Forex Trading for Beginners
Welcome to the world of Forex Trading. Forex is the largest market in the world. More than $4 trillion exchanges hands in the forex market each day, but is forex the best market for you? The answer depends on what you are looking for.
If you want a market that never sleeps, if you want the opportunity to trade at any time of the day, if you would like to make a boatload of money in a short amount of time, forex may be for you (it should be noted that you may also lose an incredible amount of money in a short amount of time).
Traders with very little money can begin trading forex. In forex, you may take relatively large trades with small amounts of money because of the favorable leverage requirements. There are many reasons to become a forex trader, but before jumping into the reasons, perhaps we should take a closer look at the characteristics of a forex trade.
“Forex” is simply an abbreviation for “foreign exchange.” All foreign exchange transactions involve two currencies. If an individual trader, a bank, a government, a corporation, or a tourist to Obudu Cattle Ranch decides to exchange one currency for another, a forex trade takes place. In every instance, one currency is being bought and, simultaneously, another currency is being sold. In forex, we compare currencies in much the same way, currencies are traded in pairs and, thus, one currency is always compared to another currency.
An example may be helpful to illustrate how currencies are traded. If you are a hotshot forex trader, and you believe that the U.S. Dollar against the Nigerian Naira is going to go up, you may decide to buy the U.S. Dollar and sell the Nigerian Naira. Thus, you think that the Dollar will get stronger, and the Nigerian Naira will weaken. You are buying the USD/NGN currency pair, another way to look at this is to say you are buying Dollar and simultaneously selling Nigerian Naira. The unique (and often difficult to understand) aspect of forex trading to keep in mind is this: Each forex transaction involves the buying of one currency pair and simultaneously the selling of another currency pair.
If you have experience buying or selling in any market—the stock market or the used car market—then you understand markets. For any market transaction a buyer wants to buy something and a seller wants to get rid of something.
The forex market is simply a money market, the place where speculators exchange one currency for another. In many ways, the forex market is no different from the stock market. The major differences between forex and the stock market are as follows: A forex transaction involves buying one currency pair and selling another, also, the symbols to identify forex pairs are consistent and systematic, unlike the symbols used to identify companies listed on a stock exchange.
Forex traders buy and sell countries. It is true: Forex traders are basically buying “shares” in a country, just as a stock trader buys shares in a company. For example, if forex trader Ade decides to buy the USD/NGN, he is essentially buying the the United States (and selling Nigeria). To be even more specific, we might suggest Ade is buying
the economy of the United States, and selling the economy of the Nigeria. Does this mean that Ade must keep tabs on all the economic data for all the countries that she is trading? The short answer is no, but we won’t talk more about news and trading based on economic news and data.
An important aspect for a Forex trader is choosing the right broker. There are mainly two types of brokers:
- Dealing Desk (Market Makers)
- No Dealing Desk: This type of broker is sub-divided into:
i) Electronic Communication Network + Straight Through Processing (ECN+STP).
ii) Straight Through Processing (STP).
Question is what type of broker is best for you, yes You. We won’t go into deep discussion on the types of brokers here but we will suggest as a Nigerian, you choose an ECN+STP broker.
The abbreviation ECN stands for Electronic Communications Network. The ECN Forex broker ensures mutual clearing of orders executed by various clients with the broker (a Party to the deal, namely counteractor) uninvolved. The ECN Forex broker for retail traders is a platform where each order placed has its opposite order either within the company or at the ECN broker′s counteractor. The latter is usually represented by a large company or bank of Europe and the USA and acts as liquidity provider for the ECN broker. Customers of the ECN broker trade in cooperation with each other. They are protected against any risks emerging when trading through the market maker. One of the basic requirements to be met by any ECN broker is high liquidity that allows executing most part of deals among traders within the company. Today over 7 000 000 InstaForex trading accounts ensure huge liquidity satisfying the ECN system needs in full.
In case there is no opposite order for the trade of a client, it is passed to the broker′s counteractor. This technique is called STP (Straight Through Processing). Customers of the ECN broker can monitor the liquidity rate and execute trades. ECN trading has some advantages in comparison with trading through brokers who turn out to be market makers, because deals of Forex traders are not carried out against the broker, as the latter has its own counteractor: either another ECN broker client, or liquidity provided by ECN broker partner.
Unlike market makers and other brokerage companies, ECN-brokers do not play against the customer. InstaForex clients have 24-hour access to ECN trading thanks to high internal liquidity rate and reliable counteractors. Presently, InstaForex Company appears to be one of the most popular brands in the world and the most popular Forex broker in Nigeria offering the ECN trading services.
The number of forex traders in Nigeria has been on a steady rise. The Nigerian forex market remains the biggest forex market in Africa. Choosing the right broker is a very essential part for every trader because making a wrong choice might be disastrous for the trader. Instaforex, being the best broker is the biggest and the most reliably transparent broker in Nigeria.
TOOLS OF THE TRADE: FUNDAMENTAL VERSUS TECHNICAL INDICATORS.
So, how do forex traders decide when to buy or sell? There are basically two schools of traders, and you must decide which school fits your trading personality. The first school is the school of fundamental analysis. Fundamental traders use economic reports and news reports as the basis for their trading decisions. Forex traders who have a fundamental approach will closely examine world events, interest-rate decisions, and political news. Fundamental traders are concerned with properly interpreting news, whereas the focus for the technical forex trader is quite different. The technical forex trader uses technical indicators (or “indicators”) to properly interpret price movement on a chart. The forex trader who adopts a technical, indicator-based approach will examine the price charts. So, while the fundamental forex trader is concerned with interpreting news and world events, the technical trader is concerned with interpreting price on a chart.
Indicators encourage “secondary thinking,” which is a real handicap for traders looking to acquire expertise. Secondary thinking involves analyzing the indicator, spending time considering where the indicator may go, rather than focusing on the market. Naked traders, by definition, focus on the market, which is very different.
Focusing on indicators may be one of the primary reasons that some forex traders do not make money. Indicators can be confusing, unhelpful, and just plain wrong. We take a look at technical trading, and some of the tragic trading mistakes forex traders make, and how to avoid them by adopting the naked-trading approach.
In some ways, trading with indicators makes it difficult to find profits. Perhaps a close look at why indicator-based trading systems have difficulty finding profits in forex is in order. All indicators are created from price data. This is what all indicators do to price data: Price data enters into an equation and is spit out as something else. Sometimes the end product is a squiggly line, sometimes a straight line, sometimes a color or a number; it depends on the indicator. The end result is always the same: The indicator changes price data via a formula. The form of this end result (the indicator) may vary, but the process is
always the same. These very same indicators, based on price data, are meant to hint at future movements in the market. Stated another way, an indicator will suck in price data, massage and process these data, and then spit out a graphical representation of these data. Indicators offer price data in another form. Perhaps this new form of price data is easier to interpret; perhaps this new form of the price data will hint at what the market may do in the near future. All indicator-based trading systems are founded on the idea that price data is in a better form when presented as an indicator. Trade decisions based on indicators assume that the data in indicator form is more valuable than raw price data.
Indicators may be incorrect. What if the indicator is correct, but a bit slow to hint at the direction the market will take?
The indicator might provide valuable information, but might also be slow to the party, and thus not of much value.
Perhaps a slight change to the indicator formula will speed it up a bit. Perhaps indicators are similar to a wristwatch, constantly improving, more features available as needed, but would it be possible to take a wristwatch, and manipulate time by running a formula through the hours, the minutes, and the seconds displayed on the wristwatch? Would the wristwatch keep better time once the formula manipulated the actual time of the day? Using a formula to create a better time on a wristwatch may seem weird and counterproductive, but this is precisely what indicators may accomplish by changing and massaging price data. Indicator-based trading is taking a wristwatch and changing the time with a complex formula in the hopes that the wristwatch will somehow tell time better. Who wants a wristwatch with something other than the real time displayed? Do indicators (all of which are calculated using price data) allow us to understand price better?
Indicators are inherently slow. The market will be moving up long before an indicator suggests it is time to buy. Likewise, an indicator will suggest it is time to sell long after the market has started falling. This is one of the main complaints with indicators: they lag behind price.
This is a fair concern which we at Instaforex have understood and gotten a system which is non-dependent on Indicator based trading.