading currency. The most basic form of order is a market order, but you might also want to place a limit order, a stop-loss order, or a trailing profit, among other options.

It’s also vital to understand margins and leverage. To trade effectively, you’ll need to trade in large “lots” of currency to take advantage of minute changes in value. The more of a particular currency you’re able to buy and sell, the more profit you’ll make, but to achieve this, you may need to borrow money to make the trade in the first place. This act of borrowing funds is known as leverage, and the amount borrowed is your margin.

Know yourself

As you start trading currency, you should gain confidence, which will help you become a better trader. Avoid becoming over-confident as this can lead to foolish mistakes and potentially a severe financial loss. Analyze your performance after every trade: was it a success or a failure? What made it so? What could you have done differently?

Your trading currency plan or strategy should consider your strengths and weaknesses, even as you constantly strive to become a better trader. It’s essential to keep emotions out of your trading practice as much as possible. Learning about psychology will help you become a better trader just as much as learning about economics or math.

Learning to trade can be challenging, but if you’re prepared to put the work in and keep learning, there’s no reason you shouldn’t make a success of it. With the markets open 24/7 worldwide, trading currency can be a stimulating pastime and a potentially lucrative source of extra cash.

Where to trade currency pairs

Forex is traded during trading sessions. The main ones are London, New York, Sydney and Tokyo. The London and New York sessions run 8 hours a day, the Sydney and Tokyo sessions for 9 hours. At any time during a business day, at least one trading session is open.

You can trade in these sessions only through intermediary companies, which we call brokers. A broker is a company that allows you to trade on the Forex market and it provides its own trading platform. For the use of their services, they charge fees, mainly in the form of spread (spread = difference between the purchase and sale price). IQ Option, XTB and Plus500 are among the most popular brokers around the world.

How to trade

The principle of negotiation is very simple. You exchange one currency for another, with the intention of making a profit by correctly forecasting future price developments. Simply put, you buy a currency at the moment you expect its price to rise. Or, on the contrary, you sell it when you expect the price to drop. Price evolution is certainly not random and can be predicted with some probability. There are several strategies for forecasting future prices, but we’ll talk about that later.

How do I determine if the price will go up or down?

The future price can be predicted with some probability. If it weren’t possible, there wouldn’t be tens of thousands of successful forex traders in the world. The future price can never be predicted with 100% accuracy, however, what is really important is to be profitable in the long run.

The evolution of prices depends on several factors such as GDP, unemployment, inflation, interest rate in countries where the currency traded is normally used, etc. You decide whether you want to consider these details in your negotiation. You can also trade using only historical data like I did in the example above. A trading strategy is used to determine the actual future price.

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