How to trade forex for beginners? This is 10 important things to know before playing forex.
For those of you who are still public, of course wondering about how to play forex? Many people imagine the easy way, buy the currency at a low price, then sell at a high price.
In fact, to be able to do well and achieve profits, it takes an understanding of the rules and methods of forex trading that are summarized in the following 10 points.
Also read: 4 Knowledge and Aspects of Forex Psychology for Beginner Traders
1. Forex Trading Can Be Done Anytime And Anywhere
The opening times of the forex market are divided into several main trading sessions, namely: Sydney Session (Australia), Tokyo Session (Asia), London Session (Europe), New York Session (America). These trading sessions are open and alternate, so it is as if forex trading is going on without stopping.
This fact had a big impact after the birth of the online forex trading method, because it means that forex traders in any corner of the world can trade 24 hours a day for 5 days a week.
You can trade forex before going to the office, before going to bed at night, or even during work breaks.
Also read: 9 Types of Orders in Forex Trading that Traders Should Know
2. How to Trade Forex Online Requires Internet Access
Before entering into a discussion about how to trade forex, it is necessary to know what the supporting infrastructure is.
To be able to trade forex online, you need a computer, laptop, or smartphone; As well as Internet connection. In addition, forex trading platform software is also needed that can be downloaded and used for free.
Where can I get the software for forex trading? These companies are called forex brokers who will connect you as a trader to gain access to the market. So, the first step in the forex trading procedure is to register with a particular broker, then download the trading software it provides.
If you want to try out how to play forex and don’t want to trade for real, you can also register for a forex demo account first.
Also read: 6 Times and Hours to Forex Trading: From Asian to American Session
Forex demo accounts can be obtained for free from any broker, and you can use them to trade with virtual funds (no need to deposit any real funds).
Meanwhile, learning materials on how to trade forex can also be accessed freely and free of charge from the internet, including on the site Forex.bacalagers.com that you are currently viewing.
3. Currencies are Traded in Pairs
It’s not just men and women who are created in pairs. Forex trading is also done in pairs (pairs). In forex trading, we will sell or buy currencies, and that is of course done between two different currencies.
Therefore, the mentions are always in pairs, where the stronger currency will be in front. For example, the US Dollar with the British Pound which is abbreviated as GBP / USD. Or the American Dollar with the Japanese Yen becomes USD/JPY.
There are basically eight currencies that are most commonly traded in the forex market. The eight currencies, called the major currencies, consist of:
- The US Dollar (USD) is also known as the ‘Greenback’ or ‘Buck’.
- The Euro (EUR) is also known as the ‘Single Currency’ or the ‘single currency of 18 countries’
- Japanese Yen (JPY)
- British Pound Sterling (GBP) nicknamed ‘Sterling’ or ‘Cable’
- Australian Dollar (AUD) nicknamed ‘Aussie’
- New Zealand dollar (NZD) nicknamed ‘Kiwi’
- Canadian Dollar (CAD) nicknamed ‘Loonie’
- Swiss Franc (CHF) nicknamed ‘Swissy’
These currencies are usually paired and traded with each other (cross), and are among the most traded currency pairs in the world. There is also what is called an exotic pair (exotic pair).
For example the American Dollar with the Singapore Dollar (USD/SGD). However, trading exotic currencies is rare in the forex market, as the volatility and trading costs are usually very high, so the risk of loss is greater than the potential profit.
Because currencies are traded in pairs, in forex trading, when we buy (Buy) one currency, we automatically sell (Sell) the currency that is its counterpart. For example, in the Euro vs Dollar pair, as shown in the image below.
The currency that appears in front of the slash is known as the base currency or in this case EUR, while the currency behind the slash is usually called the counter or quote currency or in this case USD.
If the order we place is ‘buy’, the exchange rate tells us how much we have to pay using the quote currency to get the base currency. To make it easier, let’s use the example above. To buy EUR 1, we have to pay USD1.4746.
When we ‘sell’, the exchange rate tells us how many units of the quote currency we will get when we sell one unit of the base currency. If we use the example above, it means we will get USD 1.4745 when we sell EUR 1.
To make it easier to understand currency pairs and how to trade forex using them, we simply memorize the key: the base currency is the ‘base’ or ‘base’ for our ‘buy’ or ‘sell’ orders.
So…when we buy EUR/USD, it means we are buying Euros and selling US Dollars; And if you sell EUR/USD it means selling Euros and buying US Dollars.
Also read: Hierarchy and Forex Market Structure that Traders Should Know
4. Forex traders can profit when prices go up or down
Basically playing forex is done by looking at market conditions, then predicting whether the value of a currency pair (price) will go up or down.
The prediction is then executed by opening a trading position (entry or open position). In forex trading, there are only two types of positions, namely:
– Beli (Buy/Long Position)
Buy positions are opened if the price of a currency pair is predicted to UP. Buy position means we want to profit from price increases in a currency pair.
So if you want to buy, we have to make sure the value of the base currency will increase. After buying at a low price level, we will close the position (close position) with a higher price.
– Jual (Sell/Short Position)
Sell positions are opened if the price of a currency pair is predicted to DOWN. Sell position means we want to profit from price declines.
So, if you want to sell, we must ensure that the value of the base currency will decrease. We buy at a high price level, then close the position after the base currency value is lower than the opening value.
Because in the way of forex trading there are two types of positions, forex traders have the opportunity to make profits, either when the exchange rate of a currency strengthens or weakens. Very interesting, isn’t it!?
Also read: History of Forex Trading: From Era of Gold to Online Trading Like Now
5. In Forex Trading There Are Two Types Of Prices
Have you ever logged into a Money Changer to exchange foreign currency (foreign exchange)? There are two types of exchange rates, namely the selling exchange rate and the buying exchange rate.
Similarly in forex trading, all price quotes are written in two prices: bid and ask. The bid price is usually lower than the ask price.
To understand it, let’s look at the previous price quote again:
The bid price is the price at which the broker is willing to buy the base currency and sell the quote currency. This is the price we use if we are going to sell a currency pair.
The ask price, or sometimes also known as the offer, is the price at which a broker is willing to sell the base currency and buy the quote currency. That is, the ask price is the price we use if we are going to buy a currency pair.
In the example above, we have the option to sell Euros at 1.4745 or buy Euros at 1.4746. The difference between the bid and ask prices is referred to as the spread, and it is part of the reward traders give the broker in return for providing trading software and connecting with the market.
Also read: Top 4 Forex Trading Risks You Must Understand, Don’t Lose!
6. Price Movement Count Based on Pip
In forex trading, price movements are calculated starting from a few numbers behind the comma. This unit of price movement is referred to as a ‘pip’.
Or in other words, a pip is a unit of measurement that shows the change in value between two currencies. For example, the USD/JPY pair moved from 91.23 to 91.24. Well, this 0.01 increment is called ONE PIP.
A pip is usually the last decimal in a quoted currency value. Most forex pairs appear with 4 decimal places, but some pairs (such as the Japanese Yen cross pair) have 2 decimal places.
Along with the development of financial technology, more and more brokers provide trading facilities that can monitor price movements to even smaller fractions. Therefore, not all brokers use 4 and 2 digit quotes; There are also brokers who use 5 and 3 digit quotes.
Well, those brokers basically use ‘fractional pips’ or what are also called ‘pipettes’. For example, if USD/JPY moves from 91,234 to 91,237, it means that there is a change of 0.003, or equal to 3 pipettes.
Got it!? Well, now the question is, how to calculate profit from pips? Because each currency has its own exchange rate, the way to calculate the pip value for each pair continues to change along with the fluctuations in the exchange rate. Consider the following example:
Rambo has an account with DoraFX broker that provides four-digit quotes. There, he will trade USD/CAD. At that time, the USD/CAD rate was 1.0200. The rate can be read as: 1 USD/1.0200 CAD. Here, a change of one pip means a change of 0.0001 CAD. So the dollar value per pip per unit traded is:
= (0.0001 CAD) x (1 USD / 1.0200 CAD)
= (0.0001 CAD/1.0200 CAD) x 1 USD = 0.00009804 USD per unit
With that example, if Rambo trades 1 mini lot in the USD/CAD pair, where 1 mini lot = 10,000 USD, then the dollar value per pip is approximately 0.98 USD.
Dizzy? Don’t worry, when trading later we don’t have to worry about pip or pipette calculations. The trading platform can do all the calculations for us automatically.
Also read: Simple Guide How to Make Money From Forex Trading Up To US$1000
7. No Need Big Capital Because There Is Leverage And Margin
In the financial market, apart from ordinary trading, the term ‘Margin Trading’ is also known. Margin Trading allows us to trade forex with much less capital than is actually needed to access the forex market.
In fact, it takes millions of dollars to play forex like the big players. However, Margin Trading allows us to take part in this very lucrative market.
Margin Trading is an activity of trading financial assets using funds borrowed from a broker, after we provide a certain amount of funds as ‘collateral’ to the broker. However, even though ‘borrowing funds’, we do not have to pay interest to the broker. Why so?
Because forex trading is trading non-physically, that is to say, the broker does not need to hand over a wad of real 10,000 Euros to us. We as traders are enough to pay trading fees in the form of spreads and commissions only to the broker.
To clarify, consider the following example of trading without margin (Margin 1:1):
It is known today that the EUR/USD exchange rate is 1.6612, which means 1 Euro is equal to USD1.6612. And the next day the currency pair has experienced a movement of points to 1.6712. For example, if we buy 100 euros, the profit we will get is calculated as follows (1.6712 – 1.6612) x 100 euros = 0.01 x 100 = 1 euro.
You see, the profit is only 1 Euro, so what’s so interesting about forex trading? Well, the capital is small, only 100 Euros. Imagine if we deposit a larger capital, 10,000 Euro for example. So if you count again, with a deposit of that size, the profit can be 100 Euros! If exchanged for Rupiah 100 Euro x IDR 15,000 = IDR 1.5 million! Wow, that’s pretty good too!
From the case examples above, maybe some of us have the opinion, “A deposit of that size but the profit is only 1% percent? We are desperately looking for a capital of 10,000 Euros aka 150 million Rupiah, just to get 1.5 million Rupiah? It’s just a lie, right.”
Wait a minute! The example above is conventional trading with a one-for-one system, which means the higher the capital, the higher the profit. This type of trading will certainly not be of interest, especially for those of us who have mediocre pockets. From there, Margin Trading was born with the “leverage” feature.
Leverage can literally be interpreted as ‘leverage’. In terms, it can more or less be interpreted as ‘leverage’ offered by brokers so that we can trade big even though our capital is small. This is because in order to really make a profit, you will actually need a large capital.
With leverage, we don’t really need to put up a capital of 10,000 Euros to trade. In essence, you only need to guarantee a small amount to get the 10,000 Euro capital.
For example, with a leverage of 1:100, we can simply give 100 Euros to the broker to get 10,000 Euros of ‘capital’. If the 10,000 Euros capital is used for trading and makes a profit like in the example above, then the profit is still 100 Euros! In essence, we can be 100 percent profit once a trade!
Also read: 6 Reasons and Advantages of Forex Trading that You Must Know
The 100 Euros as ‘collateral’ in this example is called ‘margin’ which you need to submit in order to take advantage of this facility. Or in other words, margin is the amount of money we need to hand over to the broker as collateral so that we can trade forex freely.
In practice, margin is usually indicated in the form of a percentage of the guarantee that we must submit versus the amount of funds that we can use to open a trading position. Based on the margin determined by the broker, we can calculate how much our maximum leverage is. Here’s an example of the conversion:
8. Margin is a Double-Edged Knife
From the description in the previous section, of course it can be concluded that the existence of leverage and margin is profitable for traders. However, this is actually a double-edged sword that must be used wisely.
The problem is, the margin disguises how much of our capital really is, so that even when there is a big loss, you can’t even feel it. For example in the example above.
Thanks to a margin of 1%, with enough capital of 100 Euros, we can get a profit of 100 Euros. However, if EUR/USD doesn’t go up from 1.6612 to 1.6712, but instead drops to 1.6512, then we will lose 100 Euros as well.
Therefore, it is recommended to use moderate leverage and margin, around 1:100-1:200 if you are still new to forex trading. In addition, we must pay attention to the following important terms when trading forex:
- Margin Requirement/Margin Required: the same as the definition of ‘margin’ above, this means the amount of money we need to hand over to the broker in order to trade forex.
- Account Margin: the total money we have in our ‘account’ or account with the broker.
- Used Margin: that part of the money in our account that the broker ‘locks up’ to maintain current trading positions. We cannot tamper with this Used Margin until our trading position is closed (Close Position), or is hit by a Margin Call.
- Usable Margin: the part of the money in our account that is free to use for buying and selling, aka opening new trading positions.
- Margin Call: if the amount of money in our account cannot compensate for possible losses, or when the amount of capital we have is lower than the Used Margin, the current trading positions will be automatically closed by the broker according to the market price. Being hit by a Margin Call (MC) means that we have clearly lost.
If you understand these terms, then we can anticipate the possibility of inadequate margins or even experiencing losses that exceed our available capital.
Please note, risk in forex is inevitable, but can be controlled, including the risk of insufficient margin.
Also read: The 6 Type Forex Market Participants In The World
9. Online Trading Don’t Need To Be Online All The Time
Technology has made the way of online forex trading in such a way that it makes it easier for us as traders. For example, after opening a trading position, we do not need to stare at the computer while waiting for the position to reach the profit target.
We simply place an instruction on the platform, at what price the target profit is considered to be reached and the trading position should be closed.
Later, even if we are relaxing watching a movie in the cinema or busy working in the office, trading positions will be closed automatically and profits will be directly entered into the account.
Through a similar method, we can also prevent fatal losses due to Margin Calls. You do this by placing a Stop Loss to close a losing trading position, before reaching the margin availability limit.
Therefore, even if we do not observe the market continuously, we can still prevent unwanted losses. Very practical, this is the ease of today’s forex trading.
Also read: What is Forex Trading: Definition, Markets and Forex Basics
10. Open Trading Positions Don’t Have To Be At The Current Price
Suppose, based on various forex analyzes that have been carried out, you predict the price on EUR/USD will increase in the long term, but you think the current price is not low or has the potential to open a Buy position because it can still go down again.
What to do? Should you monitor the computer constantly to check what the last price of EUR/USD was? Of course there’s no need.
On the forex trading platform provided by the broker, various types of instructions are available.
In addition to instructions for closing trading positions automatically, there are also various types of orders, such as: sell if the price is above the current price (Sell Limit), buy if the price is below the current price (Buy Limit), and so on.
This can be witnessed and tested directly on the trading platform, even if you only have a forex demo account.