There is a growing interest in forex trading as a way to top up your income, or even to switch to a full time career. While it’s more accessible than ever before, forex trading can also be complex and risky, especially if you are a complete newcomer.
However, everyone was a beginner once, and even people with no background in finance or economics have gone on to become successful traders. Here’s a look at how to learn forex trading from scratch, so that you can navigate the complexities of the markets with confidence.
The basics: what is forex trading?
First up, let’s take a look at the nuts and bolts of forex trading. ‘Forex’ is a portmanteau of foreign exchange, which is necessary for overseas travellers and international businesses and investors who need to use the currency of the particular country they are dealing with.
However, the majority of foreign exchange transactions are driven by speculative traders purely for the goal of generating capital, or to hedge against the risk of future changes in price, or to diversify investment portfolios.
The basic concept involves buying one currency while simultaneously selling another, with the aim of profiting from the difference in the relative values. The trades can be made as long term investments over several weeks or even months, or made within a day or even minutes.
How the forex markets work
The forex markets are the largest global decentralised financial markets in the world, with a daily trading volume of around $7.5 trillion. Due to international time zone differences, they also operate almost around the clock, which makes them more accessible to traders who also work a full time job.
There are four main sessions: London, New York, Tokyo, and Sydney, which overlap at opening and closing times, creating particularly busy periods with good trading options. This makes the forex markets highly liquid, which means buyers and sellers are usually always readily available, particularly for the major currencies such as the US dollar or the Euro.
What drives currency prices?
Currency prices fluctuate according to a range of influences, including economic indicators of individual countries, such as GDP, interest rates, inflation, the consumer price index (CPI) and unemployment rates. They are also driven by geopolitical events such as elections, wars, natural disasters and pandemics; and also market sentiment and appetite for risk.
Therefore you should start to follow the current affairs and economic data releases for the currencies that you are interested in trading. For beginners, it will be in your best interests to trade with the ‘majors’. These are currencies from the major economies, including the USD, EURO, GBP, AUD, JPY, and the CAD.
Learn the terminology of trading
It’s best to make an effort to learn the language of trading before you dive into the markets, otherwise you will risk becoming confused and will be more likely to make basic mistakes. There is no need to spend a lot of money on learning materials, as there are plenty of free resources available on the web.
Decide on the learning method that works best for you, such as an online training course; independent reading; webinars; or immersing yourself in trading forums and communities, and perhaps working with a mentor. You may choose a combination of all of these methods.
When selecting a training course, don’t just jump at the ones that appear at the top of the search engine results pages, because they can vary considerably in terms of content and quality.
Red flags to look out for include constant promises that you will be making thousands of dollars within a few months, and too basic and brief or overly dense and technical explanations. Research a few courses and pick one that is most compatible with your learning style, in terms of language, tone, and content.
Remember that forex trading is a dynamic process, and you should continually invest in your knowledge by reading widely and keeping up with current affairs and political analysis.
Put together your own trading plan
When you feel that your knowledge level is sufficient to navigate your way through a trade, it’s time to put together a trading plan. This will guide you through your decision making and stop you from making impulsive moves that aren’t supported by technical or fundamental analysis (which you will have learned about during your training course).
Keep it simple: a straightforward strategy can be just as effective as a more complicated one. There’s no need to pile unnecessary pressure on yourself as you make your first forays into the markets. However, your strategy should include basics such as whether you will be making long term position trading; swing trading; day trading; or scalping.
The tactic you take will depend on the amount of time you have available for trading, and your individual characteristics and preferences. For example, scalping and day trading are time-intensive, as they require intense concentration. You will also need the ability to think fast and be comfortable with making quick decisions under pressure.
The other crucial element to have in place is a risk management plan. If you aspire to gain access to a funded account with a prop firm, you’ll need to be able to demonstrate that you can manage risk responsibly. In fact, the essence of good trading could be boiled down to taking carefully managed risks, otherwise you are really just doing little more than gambling.
Always pre-define your market entry and exit points, and use stop-loss and take profit orders to mitigate against damaging losses. Never trade more money than you can afford to lose, and avoid the temptation to overleverage. As a general rule, new traders should not risk more than one to two per cent of their account value per trade.
Start trading with a demo account
A demo account is a good stepping stone between the theory of forex trading and the cut and thrust of the live markets. It will help you build your confidence, as you will be working in simulated market conditions, but without the additional stress of trading real money. What’s more, many prop firms offer a free 14-day demo trial, so it won’t cost you anything.
However, to give yourself the best chance of success, treat your demo account as if it were real money. This will mean that you encounter the most realistic trading scenarios, and thus your learning experience will be more beneficial. Start small and do not become over-ambitious, and always stick to your strategy.
It’s also a valuable opportunity to familiarize yourself with the interface of the trading platform, so you won’t waste time searching for certain features when you progress to live trading. Remember, if you do well during the demo phase and hit your profit targets, you will have the option of progressing to the evaluation program.
You’ll usually need to pay an upfront fee to take part in the evaluation stages, but some prop firms such as FTUK will refund this if you pass one or two tests during the 14-day trial. This will then give you access to a fully funded account with a scaling trading plan.
Initially, the profit share will be split 50:50, but as you progress you can work your way up to an 80:20 profit share in your favour. You will also be able to scale up your account size to a maximum of $6m +, so there really is serious money to be made if you are prepared to put in the time, and have the dedication and resilience to learn forex trading from scratch.
Refining your skills
When you feel confident enough in your basic skills, it’s time to start honing your trading mindset. This will give you a competitive edge, and help you to remain calm, positive and resilient even when the waters are choppy and your trades are not going as you hoped and planned they would.
It’s worth reading up on trading psychology, because when it comes to dealing with money, we all have strong feelings. Even if you don’t regard yourself as a particularly emotional person, human beings are hardwired to protect their assets and fear losses— it’s an evolutionary instinct that is impossible to completely suppress.
The best tactic is therefore to work on developing your emotional intelligence, and educate yourself about the hidden biases that can subconsciously influence our decisions. If you find that you become overly cautious and fearful of making losses, this will impede your ability to make consistent profits.
Conversely, new traders can be prone to becoming greedy at the first hint of success, and this can lead them into hanging onto a profitable trade for too long, or becoming overconfident in their abilities. Learn how to manage your emotions, and step away from the screen and refer back to your trading plan when you lose your cool.