How to Trade Forex?
Have you ever wondered how to trade forex in order to generate supplemental income or maybe even trade professionally full time?
Getting started can be a little daunting so we’ve created this handy guide to help you on your journey to forex trading success.
Read on and you’ll be trading forex like a pro in no time.
Forex trading basics
When you trade forex, you are trading one currency against another eg. the Euro against the US Dollar (EURUSD), or the US Dollar against the Rand (USDZAR).
When you go long (buy) a currency pair, you are speculating that the first currency in the pair (the base currency) will appreciate against the second currency in the pair (the quote currency) eg if you go long EURUSD, you are placing a bet that the Euro will rise in value against the US Dollar.
When your short (sell) a currency pair, on the other hand, you are speculating that the base currency will depreciate against the quote eg. if you go short USDZAR, you are placing a bet that the USD will depreciate against the Rand.
Selecting a forex broker and forex demo accounts
One of the best ways of learning is by doing and forex demo accounts are a great way to get started completely risk free.
Before you can access a free forex demo account, you will need to find a forex broker who offers them. There are lots of forex brokers around so this part should be very easy, but as you will likely open a real account with the first broker you open a demo with, it’s important to select a good broker to start with.
Selecting a forex broker in your home jurisdiction is a great place to start as this will make deposits/withdrawals, customer service, dispute resolution etc much easier.
Other considerations are the broker’s reputation, time in industry and fees and conditions.
Seeing as you are already here, if your trading forex from South Africa or indeed anywhere on the continent, Blackstone Futures is a great place to start – we are one of South Africa’s oldest and most prestigious brokers and we will not be beaten on fees and conditions and we of course offer free forex demo accounts.
Taking your new demo for a spin
Now you have a new forex demo account, it’s time to take it for a spin.
Before you do though it’s important to note that demo trading is a completely different psychological challenge than trading a real account – the purpose of a demo account is to learn the MT4 platform and basic trading functionality, ensuring any mistakes you make such as clicking wrong buttons, entering wrong order sizes etc, are made in a completely risk-free environment.
Once you have opened your MT4 platform and logged into your demo account, place a trade, any trade. The default size option is perfect for your demo balance.
What happened? Did your trade go into profit or was it a loser?
Whatever happened, close the trade and do another. Repeat this process till you are comfortable with executing and closing trades – this is the best way to learn how to trade forex.
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How to trade forex – well!
The first step towards trading forex well is technical analysis and charting. Look at your demo trades carefully and compare them to the charts. Chances are you will see a pattern.
Unless you were extremely lucky, what you should notice is that when you bought a currency pair while it was high, you lost money and when you bought a currency pair when it was low you made a profit.
This is the most basic tactic when it comes to trading – buy low and sell high – if you learn this from the start, you will be in a much better position for when you go live.
Did you try out shorting yet? If not, try selling a currency pair when it rises – if you are quick you should almost definitely be able to get out of the trade at a profit.
This short term approach is called scalping and is probably not a great place to start for a new trader on a real account, but a valuable lesson to learn now on your demo account.
How to trade forex using RSI
Let’s try adding the Relative Strength Index indicator to your chart. Though this indicator isn’t perfect, one of its advantages for new traders is it’s all about buying low and selling high.
When RSI crosses above the 30 threshold, open a buy trade. When it crosses below 70, close your buy.
Now try shorting – when RSI crosses below 70, open a sell trade, when it crosses back above 30, close your sell.
Though this is not recommended on a live account when you are just starting out, you can do this on a 1 minute or 5-minute chart to supercharge your learning experience.
How did these trades turn out compared to the random trades you did initially? Unless you were extremely lucky or failed to follow the rules, chances are you got much better results.
Taking what you’ve learnt live
Now you have learnt the ropes, it is time to practice trading on a live account with real money.
If you want to make serious profits trading live, you will eventually need to fund your account with sufficient money to generate significant profits, but for your first week of live trading, it is best just to start out with your broker’s minimum deposit amount.
At this point, we will leave your 1m and 5m charts and go to the 30m chart.
Change your trade lot size to the smallest available 0.01 and commence trading the simple RSI strategy with real money, but with minimal risk.
Though you will likely not make much of any money trading this basic strategy with such small lot sizes, it will also be near impossible to lose any significant amount of money. The training you do at this stage will be invaluable.
Honing your edge
How did you go trading small lot sizes with this basic strategy? Did you make a profit?
You may well have and you may not have, either way, it is time to start looking at the whys and how you can improve your results.
What if you only took buy signals when the chart was trending up longer term and only took sell signals when the chart was trending down?
The seed of knowledge has been planted, it is now your job to water it and grow to become a successful forex trader.
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