Forex Trading: A Guide for Beginners

The forex market is decentralized, which means that millions of trades are made across the globe online. This includes banks, other financial institutions, intermediaries (brokers), and traders. Currently, the forex market is the largest and most liquid market in the world.

Currencies are traded in 3 lots in the Forex market – micro, mini, and standard. For example, a micro lot contains 1000 USD, a mini lot contains 10,000 USD, and a standard lot contains 100,000 USD. This means that you can only trade in these sets, but you can buy or sell as many lots as you wish. 

The Purpose of Forex Trading

The main goal of traders is to earn a profit. They make predictions based upon market trends and various techniques and use these to buy or sell currency. For example, a trader predicts that the South African Rand will go down due to Omicron, the new strain of COVID-19. Thus, he sells his share of ZAR and buys USD. If the USD strengthens against ZAR as predicted, the trader will make a profit.

Key Concepts for Trading

Before you begin trading, you need to have a proper know-how of trading concepts, prediction tools, and trading platforms. 

1. Leverage Ratio 

The leverage definition on LiteForex is as follows: the number of trading funds that a broker is willing to lend to your investment based on the ratio of your capital to the number of credit funds.

Keep in mind that brokers offer various leverage rates, which can go as high as $1 of equity for positions of $100. You may want to use leverage as a way to make a short-term profit, but leverage itself comes with a number of risks. Let’s understand the pros and cons of using leverage in the Forex market.

If traders have $10,000, they can trade that as $1000,000 with a leverage ratio of 1:100. This means that if the investment is unsuccessful, they will lose $10,000, but if it is successful, they will earn $1 million. This is why they say: the greater the risk, the greater the return.

Thirdly, you’ll enjoy favorable financial conditions, i.e. lower interest rates. You will also be more financially protected. But that’s not all. The biggest risk of a high leverage ratio is that you are more exposed to losing your deposit. Because investors have a lot more money in the Forex market than they actually do, they tend to invest it somewhere. This opens them up to a risk of unsuccessful trades, which could cause them to lose their money. Moreover, it can be difficult to recover losses. If you lose half of your deposit, you will have to make double the amount to recover it.

All in all, if you do decide to go with a leverage income strategy, the optimal ratio for beginners is 100:1 because while it may open you up to some risks, it improves liquidation. 

2. Breakout Trades 

Another great strategy that you can adopt as a beginner is breakout trades. Breakout, in this case, refers to the movement of price beyond a support area, either above or below. When prices increase beyond resistance, it is called a ‘bullish breakout,’ and when they decrease beyond resistance, it is called a ‘bearish breakout.’

Traders use this strategy because it indicates market volatility, which means that they can take advantage of the situation and make a profit. However, to be successful, you need to enter the market when the breakout begins and stay till the market goes back to normal.

However, some experts also suggest waiting to see whether the breakout turns into an upward or downward market trend and then trading.

Conclusion

There are a number of other strategies out there that you can use to earn a profit, for example, moving averages, carry trades, fundamental analysis, and many more. However, studying each and knowing what works takes time – and experience is the key to being a successful trader.

In addition to this, trading apps such as LiteForex have replaced human brokers to allow for easier and direct transactions. Not only does it take seconds to make a trade so that investors can capitalize on market trends, but trading apps also show real-time information via graphs so that investors can make accurate decisions.