5 Basic Concepts You Need to Know Before Trading

Let’s set the scene… You’re sat in front of your trading platform with a demo account standing at 4K profit. That familiar itch that’s been growing since you started demo trading begins to creep into your fingertips. You want to start trading live. And then… The age-old question, ‘Am I ready?’

Many of us get to this existential crisis, asking ourselves if we’re ready to take the leap into the unknown. Have we prepared enough? Do we know enough? Have we practiced enough? And how do we define ‘enough’?

In this article we’ll be exploring 5 of the basic concepts that should be a part of your trading repertoire before taking the plunge into live trading. So that you can, at the very least, ensure you have the basic knowledge to begin.

1. Bid, Ask & Spread

You probably already know the basics of the ‘spread’. But let’s have a cheeky little recap just to make sure.

So, the Bid or Sell price is the price that a forex trader is going to sell the currency pair for. And the Ask or Buy price is the price that a forex trader is going to buy the currency pair at. The difference between these two prices is the spread.

Now, you can have fixed or variable spreads. The names are pretty self-explanatory, but as a quick review, fixed spreads stay the same no matter what the economic situation. Variable spreads however, can change, so in times of low liquidity they can rise significantly. You can select the type of spreads that you wish to use, depending on your strategy!

Understanding the spread itself is a relatively simple task. But, understanding the implications the spread can have on your trading is a monumental one.

First of all, you have to have a good idea of how the spread will impact your success, based on the instruments that you trade. Generally speaking, spreads on the majors tend to be much lower than those seen with exotic pairs, or metals because of the higher levels of liquidity. More people trade common pairs so there is higher liquidity. In theory, trading more common pairs should give you a lower overall trading cost.

Spreads will also have an impact on different trading strategies. For example, scalpers tend to open many small trades for a very short time. If the trader has huge spreads then it becomes very difficult to make the small profits that scalpers aim for. On the other hand, should you be a swing trader, or someone who concentrates more on longer time-frames, the spread will be of much lower importance as there’ll be a much smaller impact on the profit margin.

Now, monitoring the spreads you get from your broker is also really important. Keep an eye out for any changes that may come about during times of high volatility (like during the NFP release). There may be significantly bigger spreads, so appropriate risk management should always be employed.

It’s at this point that we’ll remind you about the benefits of trading with a regulated broker. Although most brokers experience increased spreads during times of high volatility, unregulated brokers can extend their spreads significantly, effectively blowing your trading out of the water. Try to find yourself a regulated broker to trade with safely!

2. Platforms

We don’t know if anyone has told you yet, but… choosing the platform where you trade from should depend on the features that you need. The MT4 platform is readily available from lots of different brokers because of its incredible capabilities. It has advanced charting tools which can be used by loads of different traders for many different strategies. The possibilities are endless.

One such platform is the world-renowned MetaTrader 4 platform, where you can trade loads of different instruments, conduct advanced technical analysis with ease, use expert advisors, access trading signals and so much more.

The MT4 platform gives traders from all different experience levels the opportunity to trade with ease and has the added benefit of being universally acknowledged. Support from broker to broker tends to be much more comprehensive because of this, and so you can usually always get the help you need.

3. Margin & Leverage

Don’t panic! The concepts of Margin and Leverage tend to go hand-in-hand with each other as your broker will request a margin to offer leverage, so we’ll explain them together.

The forex market used to be quite inaccessible to the general public because of the amount of capital needed to even open a trade. This all changed when leverage was introduced. Today you can deposit a much smaller amount and, using leverage, are able to open much bigger trades than you would using only your deposit.

For example, imagine you deposit $1000 into your account and your new broker gives you a leverage of 1:100. Without leverage you could only open a position of $1000. With leverage however, you can open a position of $100,000!

Now, this benefit doesn’t come for free, which is where the margin kicks in. The margin requirement is the amount that your broker requires from you, to allow you to open the trade. It’s normally expressed as a percentage of the position that you want to open. So, say your broker requires a 1% margin, in the above example you’d need $1000 in your account to be able to open a position of $100,000.

The use of leverage sounds like a massive benefit, but it can also go in the opposite direction. If you’re in a losing trade, your account balance can be wiped out pretty quickly! One issue that can arise from the use of leverage is the possibility that your trading account could go into a negative balance, leaving you owing your broker a huge sum. Today though, you can take precautions by trading with a regulated broker that offers Negative Balance Protection as standard.

4. Risk Management

Here we have another ‘easy to grasp’ but difficult to employ concept of trading. There are a few key techniques that you should always employ when trading to make sure that you can minimize your losses and trade effectively.

First of all, you should aim to control your losses by knowing when to exit a trade. Setting stop losses (a predetermined point of exiting a trade) makes this a much easier task as it removes the emotion while you are trading. When a trade goes into the red, your natural reaction would be to hope that it will bounce back! However, this could cause losses to be much larger than they would have been if you’d placed a stop loss when opening the position.

Selecting the size of your trade is also a great way of managing your losses. Opening smaller positions would be preferable to opening one large position, especially if you’re still learning how to trade. Although a smaller position means smaller profits, it also means smaller losses, while a large losing position could easily wipe out your account balance. Using smaller lot sizes enables you to open more trades and so, diversify your risk. Something to always remember is that if you don’t feel totally confident, approach with caution.

Also make sure that you track your overall exposure and truly understand the relation between different currency pairs. Imagine you sell EURUSD but buy USDCHF, exposure to the USD is double. If the USD goes down in value you have double the amount of loss on your hands.

You should aim to always be in control of the risk that you’re taking when opening and closing your trades. Using proper risk management is effectively the difference between success and failure.

5. Price Action

Essentially, price action is the basis of most technical analysis techniques used in trading. Price action trading is where trading decisions are based on the price movements of a financial instrument.

At its most basic level, other indicators or methods of analysis aren’t used to make trading decisions. However, it is the basis for most other techniques. As a trader starting out, you should have a firm understanding of how an instrument’s price movement can indicate future price movements.

The basis of the theory is that if the price of an instrument is moving up, other traders are buying the instrument, increasing its value overall. Conversely, if the price is going down, then the assumption is that other traders are selling the instrument. It’s at this point that a trader should be able to identify the ideal entry point for a trade.

By having the basics of this theory, you should be able to read and interpret price movements of an instrument. Later on, you should be able to apply more complex and developed technical analysis techniques to your strategy, equipping you to develop your knowledge further.

Taking the next step

Taking the next step will always be a daunting task, but not necessarily one that has to be done alone.

Maybe you feel confident enough to dive right in, or perhaps you feel like you need that extra bit of practice or information. If you’d like to speak to an expert and get some more information before taking the plunge and opening a live account, the FXPRIMUS team is always available to answer your questions.

Check out our site at www.fxprimus.com, or get in contact via Live Chat or Email and a representative will be on hand to help you out.