Step by step guide to Forex trading

As profitable and rewarding as it might be, Forex trading is also associated with various risks that might lead to investment loss. Therefore, gaining the right knowledge before jumping into the market is essential. A well-prepared trader has a higher chances of success in the Forex market. Here are the fundamental steps traders should follow before making their first transaction in the market.

• Learn or study the Forex market.

Studying the market will involve learning about the various aspects, such as the participants, market structure, key terminology, and factors that move and influence the market. A solid understanding of the basics of the market enhances a trader’s skills and helps them to utilize the most beneficial trading tools to enhance their returns.

• Decide on how you want to trade.

For retail traders on the Forex market, the most common products are spot FX options and Forex CFDs.

FX options are derivative contracts giving a trader the right (and not obligation) to sell or buy a forex contract at a specific price on a particular date.

A CFD (contract for difference) is a derivative product allowing traders to speculate on the price movement of an underlying Forex asset without owning it.

Both options and CFDs yield profit and losses depending on the trade position size and the magnitude of price movement between the entry and exit points of the trade.

• Choosing a broker

A broker enables traders to access the Forex market; hence, traders must be careful while making this decision because brokers become their trading partners. Traders should consider various factors when selecting their Forex brokers, including:

Payment methods – It is essential that there are convenient and safe payment options, withdrawals with minimal hassles, and quick deposits.

Trading platforms – Traders should consider the reliability of the trading platforms, automated strategies, tradable assets, trading costs, and ease of use.

Regulations – A trader should consider a broker’s licensing and the jurisdiction within which they are allowed to operate, the transparency of the broker’s services, and the safety of their funds.

Trading resources – The trader should choose a broker who can readily avail educational materials, economic calendars, a demo account, risk control tools, trading calculators, and other valuable resources.

Customer service – The broker should be responsive, professional, and readily available to provide any support brokers need.

• Opening a trading account

Once a trader has chosen a broker, they go ahead and open a trading account through which they can trade their chosen assets. Traders should evaluate the available accounts and select one suitable for their trading needs. New traders are advised to begin with demo accounts to practice market operations without risking real investments. Once they are conversant, they can proceed to their preferred real trading accounts.

• Preparing a trading plan

After opening a trading account, traders prepare a plan detailing how they want to trade, guided by their goals and objectives of trading. The plan outlines various aspects, including:

Trading logo

Trading goals and objectives

Trading rules

Trading strategy

Risk management

Selecting a Forex pair

Traders can choose from various Forex pairs, falling under three categories: majors, minors, and exotic pairs. The pairs differ in volatility, liquidity and the exposure level to risks.

• Analyzing the market

In forex trading, profits and losses are defined by the market entry and exit prices. Traders should analyze the movement of their preferred assets to determine their opportunities and the best price point at which they should exploit these opportunities. They should conduct technical, sentimental, and fundamental analyses.

• Buying or selling

After analyzing the selected currency pair, the trader should decide whether to sell (go short) or buy (go long). In forex trading, traders go long when they expect the underlying asset’s price to rise and go short when they expect the prices to fall.

• Managing risks

In the same way that the Forex market is a pool of opportunities, it is also susceptible to risks. A trader must develop a risk management plan to be successful and sustainable in the market. These risks include leverage risks, transaction risks, interest rate risks, volatility risks, and market risks. The different risk management strategies include:

Defining the maximum risk per trade

Using stop loss and take profit orders

Determining the maximum drawdown over a specified period of time

Making a trade with propositions whose reward/risk is favorable

Avoiding excessive leverage

Carefully selecting the assets to trade in

• Monitoring your positions

Forex trading is a highly volatile and dynamic market, presenting both risks and opportunities. Traders are, therefore, required to monitor their positions to ensure they are in line with the prevailing market conditions. Some useful monitoring strategies include:

Staying up to date with the emerging events and news

Observing other traders

Subscribing to alerts and trading signals

Taking advantage of the reporting and monitoring features available on the trading platform

• Closing your trade

After opening a trade and monitoring it, the next crucial point is determining when to close it. The time when a trader closes a trade determines whether they make profits or incur losses. An appropriate closure strategy enables traders to minimize their risk exposure and not leave when the market is expected to be profitable. Some of the reasons why a trader can close a trade include:

It is the point of stop loss take profit

A trader wants to evade a margin call

End of a trading session or period, unforeseen losses are likely to emerge in the next session.

Freeing up capital for a new opportunity

Changes in market situations invalidating the initial analysis