The Forex trading for beginners’ guide will cover all the information you need on how you can start FX trading. We’ll cover how to trade Forex for beginners, which will equip you with the right knowledge to tackle the world’s largest capital market. As a bonus, in order to make things run smoothly for you, we’re going to reveal which is the best forex trading platform for beginners.
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The Foreign Exchange Market is by far the biggest market in the world in terms of liquidity and trading volume. It’s estimated that, on average, more than $5 trillion are transacted on a daily basis. It’s no surprise, trading in the Forex market is so exciting. Forex trading is free and it’s very cheap to get started as a trader in the FX market. Once you are able to hone your skills, you may be able to trade forex full time.
There are many reasons why you should learn to trade. The best forex trading strategies will empower you to earn a considerable amount of money over time. This doesn’t mean there aren’t disadvantages to Forex trading. There are pros and cons of trading forex that you need to factor in. If you want to have a good starting experience, you need to have a 360-degree view of the FX market.
You need the best forex training for beginners that is currently available. Once you are trained, you can learn how the Forex 24-hour trading market can give you access to trading, through the four major trading sessions (London, New York, Tokyo, and Sydney) regardless of your time zone.
Let’s get started and learn the inner workings of what is forex trading and how does it work
What is Forex Trading? A Basic Overview
Forex is an abbreviation for the foreign exchange market. In the financial world, Forex trading is also known as FX trading, currency trading, or foreign exchange trading which can be used interchangeably.
Unlike stocks which are traded on a stock exchange like the NYSE, the global Forex market is a decentralized market. Most Forex transactions are carried out over-the-counter or off-exchange. Stocks are listed on physical public exchanges, but Forex currencies have no physical location.
Check out the step-by-step process to follow before you start engaging in the over-the-counter market: Over-the Counter Trading – How the Whales Trade.
The biggest players that operate in the FX market are the big banks, governments, major corporations, and hedge funds. These are also referred to as being the institutional market players. However, there are also quite a few individual traders involved in the market as well.
Consumers who want to buy goods from another country, travelers who’re looking to travel overseas, business conducting trade abroad and last but not least investors and traders who wish to take advantage of the price fluctuation in the Forex market are the second type of traders also known as the retail crowd.
So, how does Forex trading work?
Forex traders trade with one another through a structured group of dealers and computer networks that act as market makers for their own customers.
When you’re involved in a trade you’re basically exchanging one thing for another. Usually, you exchange money for a good or service. In stock trading, you exchange money for shares in a company. In the Forex market, when we trade we exchange one currency unit for another currency unit. The American Dollar, Euro, and British Pound are all among the most commonly traded currencies.
Learn how to make money in the stock market fast with the CANSLIM formula.
For example, if the price of the EUR/USD exchange rate is 1.1150 it suggests that we can get 1 euro for every 1.1150 US dollars.
By now we’ve introduced several terms that need to be explained further so let’s learn forex trading for beginners.
How to Trade Forex for Beginners?
The basic foundation of trading in the foreign exchange market consists of firstly understanding how currencies are quoted and what the exchange rates represent. In the Forex market, all currencies are quoted in pairs. Which is why the act of Forex trading involves simultaneously buying one currency against another currency, which is sold.
Let’s now examine how many types of currency pairs you can encounter in the FX market.
Type of Currency Pairs
Depending on how much trading volume a currency is carrying out, we can split currencies into three major categories:
- Major Currency Pairs: These are all the currencies that are traded against the US Dollar, the world’s reserve currency. Eg: EUR/USD, GBP/USD, and USD/PY. The major pairs offer the biggest liquidity with EUR/USD being the most liquid currency pair.
- Minor Currency Pairs: Also referred to as cross pairs and are currency pairs that don’t trade against the US Dollar. Eg: EUR/GBP or EUR/CHF. They offer less liquidity for trading.
- Exotic Currency Pairs: Also referred to as minor pairs, are currencies linked to the emerging economies around the world. Eg: South African Rand, Brasilian Real, and Turkish lira.
As you can see, the American Dollar plays a major role in the forex market.
Next, we need to clarify how to read currency pairs and why we use a three-letter quotation system.
How to Read and Understand Forex Quotes
The standard quotation system uses a three-letter abbreviation system and will always involve two currencies where the first currency listed on the left is the Base currency while on the right is the Quote currency. The quoted price indicates how much of Quote currency is required to buy/sell one unit of Base currency.
The next thing to understand is that currency pairs always have two prices: the Bid price and the Ask price. This is the two-way quote system used for buying and selling of currencies. In simple terms, the Bid price is the price at which you can sell while the Ask price is the price at which you can buy.
How to Use Forex Orders
Generally speaking, a Forex order is a command given to your broker that shows:
- What currency pair to buy/sell
- The direction of your trade (Long or Short)
- The price to buy/sell
- Where to Take Profit
- Where to Exit
- How much quantity to buy/sell
- The type of order
Direction wise, a forex order can be used to do two things:
- Buy (Long) – If you expect the currency pair to rise, we use a buy order that is executed at the Ask price and closed at the Bid price.
- Sell (Short) – If you expect the currency pair to fall, we use a sell order that is executed at the Bid price and closed at the Ask price.
There are five common order types that anyone can use to enter and exit a position in the Forex market:
- Market order is designed to open a trade immediately at the best available market price. It can be used for both buying and selling. This order guarantees that the trade will be executed, but in volatile markets, the entry price can be slightly different than the last price quoted.
- Limit Order is designed to open a trade at a specific price and an expiration date. It can be used for both buying and selling. This order only guarantees that your trade will be executed at the desired price. For longs, the trigger price needs to be below the market price. For shorts, the trigger price needs to be above the market price.
- Stop Order is designed to buy when the trigger price is above the current market price and sell when the trigger price is below the current market price.
- Stop-loss order is designed to limit your losses and avert from potentially losing all your capital. If you’re buying and the exchange rate starts to go down the stop-loss order will automatically liquidate your position and minimize the loss.
- Take profit order is designed to close a profitable trade and lock in the profits.
The process to learn how to trade Forex for beginners
How to Open your First Forex Trade
The first step you need to undertake is to open a practice account with your favorite Forex broker. This will give you a trading platform from where you can access the Forex market.
If you don’t want to wait for a particular exchange rate to be reached to open your first trade you can instruct your trading platform to open the trade at the current price level. This is called entering at the current market price.
You can instruct your trading platform where your stop loss, take profit and how much quantity you want to trade aka the position size. Your trading platform will do the rest.
In order for you to make a profit the market needs to go up after you bought. The same is true in reverse if you shorted the market; the price needs to go down to make a profit.
Leverage, Volume and Margin Requirements.
To invest and trade in the Forex market, you need to understand how margin trading works. Basically, whenever you open a trade you only need to put up as collateral a certain amount of your balance. This deposit is referred to as the margin requirement.
This means that you don’t have to cover the full position size, but only deposit a fraction of it to cover the possible losses. As long as your trade is active, your FX broker will lock up the required margin and only free it back to you once the position is closed. This enables traders to execute much larger trades than they could otherwise afford.
The margin requirement depends on three things:
- Instrument you trade: EUR/USD, GBP/USD, USD/JPY etc.
- Position size: This is the amount you buy or sell and it’s measured in lots. For example, 1 standard lot has a nominal value of $100,000 and it’s worth $10 for every pip movement. For example, if you want to trade $50,000 of EUR/USD that equates to 0.5 mini lots and it’s worth $5 for every one pip movement in the exchange rate.
- Leverage: Allows you to control bigger sums of money by borrowing from your FX broker so you can boost the profits of a trade. The standard leverage offered by most brokers is 1:50 and it can go as high as 1:500. Using a 1:50 leverage it means that you can control with every $1 from your account $50 in buying power. For example, if you invest $10,000 with a broker that provides you with 1:50 leverage it means that your total buying power is $500,000 (50 x $10,000).
The margin requirement can be calculated using the following formula:
Margin Requirement = (Contract Size * Lot Size * Price) / Leverage
For example, if you want to buy 0.8 lots of EUR/USD at the current market price of 1.1150 and using a leverage of 1:100 you need to have in your account at least $892 to open that position. In other words, with only $892 you can control a position size of $80,000 (0.8 lots) which is your buying power. Because of this, forex trading for beginners might be more affordable than you assumed.
Margin Requirement = (100,000 * 0.8 * 1.1150) /100 = $892
Let’s now study some of the market catalysts that can drive a currency pair.
What Drives the Forex Exchange Rate
The value of the currency pair can be driven by several factors including:
- How well a country’s economy is doing?
- Geopolitical events and how stable is a government.
- Central Bank’s monetary policy.
- Interest rates
- News reports and economic data.
- Supply and Demand.
These are a few of the factors that can influence the value of a currency.
Best Forex Trading Platform for Beginners
The best forex trading platform for beginners is the MetaTrader4 platform developed by MetaQuotes Software. The MT4 platform is one of the most popular Forex trading platforms utilized by millions of retail Forex traders around the world. Its features can be used by both experienced and beginning forex traders alike.
The MetaTrader 4 is free and it comes with many built-in features. There are countless technical indicators that can help you analyze a Forex price chart. Additionally, you can use the MT4 to build your own automated trading strategy and backtest any kind of trading ideas you might have.
Learn how to backtest your trading strategies even if you don’t have any experience with our Beginners’ Guide to Effective Backtesting.
Alternatively, you can use the web-based trading platform TradingView, which is another free Forex trading platform that has the same features as the MT4 platform and much more.
Without a forex trading strategy to advance your trading skills, a trading platform is useless. This is why we want to also explore the wide range of forex trading strategies
Below you’ll discover what are the different types of forex trading strategies that work.
Forex Trading Strategies for Beginners
Forex traders employ different trading styles that mostly fit their own personalities. We can break down Forex market trading strategies into four distinctive trading edges that can be used in different market environments:
- Forex scalping strategies (Simple Scalping Trading Strategy: The Best Scalping System)
- Forex day trading strategies (The Moving Target Strategy - Day Trading Strategy)
- Forex swing trading strategies (Swing Trading Strategies that Work)
- Forex position trading strategies (Positional Trading Strategy – Trade like a Hedge Fund Manager)
While these are the most popular active FX trading strategies, Forex traders can use these concepts to innovate and develop well-versed Forex systems through the use of fundamental analysis and/or technical analysis. There are many tools a Forex trader can use to gain an edge in the FX market like Forex chart patterns, technical indicators, statistics and much more.
Check out a top-down approach to fundamental analysis of stocks: Fundamental Analysis of Stocks – 5 Financial Ratios to Follow.
In order to time the Forex market, you can apply a Forex strategy that is designed to improve your trading:
- Forex trend trading strategies
- Forex momentum trading strategies
- Forex range trading strategies
- Forex reversal trading strategies
- Forex breakout trading strategies
- Forex Carry Trade strategies
As a novice Forex trader, you have a wide variety of Forex trading strategies so you can take advantage of the currency price fluctuations. Since the market conditions are constantly changing, make sure you get familiarized with different types of Forex trading strategies.
Final Words – Forex Trading for Beginners
The basic mechanics of trading the forex market are similar to any other market. Buy low and sell high in the hope to generate a profit. Due to its unique characteristics, the forex market provides a wide range of trading opportunities that no other market does. The forex market, therefore, is very suitable for the novice trader that is looking to either make an extra income or a full-time trading career.
Forex trading for beginners can be extremely competitive. So, make sure you learn how to trade forex for beginners before you risk your hard-earned money. Learn as much as you can about the ins and outs of FX trading so, you’ll always be prepared to safely navigate the Forex market.
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