6 Easy Lessons To Learn The Basics As A New Forex Trader

February 20, 2024
Natalie Thorburn

 

Learning the basics is the first and foremost thing that you need to do when you are new to something. Forex trading is also something that you need to learn from scratch. New traders who spend enough time to educate themselves and prepare for the trading process, can surely explore the dynamic currency market with ease. The learning period will be different for each beginner but the first lessons are the same for every novice trader. However, the time that will be needed to grasp the trading concepts and comprehend the forex terms will depend on your ability to learn.

In this blog, I will be sharing some easy lessons to understand the basics of forex trading and it can be an insightful read for all beginners. So, keep reading till the end.

  1. The Basics of Currency Pairs

The asset class that you will be dealing with as a forex trader is international currencies that are traded as pairs. A currency pair is made by stating the value of one currency against another currency. The first one is referred to as base currency and the second one is the quoted currency. The price of a currency pair is the exchange rate of the currencies that are paired together. These prices are stated in ‘pips’ which is the standard unit of measurement in forex. To make profits in forex trading, one should be able to buy and sell the currency pairs after anticipating the price movements with accuracy.

Since the price fluctuations are counted with pips, one should also consider the pip value for estimating the profit potential of a trade. This task is made easier by a profit calculator which can calculate an estimated profit of a trade in advance, once you enter the required details. Apart from this, there are many currency pairs that you can trade in the forex market and all of them have distinct features that you should know about for planning your trades. So, the first lesson to learn as a trader is studying different currency pairs.

  • Major Pairs - Major pairs are the most traded pairs and this also makes them highly liquid. Major pairs always include USD and other major currencies like Euro, GBP, AUD, JPY etc. They are perfect for a beginner due to their stability and tight spreads.
  • Minor Pairs - Minor pairs come second in terms of trading volume and liquidity. They also include major currencies but not USD. They are more volatile in nature and are also known as cross pairs.
  • Exotic Pairs - Exotic pairs are formed with one major currency pair with the currency of a country, where the economy is still developing or emerging. They have low liquidity and high volatility. Because of this, they are very risky in nature.
  1. Forex Trading Sessions

The forex market is always open and trading hours are divided into 4 trading sessions based on the time zones of the 4 major economies. They are named as New York session, Tokyo session, London session and Sydney session. The forex market is only closed during the weekends; hence, you can engage in currency trading 24 hours a day and 5 days a week, with the only exception being special holidays.

Traders can choose to trade during any of these sessions after considering the currency pairs that are actively traded during these hours and their personal schedules. You can also use tools like time zone converters to see the timings of different trading sessions in your local time zone.

  1. Trading Terminology

Every financial market has some technical terms that you have to learn before becoming a trader. The forex world also has its own jargon and I already mentioned one that is pip. Pip stands for price interest point or percentage in point and it is one of the unique terms that forex traders use. I also talked about currency pairs and how they work and you should understand the meaning of terms like base currency and quoted currency.

Talking about currencies, you will have to consider the conversion rates before placing each and every trade and you can depend on currency calculators for converting an amount from one currency into another. They are automated tools that apply real-time exchange rates, promising precision while giving instant results.

There are a lot of important terms that you should get familiar with as a forex trader but I want to talk about going long and short as it is the most basic. Going long on a currency pair means that you are buying the base currency as you expect a price rise and shorting is a strategy where you sell the pair while anticipating a drop in its price.

  1. Entering and Exiting Trades

When it comes to entering and exiting trades, you have to follow a sound trading plan and strategy which needs to be well-aligned with your trading goals and risk tolerance. You should also take time to calculate the optimal position size or lot size for attaining your profit target. When it comes to finding trade setups, the majority of traders depend on technical analysis, in which they monitor the price charts to identify good trading opportunities. Then, you have to decide the entry and exit points after careful consideration of the potential outcome. You can also rely on tools like technical indicators to confirm the analysis.

 

  1. Research and Analysis

Besides technical analysis, you should also take time to do some research about the forex market and how it moves. You should also learn about fundamental analysis which focuses on the fluctuations that are caused by economic data releases and news events that influence the forex currency pairs. For instance, the interest rate policy of the Federal Reserve and ECB will influence the price of the EUR/USD pair. The monetary policy of the Bank of England will impact the cable pair (GBP/USD) and even the inflation rates and GDP of economies play a key role in determining the value of their currencies.

  1. Types of Forex Traders

We can categorise forex traders into 4 groups based on their trading style. First is a scalper who enters and exits multiple trades within a few minutes and aims to make quick profits. Day traders also focus on short-term price movements but they keep the trades open for a longer duration. But they don’t take any overnight risks. Swing traders follow a medium-term strategy as they hold on to their positions for several days or weeks. Positional traders follow a long-term strategy as they keep their trades open for months or even years. You should select a trading style that suits your trading personality and risk tolerance.

Conclusion

So, these are the 6 forex lessons to learn the basics of currency trading with ease. It is impossible to cover everything in a blog but I hope this information can help you to get started on your trading journey. Take your time to dig deep and learn further about the forex market and trading concepts. The more you learn, the more you can earn as a beginner.

 

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