In recent years, the popularity of forex trading has skyrocketed. Thousands of people, both in South Africa and around the world, have started exploring it to participate in the financial markets and diversify their income sources. If you’re reading this blog, you’re probably one of them!
That said, forex trading can be intimidating for beginners. You’ll encounter terms like “price movements” and “major currency pairs,” as well as charts that can be challenging to understand. While it offers opportunities, it also comes with significant risks. Success requires proper knowledge, practice, and a solid approach to risk management.
In this blog, we’ll guide you on how to start trading as a beginner. We’ll break down some of the tricky trading jargon and teach you basic strategies to get you on your way.
What is Forex Trading?
Forex is short for “foreign exchange.” By its name, you might guess that this means trading different currencies, and you’d be guessing right. Through forex trading, a trader is involved in buying and selling financial instruments like currencies to turn a profit.
Why choose forex over other types of assets? The forex market is massive. Trillions of dollars are traded daily, making it the largest and most liquid market in the world. Unlike regular stocks, it also operates 24/7. This gives you the flexibility to trade at any time that works for you.
While these benefits are appealing, it’s important to remember that trading forex also comes with risks. High liquidity and constant market changes can lead to losses. It’s essential to trade carefully and understand the challenges.
In South Africa, forex trading is legal and regulated. This helps create a safer environment for traders. Even so, staying informed and trading responsibly is always important.
Forex Brokers Are Your Entry to Trading
So, is forex trading as easy as hopping onto a random website and shouting, “I want to trade forex!” into the void? Well, yes and no.
Jumping into the forex market is certainly easy, but you’ll need the help of a broker. Just like stock brokers, forex brokers are licensed to provide beginner traders with access to a trading platform. Therefore, finding a reputable broker who prioritises your needs is crucial for becoming a successful forex trader.
So, what factors should beginner traders consider?
Reliability
You wouldn’t put your money in some no-name bank with no credentials, right? It’s the same thing with trading forex. Make sure your broker has a solid reputation through checking the reviews and ratings from other traders.
Transparency in Fees
Forex should be about making money, and fees, while necessary, can sometimes get in the way. That’s why it’s important to have a broker who is upfront with you about whatever fees and commissions they charge, so that you aren’t randomly surprised with a greedy fee structure.
Customer Support
As mentioned, the forex market is 24/7, so you’ll want to have a forex broker who’s there for you any time of the day or night. This is especially true when you’re a beginner who needs as much guidance as possible. Before signing up for a broker, make sure they offer a robust customer support system, preferably with multiple channels like an official email, phone hotline, and live chat setup.
Regulation
The good thing about forex trading’s popularity across the globe is that different countries have started recognising its importance, and as such, have begun to put regulations to protect traders. So, if you’re a beginner trader in a country like South Africa, make sure to check your local regulation authority. Forex trading in South Africa is regulated by the Financial Sector Conduct Authority (FSCA).
Trading Instruments
Now, we get into the weird little terms that come with being a beginner forex trader. The first of which are understanding the different kinds of currency pairs used as trading instruments.
Currency Pairs
The meat of forex comes with buying and selling currency pairs. As the name tells you, the currency pair involves two different currencies. For instance, you might be trading the currency of EUR/USD (Euro/US Dollar) or GBP/JPY (British Pound/Japanese Yen). In reading a currency pair, the first currency is what we call the base currency, which is the currency you buy. The second currency, on the other hand, is the quote currency, which you sell.
So how do you make money off this? When you buy the base currency and sell the quote currency, you hope that the value of the base currency will rise relative to the quote currency. The difference in price is ultimately what will get you profit.
Major Pairs
A major pair refers to combinations between the US Dollar and other major currencies like the Euro, Japanese Yen, British Pound, Swiss Franc, Canadian Dollar, and Australian Dollar. These are called major pairs not only because of the prominence of the currencies, but also because they are the most traded currencies in the world.
Minor Pairs
Despite the name, minor pairs still involve major currencies. However, they are trades of the major currencies with each other, but not with the US Dollar.
Exotic Pairs
So, what about pairs which don’t involve a trade of major currencies? We call these pairs the exotic pairs. These happen when you pair a major currency with a smaller currency, typically from emerging markets.
How to Get Started with Trading
Getting started with Forex trading involves several steps:
Educate Yourself
There are droves of helpful resources online to help you get started with trading. There are plenty of online resources, courses, and books out there that can explain the basics of forex trading for beginners and give tips for those who want to start getting more in-depth.
If you’re wondering how to start forex trading in South Africa, JP Markets has eBooks packed with insights and strategies to help you master the markets. There are also websites like BabyPips, which offer free comprehensive courses for beginners.
Choose a Broker
Choosing the right broker is important. Look for one with a user-friendly platform, educational tools, and proper regulation. JP Markets, for example, is authorised by the Financial Sector Conduct Authority (FSCA) as an Over-the-Counter Derivatives Provider. JP Markets ensures that all personal information and documents are stored securely in compliance with data protection regulations.
Open a Trading Account
Here comes the fun part! Once you’ve registered with your broker of choice, you can start opening your trading account. Look into the different types of accounts being offered by your broker. Many brokers offer a wide set of different accounts depending on your trading style, budget, and experience level.
Start with a Demo Account
Some brokers will even offer demo accounts to beginners. If they do, take advantage of this! Demo accounts are designed to help you practice trading, by allowing you to spend virtual money instead of risking your own capital. This way, you can better understand how the trading platform works and develop your trading strategies, all without the risk.
Develop a Trading Plan
Never trade without a plan. Trading plans are designed to keep you disciplined, engaged, and responsible with your money. A good trading plan has a defined list of trading goals, as well as an assessment of your personal level of risk tolerance.
Basic Tools and Resources Needed for Trading
What’s a carpenter without a hammer or a doctor without a stethoscope? As a trader, having your own utility belt of tools is crucial. A diverse and curated toolkit will allow you to make better trading decisions. Forex trading apps and tools range from basic news apps that keep you updated on market trends to complex analytical tools that help you understand currency movements. Here are some essential tools:
Trading Platforms
This is the most fundamental of trading tools, and the one that your broker should provide. Platforms like MetaTrader 4 (MT4) and MetaTrader 5 (MT5) offer real-time market data, charting tools, and various analytical tools. These platforms are widely used by traders worldwide.
Economic Calendars and News Apps
An economic calendar not only helps you keep track of dates, but also plots out major economic events and announcements that could impact currency values. JP Markets offers access to an Economic Calendar, designed to keep you ahead of the curve.
Outside of the economic calendar, one way to take note of the events which may impact your buying or selling are through simple news apps such as those of Bloomberg, Reuters, and other reputable press organisations that provide financial news and analysis.
Mobile Apps
Nowadays, trading doesn’t need to be through clunky old websites. Many trading brokers, including JP Markets, now offer mobile trading apps, allowing you to trade on the go for better convenience and simplicity.
Analytical Tools
Once you get into the slightly more advanced levels of trading, you’ll soon find that no respectable trader would be caught dead without their analytical tools. Tools like TradingView offer advanced charting and analysis features, helping you make informed trading decisions.
Disclaimer: The tools and platforms mentioned are for informational purposes only. JP Markets does not endorse specific tools and encourages users to choose based on their preferences and needs.
Types of Analyses in Forex Trading
When it comes to forex trading, it’s important to understand the market and make decisions informed by it. This is where analysis comes in, and particularly, the two main kinds of analysis –– technical analysis and fundamental analysis. Both approaches offer unique insights and can be used individually or in combination to develop a robust trading strategy.
What is Technical Analysis?
Technical analysis, in short, is all about using market trends. You take historical price movements and use the patterns you see as an indication for where the market will trend in the future. Here, understanding why the trends are what they are isn’t as important as simply understanding that they occur, and figuring out when they do.
Naturally, those proficient in technical analysis will use technical tools like charts to help them model future price movements. This strategy tends to work best for those who are trading currencies in the short term.
Key Concepts in Technical Analysis
Charts
Visual cues like line graphs, bar graphs, and candlesticks can help you better visualise price movements over time.
Indicators
Technical indicators are essentially signals that tell you when your ideal entry and exit points are for trades. Look out for different indicators like Moving Averages, Relative Strength Index (RSI), and Bollinger Bands
Patterns
Chart patterns can show the ways price trends may reverse or continue. You can follow some classic patterns like Head and Shoulders, Double Tops, and Triangles.
Support and Resistance
Support and resistance refer to different levels where a price can reach. If the price falls, there is usually a level of support where it bounces back; and conversely, when a price rises too much, there is usually a level of resistance where it doesn’t go further. These levels help traders make decisions on when to enter or exit trades.
What is Fundamental Analysis?
Unlike technical analysis, fundamental analysis seeks to explore the “why” behind market movements. In fundamental analysis, a trader evaluates a security’s intrinsic value by analysing related economic, financial, and other qualitative and quantitative factors which affect the market on a macro scale. When it comes to trading currencies, this may involve understanding economic indicators, and political stability as ways to determine overall market conditions and a country’s market health. Typically, those with a more long-term horizon for their trades favour fundamental analysis.
Key Factors in Fundamental Analysis
Economic Indicators
The usual factors in determining a country’s economic health fall under this category. Things like GDP, unemployment rates, inflation, and interest rates may provide valuable insights to fundamental analysts.
Political Stability
Political events and stability can significantly impact currency values. Things like wars, coups, and internal political division can drastically affect prices. Similarly, more stable governments are generally more favourable for a strong currency.
Market Sentiment
Do investors see value in this currency? Are they willing to invest and trade this currency? These sentiments, like it or not, can influence the value of buying or selling an asset. Positive sentiment can drive demand, while negative sentiment can lead to selling.
Interest Rates
Central banks’ decisions on interest rates, and whether to cut said rates or not, can greatly impact currency values. Higher interest rates attract foreign investment, increasing demand for the currency.
Common Trading Strategies for Beginners
Day Trading
Here, your trading ends as your day ends. Because you are buying and selling within a short period of time, this strategy involves taking advantage of small price movements. It requires quick decision-making and a good understanding of market trends, making day trading for beginners a challenging but rewarding approach if they are equipped with the right knowledge and skills.
Swing Trading
Unlike day trading, your horizon in swing trading may last for several days to weeks just holding an asset. This is because in swing trading, you aim to profit from swings –– expected upward or downward market shifts. Swing traders rely on technical analysis to identify trading opportunities.
Scalping
Scalping is the shortest timeframe strategy there is, where positions are held for a few seconds to a few minutes. In this strategy, you focus on making small profits on very small price changes, which is why this strategy requires high levels of concentration and quick execution.
Position Trading
The longest-term strategy, where positions are held from months to years based on market trends. Fundamental analysis works best for this kind of trading.
How to Develop a Trading Plan
Define Your Goals
You must know what you want first. Do you prefer short-term gains or long-term investments? Making your trading goals clearly will help you stay focused and motivated.
Assess Your Risk Tolerance
Trading is all about risk, and how much of it you can take. Before you trade, assess yourself and how much of the risk-reward ratio you’re willing to take on. Being honest about this with yourself will help you avoid unnecessary stress and help guide your decision-making.
Choose Your Trading Style
We’ve outlined a few of the different trading strategies. Consider those, or other strategies, based on your goals and risk tolerance. Harmonise your trading style with your own expectations of lifestyle and free time.
Create a Strategy
Develop a strategy based on technical and fundamental analysis. This should include criteria for entering and exiting trades. Your strategy should be tested and refined over time.
Stick to Your Plan
Discipline is key in trading. Focus on incremental gains through following your plan and avoiding impulsive, emotional journal. One way to do this is to keep a trading journal to help you build proper trading habits over time.
What is Risk Management and Why is it Important?
Trading is a battle of risk. It’s not just about making profits, it’s also about protecting what you have. That’s what makes risk management in trading the most important skill, as it ensures that you can survive losing trades and stay in the game for the long term.
Five Essential Risk Management Strategies
Limit Your Risk Per Trade
Even if you have a high-risk appetite, don’t risk everything on one trade! It’s better to risk only a small percentage of your total trading capital on any single trade to ensure that even if a trade doesn’t turn out as expected, the overall impact on your capital is manageable. One common rule is to only risk 1-2% of your capital on a single trade.
Use Stop-Loss Orders
A stop-loss order is an automatic order to sell a currency when it reaches a certain price, minimising losses on a trade. These tools are your friends, as they can force you to avoid a streak of bad decisions that could lead to significant losses of capital.
Diversify Your Investments
Spread your investment across different currency pairs and possibly other asset classes to reduce risk. Diversification helps balance out losses in one area, as you get to hedge on the gains in another.
Understand Leverage and Use It Wisely
Leverage refers to being able to trade money you essential borrow from the broker. While leverage can be a great tool to help you max out your gains, you must use it cautiously, especially if you’re an inexperienced trader. High leverage can lead to significant losses if not managed properly.
Keep Emotions in Check and Follow Your Trading Plan
Don’t let your feelings get in the way of your finances! Emotional decision-making is known to lead to rash choices, which could lead to significant losses. Stick to your trading plan and stay calm and confident even when you make losses.
Common Mistakes Beginners Make and How to Avoid Them
Overleveraging
It’s best to start with lower leverage ratios to manage risk effectively, as using too much leverage can lead to massive losses.
Lack of a Plan
Don’t trade just for the heck of it. Really think about your plan, and how you can stick to it, before you set foot into the trading world.
Ignoring Risk Management
Failing to manage risk can deplete your trading capital quickly. Use stop-loss orders and diversify your investments to protect your capital.
Emotional Trading
Whether you make a bad trade or a good one, stay calm, and don’t let your emotions get in the way of sticking to your trading plan.
Neglecting Continuous Learning
The market is constantly evolving. Stay informed and continuously educate yourself about market trends and strategies to stay ahead.
Tips for Successful Trading
- Stay updated with market trends, news, and economic indicators. The Forex market is constantly evolving, so continuous education is essential.
- Stick to your trading plan and avoid emotional decisions. Discipline helps you stay focused and avoid impulsive trades.
- Document your trades, strategies, and outcomes to learn from your successes and mistakes. A trading journal helps you analyse your performance and improve your strategies.
- Utilise trading platforms, economic calendars, and analysis tools to make informed decisions. Reliable tools help you stay updated and make better trading decisions.
- Begin with small investments to minimise risk while you’re learning. Starting small allows you to gain experience without risking significant capital.
Recommended Books, Courses, and Resources for Beginner Traders
Books
“Currency Trading for Dummies” by Kathleen Brooks and Brian Dolan
We love this book for those starting out. It provides a comprehensive introduction to the world of Forex trading for beginners. It covers the basics of how the Forex market works, strategies for trading, risk management, and how to analyse the market.
“Forex for Beginners” by Anna Coulling
This book allows traders who have minimal forex knowledge to develop an even more solid foundation in Forex trading. It covers essential concepts such as understanding currency pairs, how to use trading platforms, and basic strategies. The book is written in a straightforward, easy-to-understand manner, making it accessible for complete novices.
“The Little Book of Currency Trading” by Kathy Lien
Kathy Lien is a well-known Forex analyst and trader, which makes the insights in her book invaluable. “The Little Book of Currency Trading” provides practical advice on Forex, from how to trade currencies, including strategies, risk management techniques, and tips for developing a trading plan.
Courses
BabyPips Free Forex Trading Course
BabyPips offers a free and comprehensive online course known as the “School of Pipsology.” This course is structured like a school curriculum, starting with preschool and progressing through college-level topics. The format is engaging and relieves the pressure off beginners by allowing them a judgment-free system of levelling up from the very bottom.
Investopedia Academy Forex Trading for Beginners
Investopedia Academy offers a comprehensive course specifically designed for beginners. The “Forex Trading for Beginners” course covers essential topics such as understanding the Forex market, how to read charts, and basic trading strategies. With quizzes and interactive content supplementing the videos, this trading course is designed to help you retain everything you learn.
Online Resources
Forex Factory
Forex Factory’s popularity among Forex Trader comes with its wealth of information. Tools like an economic calendar, market news, and a community forum where traders can share ideas and strategies are all available to users of Forex Factory.
TradingView
For advanced charting and analysis tools, look no further than TradingView. With TradingView, you can get real-time market data, customisable charts, and a wide range of technical indicators. You also get to share your ideas and analyses with TradingView’s dedicated social community.
Disclaimer: The tools and platforms mentioned are for informational purposes only. JP Markets does not endorse specific tools and encourages users to choose based on their preferences and needs.
Remember, forex trading comes with risks, so it’s important to be informed. Visit the JP Markets website to check out our educational resources and see how we can help you on your trading journey.
Frequently Asked Questions (FAQ)
Q: What is forex trading?
A: Forex trading involves buying and selling currencies to make a profit. You trade currency pairs, like the Euro and US Dollar, based on their exchange rates.
Q: Why is forex trading popular?
A: The forex market is open 24/7 and is the largest in the world. It allows traders to trade at any time and offers earning opportunities because of its size and activity.
Q: Is forex trading risky?
A: Yes, like any type of trading, forex trading comes with risks. Prices can change quickly, which can lead to losses. Learning about the market and managing risks is important before you start.
Q: Do I need a broker to trade?
A: Yes, a broker connects you to the forex market. Look for a regulated and trusted broker, like JP Markets, to trade securely.
Q: What tools do I need for forex trading?
A: You’ll need a trading platform like MT4 or MT5, which JP Markets provides access to. Other helpful tools include an economic calendar to track market events and charting tools for analysing trends.
Q: How do I choose the right broker?
A: Choose a broker that is regulated, transparent with fees, and offers good support. JP Markets is regulated by the FSCA and provides secure trading services.
Q: What strategies are best for beginners?
A: Beginners often start with simple strategies like day trading or swing trading. But remember that it’s important to choose a strategy that fits your goals and risk tolerance.
Q: Where can I learn more about forex trading?
A: You can explore resources like JP Markets’ eBooks, which provide helpful guidance for beginners to get started.
