Forex investments – how to make your first trade

Published: Jun 12, 2020

As a beginner, you find Forex trading difficult. Partly because you lack the knowledge to identify the profitable trades, and partly because you have unrealistic expectation. It’s common for newcomers to have the misconception they can quickly boost their income with no effort. But before investing all your savings into something you don’t understand, learn the basics of Forex trading.

This article serves as a manual for investors who are about to make their first trade.

First, let’s check the terminology

Have you ever checked a Forex trading platform? The jargon is challenging to understand. But if you want to earn money, you need to learn the terminology.

Spot Forex

This trading method implies buying and selling real currencies. This means you trade with currencies like pounds, dollars and euros. For example, you buy a specific amount of euros and exchange it for dollars, and when the value of the euro grows, you transfer the dollars again, and you earn income.

CFDs

In the Forex market, the term CFD refers to the Contract for Difference. It shows the movement in the prices of financial tools. When counting on this method, you don’t buy and sell currencies, but you benefit from price movements without owning assets. CFDs aren’t used solely in Forex; this method is also common when trading digital coins, commodities, stocks, and bonds. The principle behind this method is to allow the investor to trade in the price movements without buying assets.

Pip

Pips are the base units in the price of currency pairs. For example, if the bid price from the USD/EUR pair evolves from 1.15556 to 1.5566, it represents a difference of a one pip.

Spread

This term defines the difference between the purchase price and sale price of a currency pair. Most brokerages have low spreads for popular pairs. With currencies like JPY, EUR, and USD, the spread is 1 pip. But for exotic pairs, the spread is always higher. For a trade to be profitable, it has to exceed the spread.

Margin

The sum retained in your account during trading is called margin. But because beginner traders often lack funds, brokers offer them access to leverage.

Leverage

It’s just a name for the capital the broker provides you to boost your trades’ volume. Even if most brokers offer high leverage to all their clients, as a beginner, you should act with caution because some brokerages request the negative balance policy when your account falls below zero dollars. When you trade with ESMA regulated brokers, you don’t have to worry about negative balance policy because they protect your account and prevent it from reaching levels lower than 0.

The first steps you should follow when you place your first trade

Now that you’re accustomed to the Forex jargon let’s talk a little about the steps you must follow to make your first trade. Let’s say you already picked the platform you prefer for opening your account. Before you engage in operations, check the following phases.

Choose the currency pair

The Forex market is designed to facilitate currency exchange, so your entire business will focus on buying and selling currencies. The strategy is simple: you buy one currency and sell another at the same time. Because the process always implies two coins, you work with pairs. When you’re feeling more confident, you can earn the opportunity to test your skills with a funded trader account.

You’re a beginner, so start with the most common pairs of currencies because they’re the easiest to manage. Once you gain knowledge of the market, you can trade with any pair you find suitable.

Gain insight into the market

Base your trading endeavours on analysis, knowledge, and research. Without them, you trade on emotion, and feelings aren’t your best ally when investing in currencies. Pro traders always recommend beginners to keep their feelings at bay when they login in their trading account. Ask Traders have some great market analysis that is regularly updated, perfect for keeping your eye on the market.

There are countless Forex resources, and many provide contradictory information so that it may overwhelm you at first. But focus on researching data about the pair you want to trade, and use only reliable resources. Trustworthy sources always stand out from the rest because most investors use them. Before placing a trade, check the historical and current charts, go through the latest economic news, and analyse the activity of the market. Worldwide events always influence the evolution of currencies, and it’s wise to stay in touch with the latest announcements to base your decisions on facts.

Work with a reliable broker

To start your trading journey, you need to find a trustworthy brokerage that facilitates your operations. You buy and sell currencies with their help, and they provide leverage. If you want to build a Forex trading career and plan to switch to full-time trading soon, choose a broker that offers high leverage. When browsing through the lists of brokers, check if your options are regulated or if they offer a trial period. You want to know they fit your needs before committing to their services.

Read the quote of the currency pair

All currency pairs have two prices. The base currency is always listed first, and the first-rate is the price at which you can sell the pair. The second rate is the price if you buy it. The difference between them is the spread. Most brokers state they charge no commission on operations, but they take advantage of the spread, and this is how they make money. Spreads vary from a brokerage to another, so pick one with competitive spreads on popular currencies.

Pick the position

The Forex market is different from the others and allows you to speculate up and down at the same time. When you pick the buy position, you think the value of the currency will increase compared with the quote currency. But if you choose the sell position, you foresee the value of the base currency will drop.

If you’re ready to make your first trade, pick the broker that provides the most significant benefits, select a pair and decide what position you prefer. Remember, for your first operations invest a small amount of money.