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Lesson 4: How to trade on Forex

Published 22.08.2014 at 03.23 PM.


To learn the basics of Forex trading, you need to take training courses, read many articles on currency trading or books written by experienced traders. Choose any option. After getting the needed information, you will have a basic understanding of what Forex is and how to trade on the market. Then you can open a demo account and start trading. Of course, you won’t get rich overnight as this is impossible without lots of efforts and patience.  

Many people believe that to trade on Forex, you need to have a degree in economics, remarkable insight and heaps of money.  It is not as difficult as it seems! All you need is strong commitment and free time as you can get first practice on a demo account. The main thing is not to hurry. After trading a demo account, you can open a small dollar account ($10-$15). Trading is like any other occupation where you need aspirations, effort and persistence. 

Choosing a broker

Why do we need brokerage companies? Quite simply, the minimum lot size in trades for the EUR/USD pair is $150,000. Of course, an ordinary trader will hardly find such money. And this is where banks or brokers come to help. They will provide you with interest-free loans and a possibility to open deals with a smaller amount. Loans provided by a broker are called leverage. My recommendation is to start trading without leverage and increase it to 1:100 only after having practiced enough (if you will need to).

What advantage does a broker get? Quotes have ask price and bid price. The difference between the prices is a spread which is brokers’ profit. That is, brokers get financial benefits from your deals.

Cooperation between a trader and a bank or a broker is advantageous for both sides. All you need is cherrypick the broker. 

Process of trading

The bottom line is that you need to buy currency at a low price and then sell as expensive as possible. The difference between the buy price and sell price multiplied by the deal volume is your profit. But what is interesting is that you can bet not only on a rise in prices, but also on their fall.

All deals on the market are made with the currency which stands first in the pair. For instance, selling the dollar/euro pair, you sell the dollar for euros. In other words, selling the dollar, you buy the euro. Consequently, if your forecast is correct, the USD/EUR chart will fall, bringing you profit. 

Stages of trading

  • If you think that the currency pair’s price will rise, you should open the buy deal. After the price increases, close the order and get your profit.
  • If you forecast that the currency pair’s price will fall, you should open the sell deal and after some time when the price falls, close the order and take your profit.    

To buy/sell you need to:

  • Open an account with a bank or a broker (my recommendation is InstaForex);
  • Download software for trading on Forex
  • Choose a currency pair or other asset and make a trading decision (buy or sell)
  • Wait for confirmation of the order’s opening 

Types of traders

All Forex traders can be divided into 4 categories:

1. Doubters

They always keep their eye in books and magazines with analytical outlooks while trading. There are a lot of indicators on their charts and the traders are in constant search of useful information. Doubters are afraid of opening deals or open them in small volumes.

Recommendation: be more confident, pick a trading strategy that will be simple and clear for you. Start trading demo account or a small deposit (cent account will be okay). Following a simple trading system, you will understand that there is no need to complicate. All you need is comply with the rules of your trading system.

2. Overconfident

They are blinded by ads that promise millions in profits. Don’t believe it! Even successful traders suffer losses from time to time. The main thing is a total profit recorded during the year. Earning 60%-100% annual return and trading an account of $20,000-$50,000, you can feel optimistic about the future.

Recommendation: read a lot of articles about Forex trading. Eventually, you will find the trading strategy most convenient to you. Focus on it. Doing so, you will get stable profits and will be able to analyze the market situation. 

3. Emotional

They are the mere gamblers and Forex is a sort of a game for them, not a way to make money. They rely on their emotions, quickly make money and blow up their account.

Recommendation: communicate with professional traders who have succeeded in Forex trading. First, lower your leverage to the lowest possible level. Always work on yourself and improve your money management technique. 

4. Purposeful

These traders do not need any recommendations as they can take a reality check and harness their emotions. They accurately follow the rules of the chosen trading system and consequently succeed in this field.

So you have read the basics of Forex trading. Newcomers should learn the theory and practice it on a demo account. After that, choose your trading strategy. This is a crucial point as only following a firm plan, you will be able to become a successful trader. And do not forget that choosing a broker is a very important thing. There is no room for complacency.  Check out the broker’s regulations and if you have any questions, fell free to ask the support service. Your future profits depend on this.  

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