It's lesson time! To start forex trading, you need to learn the very basics. Here's a handy step-by-step walk through of the most essential skills for new forex traders. These include how to read a forex chart and how to buy and sell a currency pair, with a particular focus on MetaTrader 4 (MT4). Here's your guide on how to start trading, and how to learn forex step by step.
This blog is part of our new Make It Happen series, a series of blogs aimed at total beginners to forex: for people working a full-time job, with little capital to start off with, and limited time to learn how to trade. Sound familiar? Here’s how to get started on your trading journey.
How to Start Trading: A Guide to Learn Forex Step by Step
Step 1: How to Read a Forex Chart
The most common kind of chart used in forex trading is the candlestick chart. This type of chart is very dense with information, condensing the open, low, high, and close for each period of time. You can see how this is displayed below.
Bullish candles are those that increase in price over the period represented. Traditionally they are represented as white, but with modern computer displays, they are sometimes displayed as green, blue, or any number of colours. Bearish candles are those candles that decrease in price over the period. Traditionally, they are displayed as black but are often coloured red in modern times.
In both bullish and bearish candles, the high price of the asset is represented by a vertical line extending upward out of the candle body called the upper tail. These extensions are also sometimes described as wicks or shadows. The low for the period is represented by the lower tail. The open and close of the period are represented by the body. However, the position of the open and close are reversed between the bullish and bearish candles. This is necessary because the close is higher than the open in a bullish candle and the open is higher than the close in a bearish candle.
Want to learn more? Read our blog on candlestick chart analysis>>
Step 2: How to Read Forex Candles
If you look at the hourly chart of EUR/USD below, you can see two candles of interest that we have highlighted. During the 15:00 hour on 24 February, the long lower tail of the candle indicates that the price dipped down much lower than the price at which the pair closed when the hour ended.
The difference between the low and close is around 100 pips. In the next to last candle, you see a candle with a long upper tail and a longer lower tail as well, with a short body. This is indicative of uncertainty in the market, a virtual stalemate between buyers and sellers. It is often a foreshadowing that a current trend is coming to an end. Sometimes this end of a trend is the foundation for a trend in the opposite direction.
Want to know more about technical analysis? See more about the difference between technical analysis vs fundamental analysis>>
Step 3: How to Read Forex Currency Pairs
Currency pairs are composed of a base currency and a quote currency. The price is the amount of quote currency that will purchase one unit of base currency.
For example, in the currency pair EUR/USD, EUR is the base currency and USD is the quote currency. USD is the unit that the price of the pair is quoted in. If the price of EUR/USD is 1.3333, then that means that it will take 1.3333 USD to buy 1 EUR. Since currency pairs are composed of one currency expressed in terms of the other, selling the currency pair means that you are essentially buying the quote currency and selling the base currency. A price of 1.3333 for EUR/USD means that it will take 1 EUR to buy 1.3333 USD. Dividing 1 EUR by 1.3333 USD, gives you 0.7500, which is how much EUR it would take to purchase 1 USD.
Here's your guide to price signals in markets>>
Step 4: How to Know When to Buy
There are various ways to arrive at the belief that a currency pair will increase in value, which means you would want to buy the currency pair. This will depend upon your specific trading strategy.
One common strategy is trend or swing trading, which helps you attempt to identify trends that you can buy into and gain profit from. There are various rules that traders use as a trading signal that a trend has begun. These could include simply reading the bare price action of the currency pair or analysing a technical indicator such as moving averages.
For example, some price action traders may look at that candle from the last chart with the long tails and small body as a buy signal. More conservative traders will wait for confirmation by waiting on one or two more candles before pulling the trigger. Still others will wait for a signal from a moving average crossover before considering a trend underway.
In the graph below, we have plotted a 5-period moving average (red) and a 15-period moving average (blue). The 5-period moving average contains the most recent data, while the 15-period moving average keeps 10 periods more information. Thus, when the 5-period moving average crosses above the 15-period moving average, it is a signal that the recent price has significantly surpassed the average of the less recent past.
See which trading strategy suits you here: Which Trader Personality Are You?
Step 5: How to Know When to Sell
Similar to buying, the methods used for arriving at the sentiment to sell are determined by your trading strategy. They are almost always the exact same as those employed in concluding to buy, only reversed.
Debunking the myths: how much do traders REALLY make? See What is the Average Trader Salary?>>
Step 6: How to Place a Trade on MT4
MetaTrader 4 (MT4) is the most popular Forex trading software in the world. It has been widely used for several years and has attracted a vast body of third-party code, indicators, and plugins that can be used to your advantage. But as a beginner, your primary concern is using MT4 to place a trade. Here is a step-by-step guide on how to place a trade with MT4.
Many versions or installations of MT4 include a feature called one-click trading. There will be a box on the chart where you can specify an order size. You can see these in the MT4 charts we have shown above. To the left of this box is a "Sell" button and to the right is a "Buy" button. This interface is fine once you are comfortable with trading on the MT4 platform. But as a beginner, it is safer and more educational to place a trade the old-fashioned and more complicated way.
On the toolbar in MT4, there is a “New Order” toolbar button. You can click that, or you can achieve the same by going to the menu bar and choosing Tools > New Order. Either way, you should see this dialog box.
The volume signifies the size of the order. What this means exactly will differ depending on the size of your particular account. The volume field is a required one. Two optional fields are the stop loss and take profit fields. The stop loss field allows you to set a price at which to close the trade to avoid further losses. Setting one is a very important part of risk management. The take profit allows you to specify a value at which to close the trade and pocket your gains.
At the lower end of the dialog are the “Sell by Market” and the “Buy by Market” buttons. These are the buttons you will use to buy or sell the currency pair at the current market price at the time your order is executed. You can also change the Type field to “Pending Order” for conditional buying options.