With markets open 24 hours a day and mobile trading platforms readily available, foreign exchange is one of the easiest forms of trading in practical terms. However, the relentlessness of market fluctuations can make crypto & forex trading appear intimidating for beginners. That volatility is a double-edged sword; while the volatility is what provides traders with plenty of opportunities for profit, market swings can also take investors by surprise.
Fortunately, there are several ways that a trader can prepare themselves for forex trading. By practicing with a demo account, identifying an area of expertise, and evaluating how past events have affected the markets, a newcomer can start their forex trading career with confidence.
Practice with a demo account
While reading a detailed guide to trading may give you an idea of the terminology and the tools in the world of forex, the best way to learn is by doing. In a pursuit where bankroll management is paramount, you don’t want to be chipping away at your trading budget while you’re still learning the ropes.
This is why it is essential that a beginner experiments with a demo account before trading with real money. Using the IG trading platform as an example, setting up a forex demo account gives users access to $10,000 in virtual funds and to test trading strategies on the go via mobile apps. This gives wannabe investors an insight into how the trading world operates, so they gain an idea of what they’ll need to do once they switch to their own money.
The demo account helps rookies to work out just what sort of trader they want to be. Try lots of different trading strategies to establish what fits with your style, while using the pressure-free environment to get to grips with identifying and analyzing market patterns. When there are market fluctuations in the real world, you’ll want to respond instantaneously for maximum benefits. A forex demo account is an effective way of making those responses more intuitive.
Identify your areas of strength
Forex market fluctuations are far more susceptible to real-world geopolitical and economic developments than cryptocurrencies, so it is important that traders only get involved with markets that they know well. Forex trading is based on currency pairs, in which you buy one currency and sell the other. One safe approach is to ensure that one of those currencies is your national currency, as you will naturally have greater familiarity with the market.
If you don’t have one particular area of market knowledge, then it is advisable to focus on the most popular currency pairs – at least to begin with. You may wish to start with any pair involving some combination of these major currencies: the US dollar (USD), the euro (EUR), the British pound (GBP), the Japanese yen (JPY), or the Chinese yuan (CNY).
These currency pairs have a higher liquidity, making it easier for you to buy and sell at the optimum price. These currencies are also more prominent in global affairs, given the size of the economies they support and their nations’ significance in world trade. If you have in-depth knowledge of a more niche currency, then make that your focus. Market sentiment drives fluctuations in value, so knowledge of a currency like the Nigerian naira (NGN) or the Qatari rial (QAR) may help you anticipate changes in mood and swings in value.
Learn how to react to global affairs
Here are three examples of key global events in recent years that have provided (and may continue to provide) opportunities for traders.
The US-China trade war
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This trade dispute has been dominating global finance news since the start of 2018. The dollar has largely performed strongly throughout, but any resolution to the dispute is expected to cause the USD to weaken. Better trade relations give China renewed power as an exporter, allowing the CNY to make gains against the dollar.
This was made clear in mid-January, when the dollar shed value following the signing of the Phase 1 trade deal. The USD closed play at 6.85957 against the CNY three days after the deal, its lowest ebb for six months. Future deals may provoke similar falls, so traders will be closely watching for indications that a deal is imminent. A weaker USD also generally spells good news for emerging economies, so investors may look at alternative currency pairs that provide opportunities to oppose the dollar.
The United Kingdom’s departure from the European Union is expected to have long-term effects on the UK and economies in the eurozone. The protracted Brexit process is an example of how market sentiment causes fluctuations. Every time an orderly exit from the EU looked more likely, investors gained confidence in the GBP.
For example, the Conservative Party’s securing of a majority at the end of 2019 reinvigorated the GBP, with traders more confident of a definitive resolution to Brexit. Markets generally respond well to certainty, although traders will be monitoring the UK’s trade talks with the EU to determine what sort of economic relationship the two parties will have in the coming years. The product of those negotiations will cause further fluctuations – anticipating the direction of those swings will be the challenge for the trader.
The Covid-19 Pandemic
While the two aforementioned political sagas have precedents to help traders forecast future market swings, the coronavirus outbreak has presented a unique and extreme threat to the global economy. Forex markets have fluctuated wildly as the virus has spread across the world, with caution naturally advised for traders if purchasing currencies during a global pandemic.
Once again it comes down to the question of certainty. If the world gains a firmer idea about the potential long-term impact of coronavirus, then investors can begin to act with more confidence. While many currencies have been plunged into downward spirals, identifying the moment when the tide turns could allow a trader to gain exposure to a currency at a favorable price. This is why it is imperative that aspiring traders stay apprised of news emerging from every continent.
Experience from other markets such as cryptocurrencies may give you the confidence to dive straight into forex trading. However, taking the time to develop trading strategies and get to grips with the mechanisms of forex will naturally give you a better chance of predicting market changes and capitalizing on those fluctuations.