How to Trade Forex – A Beginner’s Guide
Learning how to trade forex by yourself can seem like an uphill battle. It’s possible, but it can be frustrating and time-consuming. Luckily, our experts are here to help. With our guide to forex, you’ll be ready to trade currencies in no time at all. Read on to learn:
- What the forex market is and what makes it unique
- How forex trading works
- The factors that influence the forex market
- How to enter your first forex trade
- 3 top tips from our forex trading experts
What is Forex Trading?
Forex refers to the foreign exchange market, a global marketplace where you can trade one currency for another. Before you can learn how to trade forex, you need to know that the foreign exchange market is unique because it is decentralized. This means it does not have a fixed location or an owner. Decentralization gives the forex market other distinct qualities too:
- Forex is the largest financial market in the world, with a daily total trading volume of over $5 trillion.
- The forex playing field is even. When you enter the market, you have the same trading opportunities as central banks, investment firms, and giant corporations.
- The forex market is open 24 hours a day, five days a week. Unlike the stock market, which closes at a set time, activity simply shifts from time zone to time zone.
These characteristics make the forex market highly liquid. Liquidity describes how quickly you can buy and sell an asset at a stable price, and it depends on how many buyers and sellers are in the market.
Forex trading is the trading of currency within the forex market. You do this through the trading of currency pairs (one currency traded for another currency). In fact, every time you take a vacation and swap your dollars for another currency, or vice versa, you are taking part in the forex market
Of course, when you go on vacation, your only motivation for trading currencies is so you can spend money in another country. Forex traders, on the other hand, aim to make a profit from this exchange. They buy currencies when prices are low and sell them at a higher price later.
What Factors Influence the Forex Market?
Currency prices change constantly because of supply and demand. There aren’t infinite amounts of a currency, so when more people want to buy it, its price goes up. Similarly, if no one is interested in a currency, its price will drop compared to others.
As the forex market is highly liquid, there are hundreds of buyers and sellers placing trades every single day. When they do so, currency prices fluctuate. Volatility refers to how often prices fluctuate and by what amount. Depending on how high the currency volatility is, it’s going to be more rewarding, yet also more dangerous.
There are many factors that result in periods of high volatility and increased supply or demand of a currency. Familiarize yourself with some reasons why currency prices can change before learning how to trade forex:
- Inflation rate changes – Inflation is the overall increase in prices of everything, be it goods or services. When a country’s inflation rates increase, the currency devalues because you need more of it to buy the same amount of goods. In 1970, for example, a Big Mac cost just $0.65. In today’s dollars, it costs $4.35. This is inflation in action.
- Interest rate changes – It’s common to see a spike or fall in the prices of a currency pair after the country’s central bank announces that the interest rate is changing. Central banks manipulate interest rates to keep inflation and exchange rates down. As high interest rates offer lenders higher returns, they attract foreign capital and cause the exchange rate to rise.
- Economic and political news – News has a big impact on currency prices, as it affects people’s confidence in the market. For instance, after the US election in 2020, the value of the dollar rose. Industry experts labeled this the ‘Biden Bounce’ – by electing a more moderate and less erratic president, people were more confident that the market would be more stable.
- Economic data – Almost every time a country releases economic data, its currency prices changes. Data can signify a weak or a strong economy, which affects demand. You could, for example, consider a country with low unemployment rates and high retail sales, to be economically thriving. In turn, more people are likely to invest in the currency.
Understanding Forex Quotes and Currency Pairs
Forex trading is all about buying and selling currencies in pairs. The first currency is the base currency, and the second currency is the quote currency. Every currency has its own price, which is nothing more than an exchange rate of the base currency to the quote currency.
When you buy a certain currency pair, it means you are selling a certain amount of quote currency to buy the base currency. When you sell a currency pair, you sell the base currency to buy the quote currency.
To learn how to trade forex properly, you need to know that a broker will always give you two prices for one currency pair, the bid and the ask.
- The bid is the price that you can sell a currency for.
- The ask is the price that you can buy a currency at.
These terms can be confusing. It would seem more correct for the ‘bid’ price to relate to buying a currency, right? The terms actually come from the broker’s perspective. If you are selling the currency, the broker is buying it, and vice versa.
Pips and Spreads
When you are learning how to trade forex, the price change of your currency pair determines whether you’re generating profit or losing money. Traders and brokers track price changes using pips.
A pip, officially known as the “percentage in point”, is a unit of measurement used to express the change in value between two currencies. For example, if the EUR/USD prices move from 1.2050 to 1.2051, that 0.0001 difference is one pip. A pip is usually the last decimal place of a forex quote.
To learn how to trade forex, count your profits and losses in pips. This universal method of calculating trading results saves you time, as it’s far easier than counting the actual price changes and multiplying them by the market price.
As mentioned earlier, forex brokers give you two price quotes for one currency pair, the bid and the ask prices. The bid price is usually lower than the ask price, and the difference in pips between the two is the ‘spread’.
Spreads are how ‘no-commission’ brokers make their money. Instead of charging separate fees, they make money by selling currency for more than they paid to buy it, or by buying currency for less than they will receive when they sell it again.
For example, if the USD/EUR pair has a value of 1.2048, the broker may quote you a bid price of 1.2047 and an ask price of 1.2049. Here the spread is 2 pips.
How to Trade Forex in Seven Simple Steps
Now you have a better understanding of what to expect from forex trading, it’s time to get involved. In our step-by-step guide, we take you through everything, from choosing a forex broker to opening and closing your first trade.
If you’re learning how to trade as a beginner, complete this process with a demo account first. A demo account allows you to trade in a real market environment with virtual money. You needn’t risk your hard-earned cash until your confident in your trading abilities. When you’re ready, simply fund your broker account and repeat these seven steps.
1. Choose a Forex Broker
The first step is to find a reliable forex broker. While there are a huge number of forex brokers to choose from, your choice must boast regulation from a top-tier authority such as the CFTC, CySEC, or FCA. This ensures that the broker is fair and gives you support should anything go wrong.
Apart from regulation, your broker should also offer you beneficial trading terms and conditions. This includes affordable spreads, decent leverage rates, fast execution speeds, and trading tools for accurate price analysis.
2. Choose a Currency Pair
After finding a broker, the next step is to decide which currency you’re going to trade. The currency pair you choose will determine how volatile/stable your positions will be. There are three types of currency pairs in forex:
- Majors – All major currency pairs include the USD and another well-traded currency. This includes EUR/USD, USD/JPY, and GBP/USD.
- Minors – Minor currency pairs are those which involve popular currencies besides the USD, such as EUR/GBP, GBP/JPY, and EUR/AUD.
- Exotics – These are pairs that include one major currency and one from a developing economy. Popular exotic pairs include EUR/TRY, USD/HKD, and GBP/ZAR.
When learning how to trade forex, it’s a good idea to stick to trading the major pairs until you’re more comfortable with the market. Major pairs are more stable and highly liquid, as so many people want to trade them. This means you can trade whenever you want at a low price. In contrast, exotic currencies can be volatile and suffer periods of low liquidity. This can lead to huge spread fees.
3. Analyze the Markets
Before you place any trade, always perform analysis. You wouldn’t buy a car without researching prices first as the dealer could rip you off. The same is true of forex trading. Analysis helps you predict price movements and maximize your profits.
Fundamental analysis uses economic data and news events to predict the price of a currency. To perform fundamental analysis, you must look at interest and inflation rates, unemployment figures, and political circumstances. You can predict how this information may affect future price movements.
If you want to learn how to trade using technical analysis, you need to look at historical chart data. Technical analysts ignore what’s going on in the greater world and focus on the facts on their trading platform. They use past prices and trading volumes to detect trends and patterns.
If this all seems overwhelming, fear not. Whilst there’re a hundred and one things you can check before you place a trade, not all of them are so important. Here’s a list of essential factors to consider:
- Current and historical charts, which showcase price movements with visual graphs.
- News about political and economic developments, which affect trader sentiments.
- Indicators, which help you analyze various important market data. These can be technical indicators like oscillators or volatility channels, or fundamental indicators like the Consumer Price Index or Industrial Production Index.
4. Decide Whether to Buy or Sell
Forex trading allows you to make profits when the value of a currency is both falling and rising. As you can buy or sell, you needn’t own a currency first to trade. Here’s how it works:
- Buy Positions – If you think that the price of the EUR/USD pair will increase in time, open a buy position.
- Sell Positions – If you think the price of the EUR/USD pair will decrease, sell this pair.
5. Consider Which Order Type is Best for You
If you want to learn how to trade forex more efficiently, consider various order types. There are two basic types of orders: market and pending. With a market order, the broker executes your trade immediately. With a pending order, you specify a price point and the broker only executes the trade when the currency has reached it.
Besides these two basic order types, there are also standard stop-loss and limit orders, and other more technical order types like guaranteed stop-losses. Here’s how they work:
- Standard Stop-Loss Orders – With the regular stop-loss order, you specify the amount of pips you can withstand to lose. If your position moves beyond the amount, the broker will automatically close it as soon as possible.
- Guaranteed Stop-Loss Orders – This works like a standard stop-loss order, yet the main difference is that the broker guarantees your position will be closed at the exact price point you specified.
- Limit Orders – You place limit orders to buy or sell currencies at a certain price:
- A buy limit order will open a buy position at or below the specified price,
- A sell limit order will open a sell position at or above the specified price.
6. Place Your First Trade
Once you’ve decided which currencies you want to trade, and how you want to trade them, you’re ready to go. Open your trading platform, log into your trading account, and choose the currency pair you want to trade. Input the trade’s details, such as position size, leverage rate and order type. Finally, open the order.
7. Monitor and Close Your Positions
Even though you’ve placed your position, your participation in trading doesn’t stop there. You need to monitor your trades closely to watch out for unforeseen circumstances, and to spot the right time to close your trade.
To learn how to trade forex successfully, decide what profit levels or loss levels you’re happy with beforehand. The profit and loss level line will move multiple times throughout the trade – try not to worry. Stick to your price plan.
Once the currency is nearing your preferred profit or loss levels, close the trade. To do this, simply click the ‘Close’ or ‘X’ button within the trading platform. It’s that easy!
Three Top Forex Trading Tips from Our Experts
To create this guide, we consulted with our experts. With years of experience trading forex, they have a few tricks up their sleeve to keep you safe.
- Manage Your Risk – Knowing how to trade forex with fewer risks is crucial. One of the best ways to do this is to create a detailed trading plan with a realistic schedule and budget. By sticking to this plan, no matter what, you avoid making emotional and impulsive decisions.
- Use a Micro Account – While demo trading is undoubtedly useful, it doesn’t really emulate the feeling of having your own funds on the line. Many beginner forex traders move onto a micro account, which allows them to open positions worth just $1,000. By placing small trades with a micro account, you can get to grips with the emotional aspects of trading real money, before risking more capital.
- Study The Currencies You Want to Trade – It’s not enough to just pick a currency pair, you also need to make sure you know all the important driving forces of that pair, be it the interest rates of two issuing countries, their political situations, or inflation rates. As a beginner trader, you must also study currency pairs to learn which are unrelated. By trading unrelated pairs, you can spread your risks – if one pair loses momentum, the other one may maintain its profitability.
Advanced Trading Strategies
Once you’ve mastered all the basics of forex trading, you can move on to more complex strategies and indicators. Indicators are an essential part of conducting in-depth technical analysis to predict future price movements.
Here, we have compiled a list of advanced strategies to explore:
- Gann – The theory of Gann Fans implies that the forex market is geometrical, and so repeats itself in cycles. By using technical indicators, the Gann strategy allows you to make predictions about support and resistance levels based on Gann angles.
- Elliott Waves – This trading theory maintains that the markets aren’t chaotic. Instead, they move in cyclical patterns and waves, affected by trader psychology.
- Andrews’ Pitchfork – This technical indicator studies average price movements and deviations from them. According to Alan Andrews, the prices remain on the average trend line 80% of the time, while the remaining 20% are random fluctuations. To learn how to trade forex with this indicator, look for the forces that shift supply and demand, and cause the new trend line to emerge.
- Japanese Candlesticks – Japanese Candlesticks, also known as the Candlestick chart, are probably the most widely used chart types in forex trading. The chart shows four individual prices at once: open, high, low, and close prices.