For earning higher returns, investors often take the ‘high-risk’ investment opportunities like trading CFDs and Forex. In fact, Forex and CFDs are complex instruments and come with a high risk of losing money owing to leverage.
Trading CFDs or Contracts for Difference, revolves around speculating on financial markets, where the trader does not have to buy and sell the assets involved. CFDs are similar to Forex as a decentralized, Over-the-Counter, or OTC trade. CFDs involve speculating the movement of various asset types; Forex depends on price movements of different currency pairs.
Although there is a high risk of losing money, Forex trading is considerably simple when compared to trading CFDs. And, especially more convenient for beginners as CFDs cover various markets and Forex is all about the currency markets. Moreover, CFD trading involves varying tick sizes, base currency, lot size, etc. Unlike CFDs, in Forex contracts, the lot size remains constant.
To summarize, Forex and CFDs are complex instruments and come with a high risk of losing your money. Nevertheless, with the help of Forex trading tips, you can minimize the losses where both risk appetite and risk aversion are concerned. Before dwelling into a variety of tips, let’s first understand trading in Forex.
Introduction to Forex Trading
Simply put, the Foreign Exchange Market or Forex (FX), also known as currency trade, is a decentralized currencies trading market. Forex typically involves trading (buy and sell), and the exchange of one national currency for another. In fact, the Foreign Exchange Market determines the Forex rates for different national currencies like USD, EUR, INR, among others.
Forex has the highest trading volume; as a matter of fact, it is the world’s most liquid economic market. Forex also has a broad spectrum of investors, including and not limited to banks (commercial and central), financial institutions, currency speculators, and individuals. And, when we consider individual investors, they are of different kinds. For instance, based on their skill or level of trading expertise, there are beginners, intermediate, and advanced traders.
Apart from the broad classification, based on the trading styles, there are six types of Forex investors. But, before dwelling into that, let’s understand the basic types of Forex trading.
Types of Forex Trades
- Short-term Forex trading
- Long-term Forex trading
Short-term Forex trading involves trading for a short duration of time, typically ranging from a day to several days. Usually, the holding position in short term trade in FX never exceeds more than a day.
Many individuals assume that short-term trades are less risky. However, this is a common Forex myth, as trading with currency or other assets, in general, is always associated with the risk of losing money.
Long-term Forex trading usually involves time frames exceeding a year. While some of the types of trading may be both short and long-term, depending on the duration of the trader’s asset holding position. And, based on these timeframes, there are six types of Forex investors.
Types of Forex Traders
Every individual is different, and so is every type of investor. When a trader has honed in on a particular type of trading, it is vital for them to make use of the Forex trading tips, which are better suited for them.
Different types of Forex investors
- Market swings investors
- Day traders
- Position investors
- Event-driven investors
- Algorithmic investors
Scalpers, market swings investors, and day traders fall under the short-term trading category. Position trading may last for a few months to a few years. While there are position trades that are short-term as well (lasting for a year), usually, they fall under the long-term category.
Scalpers typically trade throughout the day, and they concentrate on holding their trading positions for a few seconds to a few minutes only. Their objective is to profit from smaller gains, especially when the market is the busiest or has the highest liquidity. As this type of trading is fast-paced, the investors (scalpers) are ever-vigilant, with the ability to process and analyze market changes to determine the best time to achieve small gains. Scalpers also make sure to stay attuned to market information whilst looking out for currency volatility triggers
Market Swings Investors
Short-term Forex trading may also involve investors holding their trading positions for more than a day to several weeks. Such investors are referred to as swing investors, who trade market swings. They work on similar grounds as that of scalpers, looking out for the most liquid phases in the financial market.
Market swings investors oftentimes rely on technical analysis rather than the trading fundamentals. Nevertheless, just like scalpers, they are prepared to make the right moves when the economic market is the most liquid. However, unlike scalpers, who analyze the market and look for the right opportunity, day-in and day out, investors involved in trading market swings are far more relaxed.
Day traders practice trading on an intraday basis. Typically, the time frame for holding their position lasts from a few minutes to a day. In fact, they are similar to scalpers where they close their trading position before the end of a trading day, as their objective is not to carry forward their holding position for the following day. Thus, day traders are not impacted by unexpected price hits or market fluctuations when the market opens the next day.
As the day traders never hold their trading positions overnight, they must be ever-prepared to adjust to the quick or unexpected price changes that may occur during the particular trading day. Also, day traders are often accoutered with the best trading tools and techniques for instant news on the market updates.
Long-term Forex Investors
While there are short term trades that last for a day (day traders and scalpers), or the ones lasting for a few days to a week (swing trades), there are investors holding trading positions for a few weeks to a few months as well. And, such Forex investors are referred to as position investors.
Nevertheless, position investors are again classified as short-time and long-term investors where the former holds trading positions for a few weeks to a few months. In this instance, we will refer to the position investors holding trading positions for more than a year as long-term Forex investors.
Typically, position investors rely on their assets’ long-term performance. Unlike scalpers, swing investors, and day traders, position investors are not majorly concerned with the short-time fluctuations of their asset pricing. However, they are attuned to the price fluctuations and asset performance for the stipulated time frame (long-term). Thus, successful position investors have a sound knowledge of the trading fundamentals along with sharp analytical skills in determining the timeframes for holding trade positions.
Event-driven Forex Trader
An event-driven trader relies on the trading fundamentals rather than technical analysis to make informed trading-related decisions. Such investors predominantly depend on fluctuations or spikes triggered by socio-economic and political happenings globally. Successful event-driven Forex investors are often up to date with current trends. They also have the ability to process new information to determine risk appetite and aversion to make the most of the financial market.
Forex Investors Relying on Technical Analysis
Unlike event-driven investors, who rely on fundamental analysis, the algorithmic investors rely on technical analysis. Most often, such investors make use of high-frequency trading algorithms to determine the currency exchange rates, risk aversion, and appetite, etc.
Although every trader follows a specific type of Forex trade, they can try out a combination of the various strategies for understanding the market better or for risk management.
Forex Trading Tips for Different Categories of Traders
Every investor is different, as they have different trading styles or even trading requirements. Similarly, trading tips also vary, which is further determined by the level of the trader’s experience, trading style preference, etc.
Considering the level of expertise, they are two main categories of investors: Beginners and advanced investors. And, in terms of the type of Forex trading styles, there is scalper, swing trader, position trader, day trader, etc. Accordingly, there are trading tips to make sure investors don’t lose their money.
As we have already established that Foreign Exchange is of various styles with a broad spectrum of trader skill sets and levels of expertise, we have accordingly differentiated the various FX tips based on the above-listed elements.
Is Forex Trading Good for Beginners?
Beginners and advanced Forex investors can make a profit from trading in Forex provided they understand the fundamentals. At the same time, one cannot ignore the fact that, while Forex is lucrative, it is also risky.
Whether a new trader or a seasoned professional, it is often imperative to consider whether it would be favorable to buy and sell currency pairs on a particular day or not. Ultimately, it is important to understand whether you can afford risking your money or not.
Every Forex trader must be prepared to face losses as there is always a high risk of losing money rapidly. Unlike CFDs, the price movement in Forex relies on economic and political aspects at a global level. In short, sudden e economic fluctuations due to weather changes, natural calamities, etc. referred to as risk warning may result in either heavy financial loss or profits.
With a multitude of tools, technical analysis, current market trends, and regular economy updates serving as reliable indicators, any trader, whether new or advanced, can make profits. Nevertheless, one has to be dedicated and committed to understanding the currency market to earn profits.
The bottom line is Forex is as good for beginners when they are thorough in their FX fundamentals. And, whether a trader is new or experienced on the Forex trading platform, employing the right tips and strategies will make a huge difference in minimizing the risks involved.
Forex Trading Tips for Beginners
In trading of assets in general, investors face loss due to fluctuations in asset prices, demand, and supply, to name a few. On the other hand, FX investor accounts lose money due to various reasons. And, these reasons include unrealistic plans, poor risk management, failing to adapt to the changes in the Forex market.
Needlessly, Forex Exchange could be quite intimidating to beginners or new investors. As a rule, it is often imperative to understand the fundamentals involved. Listed below are a few FX trading tips for beginners.
Understanding the Currency Exchange Market
The foreign exchange rates, the currency pairs, best markets, to name a few, are some of the core elements that every trader must know. Even though Foreign Exchange goes beyond these terminologies, it is essential to understand these terms. As investing in FX has a fair amount of risk, investors can make sure of what might work in their favor or otherwise, even before putting their money at stake, if they have mastered the fundamentals of Forex.
Forex Trading Plan (short-term and long-term)
Forex trading planning must include key pointers like profit goals, risk tolerance level, measures for evaluation, analysis, etc. Having a plan in place, whether long-term or short-term, is critical as it enables the trader to indirectly avoid making high-risk investments. In some instances, the trader may also afford to take a high risk when they are certain the trade would fall within the limits of the drafted plan.
Determine whether you can afford to lose money
Trading assets and currencies come with a high risk of losing money rapidly due to leverage. Although leverage has a high potential of magnifying the profits, they may be quite dangerous if and when the trade goes wrong, which may result in exponential losses. In fact, leverage risk is quite common in Forex. Whether you are a new trader or an experienced one, before executing the trade, you must always consider whether you are prepared for the losses.
Start with a Practice or Demo Account
There’s always the risk of losing money in trading. Practice the trade to understand the various scenarios of losing money in Forex. Beginners can start trading with a practice account to make sure they understand the risks involved, but without having to lose their money. Make sure to choose a trading platform that offers a free demo or practice account. It is vital to understand the ins and outs of Forex without having to use one’s own trading capital.
Fundamental vs. Technical Trading Strategies
Based on the kind of trading strategies used, a Forex investor could either be a fundamental trader or a technical trader. A technical trader relies on technical analysis to forecast price movements in the FX market. On the other hand, a fundamental trader uses financial and political data, news updates, etc. to forecast market movements. There are also FX investors who use both technical analysis and trading fundamentals. Beginners are advised to make use of all the available tools to forecast market conditions to find the best trading opportunities.
Understand Risk Management
In Forex, there is always the threat of losing your money rapidly due to poor risk management. Some of the most common examples include market risks, leverage risks, margin risk, liquidity risk, etc. Thus, it is important to understand the various type of risks associated with Forex. Ideal risk management in Forex would thus entail either thorough technical analysis or determining trading fundamentals.
Set Stop Loss Limits
As a rule, beginners must set a limit to how much they are willing to risk. Having a leverage ratio in compliance with one’s trading needs truly helps. Also, stop and limit orders are yet another means of risk management that will help investors to avoid risking more than what they can afford to lose.
Choosing the Right Forex Broker
Retail investor accounts lose money owing to leverage in the case of CFD trading. In fact, the loss percentage of investors losing money is provided by the Forex brokers or trading platforms, which are regulated by the Financial Conduct Authority, for instance, in a bid to enhance transparency.
According to experts, surprisingly, these losses are directly linked to the trader’s performance and skillsets and money management rather than market movements. Similarly, in the case of Forex, almost 90% of investor accounts lose money when trading without understanding the market. Trading platforms that provide valuable insights certainly help in understanding the currency markets.
In fact, choosing the right trading platform is one of the most critical aspects, which is especially important for FX beginners. Foreign Exchange is a decentralized, over-the-counter market, which makes it important for novice traders to choose a trading platform with just the right elements. For instance, best customer support, advanced tools, stop and limit features, better browsing experience, etc. can be used as indicators to choose the optimal trading platform.
Forex Tips for Advanced Traders
So, you have been there and garnered expertise in Forex trade execution. You also know whether you can afford to take a high risk in Forex or not. Nevertheless, it always helps to consider whether there are other ways to further improve your Forex trading skills. Listed below are tips that will help advanced Forex players who are willing to take the high risk to garner that extra edge in the Foreign Exchange trading space.
Readers are advised to note that these tips below apply for all types of Forex traders, whether scalpers, position and day traders, etc.
Try different time frames for holding trading positions
Trading styles predominantly differ from one trader to another, particularly where the time frames are concerned. Some prefer to hold their position for a few minutes to a few days; some hold trading positions for a few months to a few years. Experienced investors specifically would feel that a particular trading style would suit them the best in terms of risk management.
Nevertheless, one can still refer to the other styles for additional information pertaining to the trading fundamentals. For instance, a position trader or even a swing trader may take a leaf from day trading techniques as trading fundamentals. Similarly, a day trader could refer position trading for deriving better Forex trading strategies.
There are numerous currency pairs in the currency trading market
As an experienced Forex investor, you will naturally prefer certain national currencies, where you have mastered the said currency’s movement. Speculating about a particular currency pair is something that you are very good at. Why not use this information to trade your preferred currency against others? And, when you are indeed doing it, predicting the price action of your mastered currency becomes easier.
Implement your proven strategies and also try out other strategies
As an advanced FX trader, you have your own Forex trading strategy, which could either be trading fundamentals or technical analysis. Whatever your trading style, to gain that extra edge, you must be open to trying out other new strategies. Nevertheless, you can try a combination of new strategies with your own strategy, which you already find successful. In fact, one could find a myriad of trading strategies that match with their current strategies. And, trying out such similar ideas would not increase the risk factor.
Now that we have covered the types of Forex trading, investors, and risk factors, here is how one could possibly start trading in FX.
How do I start Forex trading?
Even before trading, it is crucial to ensure that your mindset is in tune with your personal goals in FX. Also, never start with a currency pair you know nothing about. Technical analysis and trade fundamentals really help to determine the currency pair you must consider for lucrative trades. Most importantly, start with a demo account to understand the price movements and the underlying results.
The next crucial step is to determine the trading time frame you are comfortable with. Remember, Foreign exchange trading involves tremendous patience and thorough market analysis. Based on the time you are willing to dedicate studying the market, you can determine the time frame (short-term or long-term) that would match your trading needs.
The third step would be to determine your Forex trading methodology such as, whether you would like to buy support and sell resistance or buy and sell breakouts. Once you have figured out a methodology, it is vital to test it out for consistency and profit advantage. And, if the test results indicate even a 50% reliability, it means, it would certainly provide an edge to you. With this method, you could test different time frames and strategies to determine the one that works best for you.
How to Trade Forex Simplified
The following are the steps to follow to start your Forex trading journey;
Step 1: For Forex trading via an online broker, browse for a Forex broker that is compatible and easily accessible on devices like PCs, laptops, tablets, Android, and iOS smartphones, etc.
Step 2: After selecting the online broker, open your trading account. Readers are advised to start with demo accounts to understand how it all works.
Step 3: As soon as you want to trade for real, the next step would be to add trading funds or capital to your account.
Step 4: Choose and download a reliable trading platform with positive reviews and testaments.
Step 5: You are all set to start trading Forex.
Most often, newcomers believe making money online via Forex is quite easy. Although true, there are certain limitations that make FX quite risky.
Reportedly, 70 to 90% of the retail investor accounts lose money in FX trading. Despite the high-risk associated, the profits are quite high. So, listed below are a few important tips to minimize risk.
Forex Trading: Important Points to Remember
1.Trade money, which you don’t need
Trading is akin to gambling, the more you play, the more money you lose, irrespective of the rounds won. Similarly, in Forex, investing capital that you can afford to lose is very important.
2. Make sure to use stop loss and limit orders.
Setting a stop loss and limit order to your open position will help you curb losses by indicating when you need to stop. For example, you can limit order to sell higher than the market or stop order to sell lower than the market.
3. Know your Risk/Reward Ratio or RRR
While stop loss and limit orders ensure you don’t lose more than you can afford, the RRR ratio depicts the journey of a trading position from the start point to stop loss and take profit orders. Ideally, the minimum RRR recommended for scalpers is 1:2, whereas, for long-term investors, it is 1:3.
Complex trading instruments like Forex always have certain risks associated. In fact, reportedly, 70 to 90% of retail investor accounts lose money when trading complex instruments like Foreign Exchange (FX), CFDs, to name a few. However, Foreign Exchange is comparatively simple and easy to follow for beginners. Despite the high risks, with the aid of the above-listed Forex tips and information, one could curtail the risks associated with minimizing losses.