You have probably heard of people making money in the foreign exchange market. However, you are convinced that it is not for you. Our goal is not to persuade you to change your mind. We will only define the basic concepts of Forex for beginners and explain how to start trading. Therefore, it is up to you to draw conclusions.
General principles
As for Forex, we mean a huge online market where currencies are traded. It is not a stock exchange analogue as Forex does not have a specific trading floor and is not regulated.
It is global, though it does not have a specified address. It is similar to the Internet: there is connection almost everywhere. However, it is impossible to define the exact place.
The key objective of Forex market participants is to exchange currency assets. This process involves banking institutions, insurance companies, brokers, large international companies, etc.
How does Forex work?
For example, you want to sell US dollars. You go to an exchange office where the dollars are exchanged for the currency you need.
Other people do the same. Consequently, the exchange office accumulates a certain amount of dollars. However, some people buy USD.
If there is extra money, it is sent to the bank. The bank also conducts exchange transactions. In case of surplus, it also sells dollars to counterparties - companies, funds, etc.
Therefore, this is the way how the money is transferred from an individual's wallet to the forex market. That is, the exchange office is the first level of this process.
Thus, Forex is a huge number of market makers linked to each other by currency contracts.
The enormity of this market is confirmed by the volume of exchange transactions, i.e. nearly $5 trillion in every 24 hours.
However, it is important to realize that not only the exchange transactions described above should be taken into account. Forex also includes players who make profits from currency speculation.
They generate profits from changes in exchange rate and follow the principle of buying at a lower price and selling at a higher one.
If we consider the forex market as an instrument of earning profits and compare it with routine work, we should distinguish its unique features:
- lack of schedule. The market works 24 hours a day, 5 days a week, the trading sessions move gradually from one region to another;
- possibility to set the amount of your income;
- free hand, no management and be no location bound;
- start with a small sum of money.
At first it seems that Forex is the best place to make money. In general, it is true. However, this is not a guaranteed income.
How to start Forex trading
To start trading on the currency market, you have to determine what sum you want to invest. Experts have opposing views.
Some specialists think that beginners should start trading with a minimum initial deposit which they can afford, $50 for instance. Therefore, the risk of losing a large sum is reduced to zero due to such small investments.
However, opponents of this view argue that a standard Forex lot is 100,000 currency units. Moreover, if you have a $50 deposit and want to open an order for a 1/100 of a lot, you will have to use huge leverage.
Moreover, if later the price dynamics are out of line with traders’ plan, they may lose money as well as the initial capital.
According to most experts, the deposit of $300 to $1000 is preferable to start trading. In this case, a record profit is unlikely. However, potential losses are not substantial either.
Besides, take into account that brokerage firms often set a minimum deposit amount.
When you have decided what sum of money you want to invest, you need to undergo the following stages:
1. Choose a brokerage company, for example, InstaForex. It will be considered the link between you and the financial market.
An individual cannot enter the forex market without a broker. You should choose your broker thoroughly as you have to entrust your savings to him.
The main criteria for your choice are work experience, reviews, and license;
2. Undergo a registration procedure. It is easy: in most cases you need to enter your full name, date of birth, address, e-mail and telephone number.
Read the agreement carefully. Do not panic if you are asked to confirm your identity. You will generally have to scan or make a photocopy of your passport or other identity document.
3. Open an account. As a rule, the broker offers different variants. Choose the most suitable for you.
Remember to keep secure your account number and your client area password;
4. Replenish an account. You will have to transfer the amount mentioned above to your account.
It is possible via bank transfer, payment systems, credit cards, and so on. It all depends on your broker payment methods.
Please note that brokers can set the minimum deposit amount. Otherwise, you cannot open a position;
5. Install a payment terminal. You should download it only from the brokerage company website;
6. Choose a currency pair and open a trade.
It is necessary to mention another two key aspects.
To become familiar with the currency market and understand how it works, you can start trading on a demo account. Many brokers offer it, including InstaForex.
You can practice trading using it. Moreover, you don’t have to invest anything. Thus, you take no risk.
The second aspect is currency pairs. As for FX trading, there are always two currencies, the base currency and the quote one.
The most popular currency pairs are EUR/USD, GBP/USD, AUD/USD, and others. Experts think it is better to start trading on Forex using them.
Therefore, the US dollar plays a key role in the global economy as well as on Forex. All major currency pairs include it.
How to trade Forex with $100
It is not necessary to have a large initial capital for successful trading in the currency market. You can start trading with $100.
You must admit that this is a relatively small amount of money for an average person.
It is not enough to invest the money. To plan your actions so that your investment will subsequently generate income is of crucial importance. How to achieve this goal?
First, business experience is significant for beginners. Therefore, consider your start-up capital mainly as a training tool rather than for making record profits.
Secondly, do not invest $100 at once. You do not spend your monthly salary at a time.
It does not matter whether you have a modest or huge initial capital. The process of entering Forex is the same. The only difference is the need to use leverage.
Thus, first we choose a brokerage company and open a trading account. Bear in mind that there are different account types with specific conditions each.
For instance, the Standard InstaForex account has fixed spread and no minimum deposit requirement. Moreover, it is possible to change the leverage.
We will discuss the leverage in detail below. Now we explain how it can be used to boost your initial capital.
For example, using 1:100 leverage by a broker it is possible to increase $100 by 100 times, i.e. up to $10,000. Therefore, you can generate such profits while trading.
After opening an account and installing a payment terminal, you may open trades.
Factors affecting profit
According to statistics, every year novice traders generate from 13% to 23% profits from each dollar. It is clear that a deposit amount is important.
In case of $100, the profit will total from $13 to $23. As for a $10,000 deposit, this sum could rise by $1,300-$2,300 over a year.
It is obvious that advanced traders make more considerable profits. The research shows that their earnings increase by nearly 40% for each dollar invested on Forex.
Note that these figures are average. Moreover, take into account that even the most advanced traders can incur losses.
However, not only deposit matters.
In addition to it, the following factors affect trader’s income:
- market situation. Significant ups and downs of currency markets are more profitable than flat periods;
- chosen trading strategy. If you don't have a clear plan and the necessary market knowledge, you are bound to suffer losses even with a huge capital.
Therefore, it is important to analyze the market, choose the appropriate periods to enter it, and determine trading intervals.
At first novice traders can be affected by emotions which influence their market behavior. Try to calm down and control your emotions.
Remember that you gain experience by incurring losses. Though your profits aren't as high as you planned, you are likely to succeed in the future.
Trade secrets
Each trader develops his own style of market behavior with time, thereby increasing the profitability of trading. The article «Best Way to Trade Forex Profitably» covers this issue.
In the early 2000s, Forex was considered a place for a limited audience with large investments. The current situation has changed dramatically. People who did not plan to be traders enter the forex market
However, the question is why do some people generate huge profits on Forex, while others earn small and irregular income?
The fact is that luck is not enough for successful trading. People who believe that fortune plays a key role are profoundly mistaken.
Trading requires excellent analytical skills. It is not a casino.
The major goal is to receive income from currency fluctuations. Therefore, if you have at least basic financial knowledge, it will be your definite advantage. However, in case you lack such knowledge, it is not a problem.
There are usually expert analytics and analysis sections as well as trading tutorials for beginners on websites of brokerage companies.
If you do not have enough experience, you may start trading with a demo account. In fact, it does not differ from a live account. However, a demo account protects you from financial losses due to inexperience in trading.
Moreover, it is essential to develop your trading strategy, that is, a plan for market behavior.
There are a lot of them. So let's focus on the most effective and popular strategies
- Scalping: many small trades are conducted during a day. The profit on each is equal to a few points. However, traders also increase their income due to a large number of trades;
2. Medium-term trading: traders hold positions at least for a day and up to two weeks.
3. Long-term trading: Positions are held for months. You don’t have to monitor changes on your computer. It is enough to occasionally assess the price dynamics. The profit totals several thousand pips.
When you start trading, you can use effective strategies applied by experienced market players.
Subsequently, you will get a clear picture of market trends and will not have difficulties with reading stock charts. You will be able to combine available trading methods as well as make your own adjustments.
Thus, you will develop your trading plan. After all, the best trading strategy is the one that perfectly suits a trader.
About losses
Even advanced traders are not immune to losing trades. You can read how to minimize them in the article «How to Trade Forex without Losses».
Moreover, the question of how to avoid losses is of great importance. Experts offer different ways of protection.
However, you should be aware that Forex is developing rapidly, and today’s effective method might be inefficient tomorrow.
Let’s discuss some ways to minimize risks which can be used in Forex trading.
The first method is installation of "locks". This technique is also called locking. You should open two positions of equal volume, but in opposite directions.
The proper use of this technique reduces losses as well as may generate profits.
The second method is reversal. It is similar to the first one. However, the key difference is that the volume of the second position is larger than the first one.
Thus, the second position overlaps the generated loss.
Another method is averaging. The second position has the same direction as the first, but its price is more competitive. Thus, the final loss will likely be minimized completely.
Another very controversial technique is the use of stop-loss orders. These are buy or sell orders which traders place in case of price correction.
Some experts think it is an excellent way to limit the amount of losses.
However, some specialists are confident that this issue is ambiguous. The fact is that sometimes the price bounces back sharply, stop-loss orders are triggered, and then stocks start moving in the right direction.
Consequently, the price subsequently moves according to traders’ scenarios. Nevertheless, it makes no difference to them due to the bounce.
Credit trading
We have already discussed that it is possible to increase your capital on Forex by using borrowed funds from a brokerage company. You can read more details in the article «How to Trade with Leverage».
To begin with, let's clarify that leverage is a loan that you obtain from your broker to increase your deposit. You do not have to draw up any additional documents as leverage is automatically added to your account.
This is a good option for those traders who do not have a lot of money, but are eager to earn profits.
You can borrow 10 and even 100 times more than you have deposited. For example, if the leverage is 1:100, it means that the broker can loan you a sum of money which exceeds your deposit 100 times.
Use of leverage with a $100 deposit
| Leverage | 1:5 | 1:10 | 1:200 |
| Trade amount | $500 | $1,000 | $20,000 |
However, the procedure is not straightforward. When you use leverage, you should have a fixed sum of money on your account. It is determined by the broker.
It will be a margin, i.e. a pledge. For example, if you plan to open a $10,000 trade with 1:100 leverage, you must replenish your account by at least $100.
In case you use a 1:200 leverage, the required minimum amount of money on your account will total $50.
It is obvious that you will have to pay back the borrowed money.
Moreover, there is another key aspect. If a trade is unprofitable and the sum on the trader's account decreases to the specified level (margin threshold), the broker closes the trade.
Let's provide an example.
For instance, you have $100 in your account and you used a leverage of 1:100. You chose the EUR/USD pair and opened a long position.
The trade is profitable as the asset has increased by 1%. The profit will be $100, which is 100 times more than as if you had not used the leverage.
Traders will repay the loan to the broker. However, they will have money as well as generated profits on their accounts.
Let's assume that the asset has fallen by 1% contrary to traders’ expectations. In this case, the position will decline by $100 and will be liquidated.
That means that you can lose all your initial capital. If the trade was carried out without leverage, you would lose only $1.
Therefore, this method allows you to maximize your profits. Besides, it also increases the risk of suffering heavy losses.
Beginners should use leverage carefully. For example, limit yourself to 1:10 or 1:20.
Increase of rating
It's obvious that every trader raises the bar of his achievements with time. You can read more details on how to achieve such results in the article «How to Improve Trading Skills».
Everyone has a bad luck streak. This is also true about the forex market.
However, don’t lose heart and stop trading.
Most psychologists agree that inner determination is important in any activity. Maybe someone doubts this fact. Nevertheless, an individual’s psychological state determines his or her success.
If you believe that trading on the currency market results in losses, so be it.
Control your emotions while trading. This limits the risk of taking injudicious actions.
Be realistic. Do not set unattainable goals and do not run considerable risks especially concerning huge sums of money.
Remember that trading should be clear to you. Trading strategies, charts and analysis methods are designed to help, not confuse a trader.
Don't let advertisements promising huge initial profits fool you. Remember, this is just a marketing ploy.
Your expected income is nearly 5% a month.
Finally, remember that experience and practice is of great importance. Analyze your past trades to improve your trading rating and avoid repeating the same mistakes.
Trading principles
Many people think it is difficult to become an advanced trader. Therefore, after the first failure they are disappointed and want to stop trading.
However, don’t hurry. We have prepared a list of basic principles that will help you master the ins and outs of Forex trading.
- Set realistic goals. As in everyday life, clearly defined goals are extremely significant on Forex.
The point is that the goals must be achievable. Don't expect to get rich in a week by investing just $100.
Remember that 5-10% profit in the beginning is considered an excellent result;
2.Do not invest your last money. Start trading with a sum the loss of which will not exacerbate your financial situation;
3. Analyze your successes and failures to reveal patterns of profitable and losing trades;
4. Stick with the trend. The golden rule of trading is that going against the market is a losing option;
5. Experiment. Even your most successful strategy can become outdated and irrelevant over time.
Do not be afraid to adapt it;
6. Do not stop learning. Trade on a demo account for 1-2 months, then move on to practice.
At the same time, read theory and analytical articles;
7. Use the indicators carefully. When you grasp the basics of technical analysis, you may use all indicators simultaneously.
However, you may be confused by such overloaded charts.
Conclusion
Notably, Forex is a fantastic opportunity to generate profits as well as an exciting occupation. Therefore, its popularity is growing.
Moreover, it's prestigious to be linked to the international financial flow.
If you take Forex seriously, you can improve your financial situation as well as significantly broaden your financial knowledge. You will need it in everyday life.
InstaForex broker will become your reliable guide in the world of Forex. It will help you to limit your trading stress and learn to achieve new heights of trading success.
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