Forex 101 — A Forex Tutorial

Want to start online trading but not sure where to begin? Our insightful guide will help you understand all you need to know about online trading.

When we refer to online trading, you may think about the stock market, and you would be technically correct. However, the truth is that with the advent of financial derivatives such as CFDs (Contracts for Difference), investors get access to much higher profit potential with just a fraction of the cost of traditional stock trading.

How to get started

Your first step to getting started in the exciting world of online trading is to find a reputable and trustworthy broker.

A broker will provide you with access to financial markets and facilitate all your trades. As such, you want to register for a trading account with a broker that offers the best trading conditions i.e. low pricing, fast order execution and safety of funds.

Fortunately, there is a way to guarantee that the broker you sign up with, won’t take your money and run and this is by way of regulation.

While the financial industry is largely decentralized with no central authority being responsible for all the transactions that take place, there are several financial watchdogs across the world, who are charged with ensuring that all brokers and investment firms comply with mandates that put the client first and that they offer a fair and transparent service.

Therefore, when signing up with a broker, make sure to only consider the ones who are regulated and licensed by supervisory bodies such as the Financial Conduct Authority (FCA) in the UK, or the Financial Sector Conduct Authority (FSCA) in South Africa.

As soon as you decide on your broker of choice, you will be able to find on the broker’s website the registration form to sign up for a trading account and download the trading platform.

The trading platform is the software, which can be used to monitor the live price feed of all the markets available under your broker as well as execute trades. The trading platform also includes various tools and plugins that can help you make sense of where the prices are heading along with other useful information.

Furthermore, there are different trading platforms available, which again depends on your broker of choice. However, you should know that the MetaTrader 4 (MT4) platform is the industry’s most popular and established trading platform that offers a great balance between stability, security and innovative features.

MT4 along with other trading platforms are typically available on desktop computers, tablets and smartphones as well. This allows you to trade from anywhere in the world, with the only requirement being a stable internet connection.

What are financial derivatives?

A financial derivative is none other than a contract that has some monetary value, which is derived – hence the name – from an underlying asset.

Therefore, you can have financial derivatives that mirror the value of any currency, stock, or even commodities and cryptocurrencies.

You may have already heard about some of the various financial derivatives available. Some of the most popular derivatives for example include Futures and Forward Contracts, Options and CFDs (Contracts for Difference).

These derivatives are incredibly useful for businesses and investors and they offer a range of advantages, however, in this article we will focus on CFDs and how you can utilize CFD trading to get access to the profit potential provided by leading financial markets including gold, currencies and even oil and crypto.

Keep reading to discover how you can start trading all these assets from anywhere in the world.

The advantages of CFDs

As already mentioned, CFDs are contracts that allow you to trade a variety of underlying markets. For example, you can sign up with a financial broker that specializes in CFDs and be able to trade all the instruments available in your broker’s offering.

Some popular instruments include:

•         Stocks such as Amazon, Google and Apple

•         Commodities such as gold, oil and coffee

•         Indices such as Nasdaq, S&P500 and FTSE 100

•         Cryptocurrencies such as Bitcoin, Ethereum and Litecoin

There are unique advantages and disadvantages to CFD trading, as you would expect from any financial investment. However, the main drawback of CFDs is the inherent risk created by the inherent unpredictability of the underlying market and, of course, a somewhat steep learning curve.

As such, while CFDs may be considered to carry a high level of risk, but if you can follow simple risk management principles, you can effectively dictate how much you risk losing with each trade.

Here are some of the opportunities provided by CFDs:

•         A variety of the most popular assets under one platform. Nearly all popular financial markets are available to trade through CFDs and you can trade them all via the same trading platform.

•         Potential to profit regardless of the market’s direction. In a typical investment, ideally, you would like the asset you own to gain value to sell for a profit. However, a CFD allows you to sell the underlying security as well, which means you can profit even if the asset is depreciating.

•         Low barrier to entry along with no commissions and no hidden fees. Despite all the advantages CFDs hold against traditional investments, you can easily start trading with minimal upfront investment and you only pay your broker a fee based on the market value of the asset you choose to trade.

•         Leverage, which unlocks higher profit potential. Online CFD trading wouldn’t be so popular or profitable if not for the use of leverage. Leverage, in simple terms, allows a trader to open trades that are worth several times more than his initial investment and enjoy much higher returns.

How does CFD trading work?

While the jargon may sound confusing, keep in mind that online CFD trading is merely speculation i.e. you just need to speculate if the price of the asset will climb or drop.

For example, let’s consider that you wish to take advantage of a price hike in gold. You will find this instrument under the XAU/USD symbol in your trading platform, which represents the price of gold against the U.S dollar.

However, regardless of the current price, opening a position on your trading platform, you will be presented with two choices: Buy or Sell.

To put it simply, if you think the price of gold will go up, you should aim to buy (go long) to benefit from the potential appreciation in value. However, even if the prices are crashing, you can still make the same profit by opting to sell (go short).

This is possible because CFDs are financial derivatives and when trading these contracts, you are just speculating on the future price of the asset without actually taking ownership of the asset itself.

It’s important to note here, however, that while you only have two choices (buy or sell), it doesn’t mean that the market will keep moving in the same direction indefinitely.

All financial markets and especially the popular ones are incredibly volatile and prices fluctuate every second according to the forces of supply and demand. This is why risk management is such an important aspect in online trading and why traders should keep track of economic news and events that may affect the performance of these assets on the global stage.

In a nutshell, trading can be risky, but as long as you do your research on the underlying market and follow the price charts closely, you will eventually be able to develop a profitable trading strategy.

Practice on demo

If you are interested in a more hands-on approach to learning how to trade online or just wish to explore the trading platform, you can just sign up for a demo trading account.

In fact, a demo trading account is an essential part of every trader’s journey in the financial markets. Demo accounts simulate the live market and therefore, you can use virtual funds to trade any asset you want and see how it all works without risking any real money.

As you can imagine, this is invaluable for trading beginners, who just want to see if online trading is right for them as well as learning the ins and outs of the trading platform.

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