How to get started with Forex - Step-by-step guide

What is Forex trading?

Forex trading involves buying and selling currencies in the foreign exchange market. It's the largest financial market globally, with a daily trading volume of $7.5 trillion in 2022. The market is decentralized, and currency transactions are conducted electronically through the interbank market. While commercial and investment banks conduct most of the trading, there are opportunities for individual investors to speculate on currency prices. Fundamentally, investors can also profit from the interest rate differential between two currencies or changes in the exchange rate. Traders must understand the market and its factors to make informed decisions, and it is crucial to seek guidance from experienced professionals before investing.

In the past, currencies were exchanged or bartered for goods and services, but the modern Forex market emerged after the collapse of the Bretton Woods accord in 1971, which allowed currencies to float freely against each other. This resulted in the development of foreign exchange trading services that monitor and facilitate the buying and selling of currencies based on their demand and circulation.

How to read Forex quotes?

Understanding how to read Forex quotes is essential for any Forex trader. Forex quotes are represented in pairs, with the first currency listed as the base currency and the second currency as the quote or counter currency.

The price of a Forex pair tells you how much of the quote currency is needed to buy one unit of the base currency. For example, if the GBP/USD pair is trading at 1.3850, that means it takes 1.3850 USD to buy 1 GBP.

Let's take the example of buying Euros with US dollars. If the EUR/USD pair is quoted at 1.20, it means that one Euro is worth 1.20 US dollars. To buy one Euro, you would need to pay 1.20 US dollars. Conversely, if you want to sell Euros and buy US dollars, the quote would be the inverse, meaning you would receive 1.20 US dollars for selling one Euro.

MetaQuotex

As a trader, you are more likely to come across something like the above image, which depicts the home terminal of MetaTrader 4 (MT4), a popular trading platform used by forex traders worldwide. The screen is divided into multiple sections, but the main focus is on the forex quote display located in the center of the screen.

The forex quote display shows real-time pricing information for various currency pairs, including the bid price (the highest price a buyer is willing to pay for a currency) and the ask price (the lowest price a seller is willing to accept for a currency). Each currency pair is represented by a unique symbol, such as EUR/USD or GBP/JPY.

It's important to note that Forex quotes are always given in pairs, and the value of the pair is determined by the exchange rate between the two currencies. Understanding how to read Forex quotes is critical to making informed trading decisions in the Forex market.

Top Forex trading strategies for beginners

For beginners, navigating the complex world of Forex trading can be challenging. With so many strategies available, it can be difficult to know where to start. So, in this section, the experts will explore some of the top Forex trading strategies that are ideal for beginners.

Scalping

Scalping is a trading strategy in which traders make frequent, small trades with the aim of profiting from small price movements in the market. Typically, scalpers hold their positions for only a few minutes or even seconds, and aim to take advantage of quick price fluctuations in the market. Scalping requires a high level of skill and discipline, and can be a challenging strategy for beginners to master.

Parabolic SAR

The Parabolic SAR (Stop and Reverse) indicator is a popular tool among beginner scalpers. This indicator helps identify potential entry and exit points by plotting dots above or below the price bars, indicating the direction of the trend.

Entry point: To enter a long position, a trader should wait for the Parabolic SAR dots to appear below the price bars, indicating an uptrend.

Exit point: Traders should exit the position when the Parabolic SAR dots reverse their position, signalling a potential trend change.

Stop loss: To limit potential losses, traders can place a stop loss at the most recent Parabolic SAR dot.

Profit taking: Profits can be taken when the trader reaches a predetermined price target or when the Parabolic SAR signals a trend reversal.

Parabolic SAR

Bollinger Bands and Stochastic scalping strategy

The Bollinger Bands and Stochastic scalping strategy is an advanced technique that aims to identify potential reversals in price action when an asset or position reaches overbought or oversold levels. It is a popular strategy among day traders looking to profit from small price movements.

The Bollinger Bands indicator consists of three lines: the middle line, which is a moving average, and two outer lines that are two standard deviations away from the middle line. The Stochastic indicator is a momentum oscillator that measures overbought and oversold conditions in the market.

To implement this strategy, traders should set up the following indicators on their chart:

Entry point: To enter a long position, traders should wait for the price to break below the lower Bollinger Band and then close above it, with the Stochastic indicator below 20.

Exit point: Traders can consider taking profits at the middle line between the Bollinger Bands before moving their stop to breakeven.

Stop loss: To limit potential losses, traders can place a stop-loss order three pips above the candle's high for a short trade, or three pips below the candle's low for a long trade.

Profit taking: A reasonable profit target could be the average price movement of three points beyond several recent price swings. Once this target has been reached, traders can consider exiting the position to lock in their gains.

Bollinger Bands and Stochastic scalping strategy

Engulfing Pattern

The engulfing pattern is a powerful two-candle chart pattern that occurs when a prevailing trend, either upward or downward, is losing momentum. It is characterized by a smaller candlestick that is followed by a larger one, which completely engulfs the preceding candle. When this pattern emerges, traders can consider entering a trade in the direction opposite to the prior trend.

Entry point: To determine the entry point in the engulfing pattern, a trader must first identify the pattern's presence on the chart. For instance, in a bullish engulfing pattern, the first candlestick is bearish and is followed by a larger bullish candlestick that engulfs the previous one. In this case, a trader can initiate a long position upon the completion of the second candlestick.

Exit point: In a long trade, a trader can exit the position when the price reaches a significant resistance level or shows signs of reversing.

Stop loss: In order to manage risk in the engulfing pattern, a trader should set a stop loss just beyond the extremities of the engulfing candlestick. In a long trade, the stop loss can be placed slightly below the low of the bullish engulfing candlestick, while in a short trade, it can be positioned slightly above the high of the bearish engulfing candlestick.

Profit taking: Profit taking in the engulfing pattern depends on the trader's specific goals and risk tolerance. A trader can establish predefined profit targets based on key support and resistance levels or use trailing stops to capture gains as the price moves in the desired direction.

Engulfing Pattern

Double Top pattern

The double top pattern often signals that an asset is about to reverse its current course and move in the opposite direction. The double top is characterized by two distinct peaks at approximately the same price level, separated by a trough referred to as the neckline.

Entry point: In order to establish an entry point using the double top pattern, a trader should first identify the pattern's formation on the chart. Once the second peak is formed and the price begins to decline towards the neckline, a trader can consider entering a short position when the price breaks below the neckline.

Exit point: One common approach is to measure the distance between the peaks and the neckline, then project this distance downward from the neckline to establish a price target.

Stop loss: A trader can place the stop loss slightly above the highest point of the second peak. This level serves as a protective barrier against potential false breakouts, ensuring that the trade is closed if the price unexpectedly moves higher instead of continuing its downward trajectory.

Profit taking: To determine optimal profit targets, traders should consider the pattern's structure, such as the distance between the peaks and the neckline. This distance can be projected downward from the neckline to establish a price target, providing a clear objective for taking profits.

Double Top pattern

Day Trading

Day trading is a type of trading in which a trader buys and sells securities within the same trading day. The goal of day trading is to earn profits from small price movements in a short period of time, usually within a few minutes or hours.

MACD

The MACD (Moving Average Convergence Divergence) strategy is a versatile day trading technique that evaluates market trends and momentum within a specific time frame. By analyzing the relationship between moving averages and stock price momentum, traders can identify potential entry and exit points based on the indicator's signals.

Entry point: When the MACD line crosses above the signal line, it generates a buy signal, indicating that a trader can enter a long position.

Exit point: In a long trade, a trader can exit the position when the MACD line crosses below the signal line, signaling a potential trend reversal.

Stop loss: In the MACD strategy, setting a stop loss is essential for managing risk. For a long trade, a trader can place a stop loss below a recent swing low or a significant support level. In a short trade, a stop loss can be placed above a recent swing high or a notable resistance level. These placements help limit potential losses if the trade moves against the intended direction.

Profit taking: A trader can establish profit targets based on various factors, such as support and resistance levels, chart patterns, or a multiple of the initial risk.

MACD

Ichimoku Cloud Trading Strategy

The Ichimoku Cloud indicator is a popular and comprehensive technical analysis tool that is used to identify trend direction, support and resistance levels, and momentum. It consists of five different components, each of which provides valuable information that can be used to generate reliable trade signals.

Entry point: The Tenkan and Kijun crossover signals can be used to identify potential entry points. A bullish signal occurs when the Tenkan crosses the Kijun from below, indicating a long position below the support level.

Exit point: A bearish signal occurs when the Tenkan crosses the Kijun from above, indicating a short position above the resistance levels.

Stop loss: To manage risk, a stop loss can be set at the average of recent price swings.

Profit taking: A reasonable profit target would be an average price movement of three points beyond the last several price swings. Once this target is reached, consider it the exit point.

Ichimoku Cloud Trading Strategy

Breakout Trading

The breakout strategy for day trading is a popular approach that focuses on identifying assets or positions that surpass specific thresholds accompanied by a rise in trading volume. This strategy aims to take advantage of the surge in volatility that occurs when the security or asset surpasses these levels, leading to a shift in prices in the direction of the breakout. To implement this strategy, follow the guidelines below:

Entry point: The entry point for the breakout strategy is relatively simple. If the price is set to close above resistance levels, then a bearish position is required. Conversely, if the price is set to close below a support level, then a bullish position is required.

Exit point: Traders should analyze the recent performance of the asset to determine the price target. Chart patterns can be useful in this process to increase accuracy.

Stop loss: A good way to determine the stop loss is to measure the average of recent price swings to create a target.

Profit taking: To determine the profit target, traders can consider taking an average price that moved three points beyond several last price swings.

Breakout Trading

Head and Shoulders pattern strategy

The Head and Shoulders strategy is a well-established technique that identifies trend reversals in the market by analyzing distinct chart patterns. This strategy is based on the recognition of a specific price formation, consisting of a central peak (the head) flanked by two lower peaks (the shoulders). By examining the market's behavior around these key formations, traders can make informed decisions on entries, exits, and risk management.

Entry point: The entry point is determined by identifying the pattern's completion, signaled by a break below the neckline – a support level drawn by connecting the troughs between the head and the shoulders.

Exit point: Traders can calculate the distance between the head's peak and the neckline. This distance, called the pattern's height, can be projected downward from the neckline to set a price target.

Stop loss: A trader can place the stop loss slightly above the right shoulder's peak, protecting against potential false breakouts and ensuring that the trade is closed if the price unexpectedly moves higher instead of continuing its downward trajectory.

Profit taking: Same as exit point.

Head and Shoulders pattern strategy

Head and Shoulders pattern strategy

Swing trading

Swing trading is a trading approach where positions are held for a period ranging from a few days to several weeks. This method aims to capture price movements or "swings" within a prevailing trend, taking advantage of fluctuations in the market.

Moving Average Crossover strategy

The moving average crossover strategy is one of the simplest and most popular swing trading strategies used by traders. This strategy involves two moving averages, a short-term moving average, and a long-term moving average, to generate buy and sell signals.

Entry point: The entry point for a trader is to open a long position when the short-term moving average crosses over the long-term moving average.

Exit point: The exit point for a trader is to close a long position when the short-term moving average crosses below the long-term moving average.

Stop loss: To manage risk, traders can place a stop loss order below a recent swing low.

Profit booking: Profit-taking can occur in two ways. Firstly, traders can take profits when they reach a predetermined price target. Secondly, traders can close their positions when a reversal signal is observed. A trader can analyze the chart pattern to determine the reversal signal and decide to take profits.

Moving Average Crossover strategy

Flag pattern strategy

The Flag Pattern strategy is an approach that capitalizes on continuation patterns within a prevailing trend, either upwards or downwards. Flag patterns signal that the current trend is likely to persist after a brief pause in the asset's price movement.

Entry point: The entry point for the Flag Pattern strategy is based on the breakout of the flag formation. For a bullish flag, a trader can enter a long position when the price breaks above the flag's upper boundary.

Exit point: Exit points are determined by projecting the length of the flagpole from the breakout point of the flag.

Stop loss: To manage risk, a stop loss can be set just beyond the opposite end of the flag formation. In a long trade, place the stop loss below the flag's lower boundary, while in a short trade, set the stop loss above the flag's upper boundary.

Profit taking: Traders should be prepared to take profits when the price reaches the calculated target based on the flagpole's length.

The Flag Pattern strategy

Buy and Hold Strategy

The Buy and Hold strategy in Forex trading is an approach where traders establish long-term positions in currency pairs, aiming to benefit from interest rate differentials and potential appreciation over time. A common example of this strategy is the carry trade, in which a trader sells a low-interest-rate currency, and buys a high-interest-rate currency. By doing so, the trader can earn the interest rate differential between the two currencies.

Unlike short-term traders who focus on market timing and rapid fluctuations, those employing the Buy and Hold strategy seek long-term profit potential. To achieve success, traders must consider various factors, including central bank policies, global sentiment, and unemployment rate trends. This method demands patience, as the trader may hold positions for years or even decades. While the interest income from the trade can be anticipated, the trader must also be prepared for the uncertainty of the currencies' relative performance over time, as numerous factors can influence their values.

The Buy and Hold strategy

Choosing your trading strategy – A guide

Common Forex terminology

The world of Forex is vast, and beginners must now certain terms that are the bread-and-butter of this field. Here are some common Forex terminology that every beginner must know of, as per our experts:

Currency: Currencies are various forms of money used as a medium of exchange in different countries, such as US dollars, euros, or Japanese yen, and are traded on the Forex market.

Currency Pair: In Forex trading, currencies are traded in pairs, consisting of a base currency and a counter-currency, like EUR/USD, where you buy euros and sell US dollars.

Major Currency Pairs: Major currency pairs involve the US dollar and one of the seven other major currencies (EUR, CAD, GBP, CHF, JPY, AUD, NZD), offering lower transaction costs and liquidity for traders.

Cross Pairs and Exotics: Cross pairs involve two major currencies without the US dollar, while exotic pairs include less commonly traded currencies, such as the Mexican peso or Turkish lira.

Exchange Rate: The exchange rate, or price, represents the value of one currency in terms of another, like how many US dollars are needed to purchase one euro.

Bid/Ask Price: The bid price is the amount buyers are willing to pay, while the ask price is the amount sellers want to receive; transactions occur when these prices meet.

Spread: The bid/ask spread represents the main transaction cost in Forex trading, as it measures the difference between the bid and ask prices.

Pip: A pip is the smallest increment in which an exchange rate can move, typically equal to the fourth decimal place of most currency pairs.

Pipette: A pipette is an even smaller increment of currency price movement, equal to 1/10 of a pip, found at the fifth decimal place for most pairs.

Going Long/Short: In Forex trading, going long means buying a currency pair, while going short means selling it.

Support: In technical analysis, support levels are price points where buying pressure has historically prevented the price from falling further.

Resistance: Resistance levels, also essential in technical analysis, are price points where selling pressure has historically prevented the price from rising further.

Leverage: Leverage allows traders to open larger positions than their initial account size would allow, magnifying both potential profits and losses.

Margin: Margin is the collateral required by a broker when trading on leverage, with the size depending on the leverage ratio being used.

Lot Size: The position size in Forex trading, lot size, affects profit and loss values, with standard lots equaling 100,000 units of the base currency, and smaller sizes available as mini-lots, micro-lots, or nano-lots.