By Forex/currency (FX) trading, a trader essentially buys or sells a currency against another (base currency vs quote currency). When a trader trades an FX pair as a CFD, such as EUR/USD, that involves buying the base currency (EUR) against the quote currency (USD) in the hope that the exchange rate of EUR will appreciate against USD If a trader feels that the base currency will gain against quote currency, he will take a buy/long position and if he thinks the base currency will weaken against the quote currency, he will take a sell/short position. For example, a trader may open a buy deal on USD/JPY if recent announcements by the Fed (U.S. Central Bank) sound more hawkish than the BOJ (Japanese Central Bank). But he may also open a sell position on USD/CAD at the same time if the BOC (Canadian Central Bank) sounds more hawkish than the Fed.
FX trading is not rocket science; but before active CFD trading, a beginner should learn about the potential risk, basic technical analysis and do some demo CFD trading. He can start with small positions in major FX pairs like USD/JPY, EUR/USD and GBP/USD with proper risk management like and learn about leverage levels, stop loss, take profit levels, position sizing and money management.
A trader should only take risks based on his financial capacity or comfort levels and the risk/reward ratio should be at least 1:1; i.e. if a trader target 100 pips in an FX trade, he should also keep appropriate stop-loss levels at around 50 or 100 pips (as per actual chart levels). Without proper risk management, a trader could lose the entire trading capital or even more. Thus, a beginner should trade as per his financial capacity; i.e. he should not trade with a capital which he can’t afford to lose.
In CFD/FX trading, both fundamental and technical analysis is important as fundamental analysis/underlying news tells us ‘where’ to take positions while technical analysis tells us ‘when’ to take that position (time and price). When fundamentals and underlying news and technicals diverge, one should take may consider taking a light position in the direction of the technicals (because price and time are the ultimate), but when they converge, one could take a position with greater confidence, doubling his usual position size. However, it is important to remember that neither fundamental nor technical analysis information is a guarantee, and only intended to help you gain insight into a trade. Past performance is not indicative of future performance.
A beginner trader should focus on:
- Technical chart as price & time, whatever may be the fundamental narrative may be.
- Daily charts for larger trends along with intraday 15-mins and 4-hours for appropriate entry and exit.
- Underlying macro-economic news including economic data, central bank policy actions and comments, domestic politics and policies, and also geo-politics.
- Trading strategy and rules and always maintain that those rules.
- In CFD/FX trading, if a position is profitable, then a trader need not deposit any additional funds for the MTM profit. But if it’s in a loss, he has to deposit additional funds at least equivalent to the MTM loss amount for carrying over the position.
- Apart from nominal P/L, there may be brokerage and some regulatory charges; i.e. a trader should calculate the overall cost of trading and minimum breakeven point before real-life trading. Also, a trader may have to pay some interest to the CFD service provider/broker for any debit amount in his trading account.
- In CFD trading, a trader can either buy first and sell later (long position) or sell first and buy (cover) later (short position) as per his analysis or algo (automatic trading signal). A professional trader usually employs both manual and automatic technical analysis (algo) along with fundamental analysis (underlying news) for trading.
- Beginner traders can improve over time with the right approach and continuous process of learning.
- The technical chart/analysis is not rocket science; it’s a simple reflection of traders’ mindset (possible future price based on existing/current price history). And one should always stick to basic simple technical charts with minimum standard technical indicators as too many indicators may create confusion.
- A beginner trader should start trading small and gradually learn how to set up a proper chart and read the same (technical analysis). At the same time, he has to focus on underlying news flow and interpret the same for his trading decision.
- A trader should also understand the underlying news and its impact on assets or FX prices. Most of the time, before news comes out, there are rumors (floating balloon) and price already moved moves to a great extent on that rumor. After the actual news, the underlying CFD/FX price often goes in the opposite direction (even after some knee-jerk reaction/whipsaw move) as the news was already discounted by the market. A trader should have the experience to read such news impacts on price charts and trade accordingly to gradually become a more informed trader.
