Forex Trading Explained, Avoid the Pitfalls

Starting a career as a forex trader is not trivial, especially if you want to succeed and earn money in the stock market in the long term. Above all, the approach contains many pitfalls that discourage many beginner forex traders.

Learn here the basics of forex trading, to understand trading, understand forex, and how to progress and make money in the financial markets in the long term.

What is forex?

Basically, the forex market is where banks, corporations, governments, investors, and traders come to trade and speculate on currencies.

Forex is also called “FX market”, “currency market” or “foreign exchange market”. It is the largest and most liquid market in the world, with an average daily trading volume of nearly $4 billion.

The forex market is open 24 hours a day, 5 days a week. Unlike stocks, it is a decentralized over-the-counter (OTC) market.

To get started, you need to master forex jargon and the most used terms in the currency market:

  • Base Currency: Currencies are quoted on the stock exchange in pairs, in the form EUR/USD for the euro against the dollar for example. The base currency is the first mentioned, here the EUR. It is the currency that the forex trader buys or sells, and always has the value of 1.
  • Quote currency: This is the counter currency of the base currency. In the previous example, it is the USD. The base currency value is expressed in terms of the quote currency. If EUR/USD coasts at 1.1200, this means that 1 euro is worth 1.1200 dollars.
  • Bid price (sale): This is the price your broker is willing to “bid” to “buy” the base currency you hold. It is therefore the selling price of the currency for the forex trader.
  • Ask price (buy): This is the price that your broker “asks” you in exchange for buying the currency of your choice. It is the purchase price of a currency. The purchase price is always higher than the sale price.
  • Spread: This is the difference between the buy price and the sell price. In reality, it is the broker’s compensation that the trader pays.
  • Pip: The smallest measurable value of currency movement. The word “pip” is an acronym for “point percentage” and a pip is equal to 1/100th of 1% of your currency. For example, if the value of the EUR increases by a single pip, it means that its value has increased by 0.0001, going for example from 1.1200 to 1.1201 dollars.

Once you know the lingo, you can read a few forex books and take online trading courses.

What is Forex Trading?

Explanation of trading. Forex trading as far as retail traders are concerned, is speculation on the price variations of one currency against another.

Trading in the currency market is an activity of investing in the stock market, which allows you to earn money by buying and selling currencies, to take advantage of rising or falling prices.

For example, if you think the euro will appreciate against the US dollar, you can buy the EUR/USD currency pair at a low price and then sell it at a higher price to make a profit in forex.

Of course, if you buy the euro against the dollar, and the euro loses value, you will realize a loss. It is therefore important to be aware of the risk associated with forex trading, and not just focus on the potential gains.

How to Start Trading Forex?

To start trading forex, all you need to do is open a trading account with a forex broker.

Find the best forex broker for you, it must be regulated in your region and offer competitive spreads (costs). If you are a newbie forex trader, make sure your online broker offers rich forex and trading education and training content.

When opening a forex trading account, your broker will offer you to download a trading platform. This is the interface from which you follow stock market prices, carry out your graphic analyzes and place your trading orders.

Before opening a trading account with your money, it is strongly advised to start with a demo account, ie a virtual account with virtual money, but in real market conditions.

The demo account will allow you to practice and gain experience without risk before you start to actually trade forex.

Skills Needed to Succeed in Forex Trading

Forex trading attracts individuals because it is not necessary to follow university courses or obtain diplomas to succeed.

It is an activity a priori open to all, but yet the vast majority of retail traders lose money on forex.

Indeed, while degrees are not necessary, learning and understanding the basics of the stock market and trading are essential to succeed in the fx market.

It is therefore still necessary to devote a lot of time and make a lot of effort to learn how to trade on the financial markets. It’s not easy to get there, but if you are determined and disciplined, you can get there.

Apart from the theoretical and practical knowledge of the stock market, here is a non-exhaustive list of the skills you will need to achieve your goals in the forex market:

  • Self-control – to accept a loss without becoming nervous
  • Self-confidence – to believe in yourself and your trading strategy and not be afraid
  • Dedication – to become the best forex trader possible
  • Discipline – to remain calm in a realm of constant temptation (the market)
  • Flexibility – to successfully trade changing market conditions
  • Organization – to form and reinforce positive trading habits
  • Patience – to wait for trading signals most likely to succeed
  • Realism – to keep goals achievable and not be disappointed, don’t think you’ll get rich quick

It should be noted that discipline and organization are often the missing factors for forex traders who lose money in the stock market.

Some rules to avoid the pitfalls of Trading on the Currency Market

Here are some basic rules to follow so you don’t get kicked out of the forex market before you start making consistent profits.

  • Don’t overlook the importance of training: any new career starts with training. Take the time to train yourself in forex trading and master the different concepts and strategies.
  • Practice on a demo account: start by practicing on a virtual trading account to test the platform, get used to analyzing charts and placing stock market orders. This step should not last more than a few weeks to a few months, it is only used to master the basic concepts.
  • Smoothly start real trading: you can deposit your money and start trading forex, but only with small positions. Starting in real life is the most difficult step, because the confidence gained in demo is confronted with a new parameter, psychology. The skills mentioned above come into play at this stage, and they are the key to the success of the forex trader. Starting with small positions allows you to make rookie mistakes without consuming all your investment capital.
  • Expand position size over time: the more you trade, the more experience and confidence you gain. You can then begin to gradually increase the size of the positions and aim for larger gains.
  • Adopt strict risk management rules: even after years of experience and gains, every forex trader must maintain risk management rules (money management) to avoid losing too much. For example, do not risk more than 2% of the capital on a single position, or more than 5% of the capital on a trading day. Stop trading for a while after a three-loss streak…

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