What Should You Consider When Beginning a Forex Trading Journey?
The fluctuating nature of the world’s currencies means it is the perfect time to begin a forex trading journey. British sterling (GBP) has seen a series of ups and downs based on British politics, from Brexit to Boris Johnson. While the US dollar (USD) has responded to the USA’s own issues, such as the trade war with China, and the ramifications of this that affected its currency. Currency exchanges have faced an exciting and interesting few years. But, what do you need to consider when starting out as a beginner in forex trading?
The main focus of forex trading is choosing currency pairs that you are likely to see a return on. These pairs are given a price quote of the exchange rate, which can change based on how valuable each individual currency is. The first currency listed is bought, while the second one is sold. The EUR/USD currency pair is the most liquid in the world because it is the most heavily traded currency pair. The major currencies – USD, EUR (Euro), GDP, CAD (Canadian dollar), AUD (Australian dollar) – have very narrow spreads due to the volume of trade they see daily. Exotic currencies also have wider spreads, and may include HUF (Hungarian forint), TRY (Turkish lira), MXN (Mexican peso).
When selecting a currency pair, you are selecting a currency to buy and a currency to sell simultaneously. The rate you get for it and the money you can make from it depends on a variety of factors: interest rates, GDP (gross domestic product), and even economic announcements. When choosing a currency pair, you’ll want to find one where you buy the first currency in the pair for less than you sell the second currency in the pair for.
In order to properly trade forex, a forex broker can be beneficial. Forex brokers can help outline a range of information to help you trade, from the history of currencies compared to one another, to possible issues that could result in one currency being devalued or another currency becoming more valuable. This helps to paint a picture of which currency pairs to trade. Forex brokers differ in what kind of platforms they allow you to use, the methods of deposit they allow, and how many trading instruments they have at their disposal.
Many also differ in terms of how much you need to deposit initially, with some being more suited to those wishing to have more of an intensive and committed forex trading journey. The benefit of a broker is that they will aim to buy and sell for you, making forex trading easier and allowing you to consider a lot of the information that can help you make the trade with the best return on investment for you.
Best Forex Pairs
Once you understand how forex trading works, it helps to have some insight into how the currency pairs work. While the EUR/USD is the most popular trading pair, USD/JPY (Japanese yen) takes second place. The pair is sensitive to political issues in both the USA and the Far East, so makes for a pair worth watching. When trading the USD/JPY, it is known as trading ‘the gopher’. The third most popular trading pair is unsurprisingly the GBP/USD, or when you trade ‘the cable’.
The pound and dollar are often both tied to their country’s economic positions, so depending on the announcement and the country, the pair could be beneficial to trade. These trades are considered the most liquid and popular due to the market being tied to the USD. The window for trades is smaller. There are some people who specialize in trading more uncommon pairs, but most traders opt for monitoring one of the major ones, usually involving USD.
Developing a Strategy
Most people, once they have the hang of how forex trades are made and which trades are likely to be lucrative, develop a system or strategy. Most strategies are based on news-based events, while some people go into the full economic analysis that helps them stay ahead of the curve. Strategies are developed through trading signals that indicate which pair combination is best to buy/sell.
You should always back-test strategies or paper trade them before using capital when devising your own approach to trading. This helps to test the integrity of the strategy while also ensuring that you aren’t caught out. The most important aspect, though, is having an exit point. This means knowing when to pull out of a long or short position and, most importantly, a losing position, so you don’t lose as much capital.
There is a lot to consider when getting involved in forex trading. The main thing is to ensure you have the right platform to trade on, usually involving a forex broker too. Then, you’ll need to understand how currency pairs work and how to trade them, which pairs are best for trading, and what strategies are needed for these trades. Once you have these in place, you should be ready to begin experimenting with trading, which is the main way in which you can hone your skills as a forex trader.