How to Get Started as a Forex Trader
The foreign exchange (Forex) market is a highly fluid and dynamic trading arena that has a large number of participants. The market is also well established, and is one of the oldest in the financial trading sector. As is to be expected, the combination of its popularity and age has made it a market that is awash with trading strategies. Trading Forex for beginners could be challenging due to the large number of confusing techniques and terminology available. In addition, some of the strategies used in this market are highly complicated and have a steep learning curve, making them difficult to use if you are just starting out. However, one thing to keep in mind is that the more you learn and the more understanding you have of the financial markets, the easier it is to trade Forex effectively, profitably, and with confidence.
Put in its simplest form, a trend is a financial market’s tendency to keep moving within a particular direction, whether up or down and even sideways. A trend-following strategy seeks to deliver Buy and Sell signals which are in line with new and emerging trends. There have been many methods developed over the years to identify the point where trends start and end. Many simple Forex trading strategies are based on these methods.
One of the biggest issues with trend-following systems is that a trader needs to know when it is time to enter or exit a trade. While an asset’s price might be trending upwards, a trader cannot simply enter a trade based on this trend without taking into account other factors which might impact this trend. For example, a trader might review the US dollar (USD) and note that it has a bullish or upwards trend. There might also be important data coming out of the US which could impact the price of the USD, such as the Nonfarm payrolls data. It is important to understand how these factors impact asset prices and to take them into account when trading Forex.
The money markets can sometimes trend between periods of support and resistance. This phenomenon is known as consolidation. A price breakout can often occur whenever the market goes beyond the established boundaries of its consolidation to establish new highs or lows. For a trend to occur, there must be consolidation. Because of this, breakouts are seen as indicators of new trends.
When a new asset high is seen, it could indicate that there is an impending upward trend that can be taken advantage of when trading Forex for beginners. The big question is: Is it possible to identify which trend you are likely to be entering? How long the trend lasts can tell you what the highest high of the trend is or its lowest low. Whenever there is a breakout that exceeds this highest high or lowest low for an extended period, you can assume that there is a new trend developing.
Another strategy that is vital when trading Forex for beginners is the carry trade. This is a kind of trade that has been in wide use by Forex professionals, so it is strictly not a system used by beginners. What is great about this system is that it is simple to understand and implement. In essence, the carry trade looks to make a profit from the differences in yield found between two currencies.
For example, let us consider a trader who borrows Japanese yen. Since the benchmark rate of the yen is extremely low (almost zero) there is very little cost in holding the currency. At this point, the trader exchanges his yen into Canadian Dollars and proceeds to invest the money into a government bond with a yield of 0.6%. The interest earned by purchasing the bond covers the cost of holding the Japanese currency.
We hope that this simple guide to trading Forex for beginners has been useful, since the strategies outlined are simple to follow, regardless of one’s trading experience. However, to be truly successful while trading this market, it is important to take the time to review and understand the dynamic Forex market. Review and become educated on the many factors, such as economic, social, political and more, which impact the movements in this market.