How to Trade Forex for Beginners?
In this article
If you are not familiar with forex trading and want an opportunity to make money, you need forex education to start.
Understanding the various foreign exchange market and methods is essential, as you must learn Forex trading by studying how to manage your risk and position yourself up for success.
If you are asking how to trade forex for beginners, this article is for you!
First, we need to understand what is forex
Forex is a foreign exchange process of converting one currency pair into another for various reasons. These reasons can include tourism, trading, or commerce. In short, the foreign exchange market is where you trade currencies.
There’s no central foreign exchange market, but it is conducted electronically over the counter (OTC).
The forex market is open 24/5, meaning it’s open 24 hours a trading day on weekdays only. The main financial centers are London, Sydney, New York, and Tokyo, across nearly all the time zones. This makes the market active anytime, with currency prices constantly fluctuating.
How do forex trades work?
You can see the current exchange rate between the two currencies in each currency pair. As an example, let’s consider EUR/USD — or euro-dollar exchange rate — as the currency pair:
- There is a base currency (the euro) on the left.
- The U.S. dollar on the right acts as the quote currency.
An exchange rate is a quoted currency equivalent to one unit of a base currency. The base currency always represents one unit, but the quote currency changes according to the current market and how much it costs to purchase one branch of the base currency.
According to EUR/USD exchange rates of 1.2, €1 will buy $1.20 (or $1.20 will buy €1). As the exchange rate rises (because €1 will buy more U.S. dollars), the base currency gains value relative to the quote currency; as the exchange rate falls, the base currency loses weight.
There is a historical convention for how some trading currency pairs appear, so base currencies usually appear first, and quote currencies follow. A USD to EUR conversion appears in EUR/USD but not in USD/EUR.
Three ways to trade forex
The main purpose of Forex trades isn’t to exchange currencies (such as at a currency exchange while travelling) but to speculate on future price movements.
Beginner Forex traders use similar strategies to stock traders by purchasing currencies whose values they expect to rise compared to other currencies and selling currencies whose purchasing power they expect to decline.
The following three ways of trading Forex will suit different traders:
The spot market.
In this primary Forex market, real-time currency trade and exchange rates are based on supply and demand.
The forward market.
Forex traders can also opt to enter a binding (private) contract with another trader and lock in an exchange rate for an amount within a future date instead of executing a trade now.
The futures market.
The trader may also choose to buy or sell a predetermined amount of the currency at a specific exchange rate at a future date using a standardized contract. The exchange rather than the forward market is where this occurs.
Forex traders primarily use the forward and futures markets to speculate or hedge against future fluctuations in a currency’s price. The spot market is where most Forex trades occur, and what happens there affects the exchange rates in the foreign exchange market.
How do currencies trade?
The three-letter code for a currency is like that of a stock’s ticker symbol. Over 170 currencies exist worldwide, but the U.S. dollar dominates most forex transactions. That’s why understanding its code, USD, is helpful.
We can use Euros in 19 countries in the European Union. They are the second most popular currency on the Forex market.
The following other major currency pairs are popular in order from most popular to least popular: the Japanese yen (JPY), British pound (GBP), Australian dollar (AUD), Canadian dollar (CAD), Swiss franc (CHF), and New Zealand dollar (NZD).
To trade, major, minor, and exotic currency pairs are available at most Forex brokers. Forex trading relies on a combination of two currencies. About 75% of Forex market trading occurs on these seven currency pairs, which are known as the major currency pairs:
Forex terms to know
The language of each market is different. Forex traders need to know the following words before they trade:
There is always a currency pair involved in Forex trades. The majors are not the only trades available; exotic currency pairs, and minor currency pairs, are also available.
You can trade currencies using a forex trading account. A forex account can be divided into three types according to its lot size:
You may trade up to $1,000 worth of currencies in one lot if you have a trading account like this.
These accounts allow you to trade up to $10,000 worth of currencies in one lot.
With this account, traders can trade up to $100,000 worth of currencies.
Remember that leverage’s margin money counts toward each lot’s trading limit. In this way, brokers can provide capital by a predetermined ratio. Putting up $100, they could trade $1 worth of currency, so you would need to spend only $10.
Pip. The smallest price change within a currency pair is a pip or percentage points. There are four decimal places in a Forex price, so a pip equals 0.00001.
Bid-ask spread. For currency exchange rates, as with other assets (such as penny stocks), buyers and sellers determine the maximum amount that they will pay (the bid) and the minimum amount they will ask for (the ask). A bid-ask spread is a difference between these two amounts and what price trades ultimately execute at.
Lot. There is a standard unit of currency in Forex called a lot. Typical lot sizes are 100,000 units of money, but micro (1,001) and mini (10,001) lots are also available.
Leverage. It is possible that some beginner traders won’t be willing to make such a large commitment to execute a trade because of the large lot sizes. With leverage, traders can take part in the Forex market without spending the money they need.
Margin. The downside of leverage is that it is not free. Margin is a deposit made by traders up front.
If one asks for the lowest price, then one will purchase currency at that price. Using $1.3891 as an example, you can estimate the lowest price you will pay for a pound. The Ask price is usually higher than the bid price.
A bid represents your willingness to pay a certain amount for a currency. The market maker continuously puts out bids in a currency in response to buyer queries. A bid price is typically lower than an Ask price, but when demand is high, it may be higher.
In a bear market, the prices of all currencies decline. Financial crises or natural disasters can cause a bear market to develop because of depressed economic fundamentals.
A bull market increases the price of all currencies. Uptrends show that the global economy is doing well, which is reflected in bull markets.
You should familiarise yourself with the terminology associated with FX trading before you trade.
There are some terms specific to currency trading besides those that appear in finance, including leverage, bids and asks, and accounts.
Contract for differences (CFDs)
The trading of contracts for difference (CFDs) allows traders to speculate on currency price fluctuations without directly assuming ownership of the underlying asset.
By buying CFDs on that currency pair when you believe its price will rise and selling CFDs on it when you believe its value will decline, you are betting on whether its price will rise or fall. Leverage is a risk factor used in foreign exchange trading that can cause heavy losses if it is not used correctly.
What moves the Forex market?
It is like any other market in which the price of the currency determines by the supply and demand of buyers and sellers. This market is subject to other macro forces. Several factors can also affect the demand for particular currencies, including interest rates, central bank policy, economic growth, and political climates.
Forex traders react to News 24 hours a trading day, five days a week, which might not affect stocks until the stock market opens the next day.
For traders, it’s important to understand what dynamics could lead to sharp spikes in currency fluctuations since so much of currency pairs trading relies on speculation or hedging.
Forex trading steps
Our easy-to-follow steps will help you trade Forex with no qualms:
Decide how you’d like to trade Forex.
The Forex market consists largely of major banks and financial institutions that buy and sell massive currency pairs daily. Trading Forex through a broker or Forex CFDs is the two main ways for individual traders who do not have the capital to make billion-dollar Forex trades.
What is a Forex CFD?
Forex CFDs are contracts where you agree to exchange the difference in the value of currency pairs between opening and closing your position. Make a profit by opening a long post and letting the market rise. Losses will occur if the price drops. By opening a short center, the opposite will happen.
Trading CFDs can occur in Forex markets along with many other markets.
Forex trading via a broker
Trading currencies through a broker – or occasionally through a bank – works similarly to trading CFDs. Your goal is to speculate on currency pairs’ price movements without owning the underlying currencies.
The short strategy can be used if you believe a currency pair’s price is heading downward. However, the market access that Forex brokers provide you with is limited.
Learn how the Forex market works
Understanding how the Forex market works when you trade currencies is important because it differs from exchange-based systems like futures and shares. A network of banks serves as the medium through which Forex is bought and sold instead of a centralized exchange. There are over-the-counter markets, also known as OTC markets. Market makers act as market makers, providing a quoted price for selling a Forex pair and a bid price for buying it.
Trading via Forex providers
Most retail traders use Forex trading providers to trade Forex rather than dealing directly with banks. By sourcing the best price from the banks and adding on their market spread, Forex trading providers can help you save money.
A few providers will let you interact directly with market makers’ order books. Trading Forex directly through direct market access, or DMA, allows advanced traders to save time and money by eliminating the spread. Instead, they trade at the price of the currency provided + a variable commission.
Open an account
Forex CFD trading requires a leveraged trading account if you want to use CFDs.
It takes minutes to open a trading account, and you are not required to add funds until you place a trade.
Build a trading plan
If you are new to the Forex markets, it is especially important to develop a trading plan. A trading plan simplifies decision-making, provides a framework for opening and closing positions, and removes emotion from the process. A Forex trading strategy could also be useful, as it governs how you find trading opportunities.
Following selecting a Forex trading strategy, put it into action. It would help if you decided what your first trade should be after using your favourite technical analysis tools on the Forex markets you’d like to trade.
The simplest traders should pay attention to changes in the market, even if they wish to be purely technical. During currency trading, upcoming economic announcements might significantly influence markets – something you may not consider in your technical analysis.
Choose your Forex trading platform.
Trading Forex with our platforms can be fast and smart. Brokers’ trading platforms allow you to trade in the following markets:
- Using a web browser
- A mobile app we offer
- A third-party platform like MT4 offers advanced functionality
We offer a wide range of Forex trading platforms, with personalized alerts, charts, and risk management tools that can be customized to suit your trading style.
Open, monitor, and close your first position.
With the right platform, you’ll be able to trade immediately. Open the deal ticket for the market you want, and you’ll see both the buy and sell prices. You can also set a stop or limit for when your trade closes based on the level it reaches once the position reaches a certain size.
If you want to open a long post, click buy, and if you’re going to open a short post, click sell.
You can view your profit and loss from the dealing platform’s ‘open positions’ section.
Make the opposite trade from when you opened your position as soon as you decide to close it. Now let’s examine some examples of possible foreign trade outcomes.
Forex trading example
Trading a GBP/USD CFD
The selling price of GBP/USD is 1.35540, and the buy price is 1.35560. Because of the possibility that the Bank of England will cut interest rates, you will sell five standard lots at 1.35540 in anticipation of the pound losing value against the dollar.
There are 100,000 contracts per pair of base currencies. If you sell currencies like GBP/USD standard contracts to your trading partner, you will trade your own funds of £100,000 for $135,540, so your overall position is worth $677,700 (£500,000).
As a leveraged product, CFDs allow you to open positions without putting down the full amount up front. Assuming that your trade price is $3,388.50 (£2,500) and the margin requirement is 0.50%, your margin will be 0.50% of that amount.
Risks of Forex trading for beginners
Because of the leverage and margin used in Forex trading, there are more risks than other assets. Since prices of currency pairs fluctuate constantly, traders can only make money by taking large positions (using leverage).
The advantage of using leverage is that it can magnify profits if a Forex trader wins a bet. This method can, however, amplify losses as well if they even exceed the initial amount borrowed.
Leverage users risk margin calls if currency pairs fall too much in value, which might oblige them to sell securities bought with borrowed funds at a loss. Even a profitable Forex trade can suffer from transaction costs, which may increase.
You should also know foreign currency traders are small fish swimming in a sea of skilled, experienced investors. The Securities and Exchange Commission warns newbies about potential fraud and information that could be confusing.
Therefore, it’s probably a good thing that individual investors don’t trade Forex often. Retail investor accounts hold just 5.5% of the global Forex market. Some of the biggest online brokers do not even offer the service.
Most traders struggle to make money in the foreign exchange market. On average, retail F.X. traders lost 71% of their investments. The complexity of Forex trading often makes it better to leave it to professionals.
Why Forex trading matters for average consumers
The Forex exchange market isn’t the place for the average investor to dabble, but it affects us all. Real-time spot market price movements will affect both export prices and international travel costs.
Buying imported goods (from cars to clothes) and travelling abroad will be cheaper when the value of the U.S. dollar strengthens relative to the euro, for example. A weaker dollar will lead to higher travel expenses and import costs (though exporters will benefit).
Ensure you monitor Forex markets if you plan to buy imported goods or travel outside the U.S.
Forex trading strategies
There are usually differences in Forex trading strategies based on the timeframe and market variables. There are strategies for trading market movements within minutes and over several days.
As a beginner, you can measure the relative success rate and suitability of different Forex trading strategies using a Forex demo account. Try several methods, blend various aspects, and choose your preferred technical indicators for entry and exit points. There are several types of Forex strategies, including:
It is a way for traders to build profits on small but frequent wins by holding multiple short-term trades. Technical analysts and traders who can devote much time to trading may benefit the most from this strategy.
Forex day trading
A Forex day trader tries to predict the market’s daily movements and avoids overnight holding costs by entering and exiting trades at least once daily. Traders who prefer short-term intraday trading methods but aren’t comfortable scalping‘s extremely fast-paced trading methods might find this method most suitable.
Forex swing trading
Trading swings in Forex can be best suited to traders interested in a balance between fundamentals and technicals. With swing trading, the positions are held open for several days to buy at ‘lows’ and sell at ‘highs,’ or vice versa.
This method analyzes fewer market trends than others, overnight holding costs may be higher, and market gaps are more likely.
Position trading aims to hold positions long and ignore price changes over a short period. The best traders may spend more time studying market fundamentals and less time analyzing technical indicators.
A long-term view of the currency pair’s overall movement involves a long-term perspective. This approach recognizes movements known as trends, and then currency positions are constructed that give directions until the trend ends.
Where to trade Forex
Trading Forex is possible through Spread Betting and CFD accounts on desktops and mobile devices. The platform offers thousands of financial instruments, including indices, cryptocurrencies, commodities, shares, ETFs, and government bonds. Find out what markets we offer.
Forex trading platform
Many beginners struggle to navigate trading platforms as they learn how to trade Forex. Open a demo account as you become more familiar with opening and closing trades on our online trading platform. This allows you to practice your trading strategy and develop your trading habits. By customizing our trading platform, you can make it fit your needs.
Forex mobile trading app
Your open positions are crucial to your trading success, regardless of your experience level. We offer an award-winning mobile app for trading that allows you to access all your functions, enter, and close trades through order ticketing, create full charts, and more.
Forex trading software programs, seminars, and courses
Trading Forex can take place using Forex software programs. According to their recommendations, some programs claim to let you know when to trade. However, no person or program can predict foreign exchange movements accurately.
Don’t be tempted by companies promoting products that promise better exchange rates or easy money. Initially, they may allow you to try out their platform for free. This is usually to entice you to buy the software or platform.
To trade FX, you won’t learn enough from a basic seminar or course.
Forex market analysis
Experienced traders typically analyze the Forex market to make more profitable trading decisions. They employ one or both of the following well-established market analysis methods.
Technical analysis examines the financial markets and forecasts future market movements using patterns and indicators. A technical analyst considers past trading activity a good indicator of a future asset’s value. Short-term market movements predict better using this trading analysis.
It is a method for determining the intrinsic value of an asset by analyzing its fundamentals. A fundamental analyst examines qualitative and quantitative information and relevant economic and financial factors. Economists might be particularly interested in economic calendars for real Forex traders.
Is Forex trading right for you?
Retail Forex traders can get started almost anywhere if they have some risk capital.
However, learning Forex trading requires more than that. You need to be proficient in the markets, have a working trading strategy within your overall trading plan, remain disciplined, remain resilient, and be able to bounce back after facing a high risk of losing.
Trading Forex, CFDs, and other financial instruments are possible with platforms such as Pepperstone. You can change your financial future by accessing 24/7 support and educational tools and managing a diverse portfolio by clicking a few buttons.
As a Forex trader, you have a decent chance of making money if you meet those requirements. It is still possible to take part if you do not have these skills by signing up with an online broker that supports social trading and copying the trades of an experienced trader.
Forex trading tips
Before you begin, it’s essential to know the basics of Forex trading. This is what you have to know to get you started on your trading journey:
#1: Learn About the Currencies You Want to Trade
Learning about the currencies, you want to trade. Specifically, the currency pairs that interest you are important.
Because there are so many currency pairs to trade doesn’t mean you need to trade them all. Instead, choose a few unrelated currency pairs and focus on them.
This makes it easy to keep up with economic news for the countries’ currencies on which you’re focusing.
#2: Get a Trading Plan and Stick to it.
You must create a trading plan before starting trading on foreign exchange markets. Your trading plan should include:
- Your profit goals
- Your risk tolerance level
- Your trading methods
- Your assessment criteria
Once you come up with a trading strategy, stick to it. You’ll be more sensible before placing a Forex trade and nonsensical after you’ve placed a trade.
#3: Practice with a Demo Account
Practising with a demo account will give you a feel of what it’s like trading in real FX market conditions. This is the best starting point for forex trading for beginners.
Most Forex trading platforms give you a free demo account to practice with currency pairs you’re focusing on while not risking your capital.
Once you’re comfortable using a demo account, you can deposit funds into a live account and start making trades in real-time.
Learning from mistakes from practising, understanding your trading strategy, and controlling your emotions will help you succeed in your forex trading journey.
#4: Start Slow
You must know your limits and know when to stop. Starting slow will help you determine your risk on each trade, therefore allowing you not to risk more than what you’re able to lose.
#5: Stop and Limit Orders
You can get out of the market at your price by setting stop and limit orders. You’ll manage your risk better and can avoid sitting and watching the markets all day.
#6: Don’t Get Emotional
It’s a terrible idea to trade with your emotions. Deciding with your feelings can affect your trades, with a high risk of losing money.
When you trade Forex, you must only trade with money you can afford to lose.
Avoid going all-in after you have a losing trade. Be smart, stick to your original plan, and slowly compensate for the lost money.
#7: Stay Consistent
We consider consistency one key to successful trading. All traders face a high risk of losing money, but you can be successful by remaining positive.
Consistency comes from sticking to your plan, educating yourself, and remaining disciplined and patient.
#8: Adjust Your Trading Strategy
If you feel your trading strategy is no longer working for you, adjusting it according to your needs is okay. What’s most important is that whatever your trading plan is, it remains a reflection of your goals. Your trading plan should get adjusted if your financial situation or goals change.
#9: Choose a Regulated Forex Broker
Traders are not always aware if their Forex brokers are regulated or not. Your Forex broker will remain honest, be appropriate, and conduct morally in a Forex trade with regulation. Do not overlook checking if Financial Sector Conduct Authority (FSCA regulates your Forex broker) or non-regulated!
Take the Leap!
Forex trading may seem daunting and difficult initially because of its high daily trading volume, but you will be comfortable and on your way to building wealth by following these steps.
You don’t need to read guides on Forex trading for beginners to understand the Forex market. Instead, keep practising with a demo account, set goals, and create a trading strategy to align with your goals.
Get acquainted with a regulated Forex broker who will assist and guide you with your strategy and help you get set up for success.
Forex trading is a slow process of accumulating wealth, so don’t be in a rush. Do not trade with money you cannot afford to lose, as of losing money while trading currencies at Forex.
Jason Morgan is an experienced forex analyst and writer with a deep understanding of the financial markets. With over 13+ years of industry experience, he has honed his skills in analyzing and forecasting currency movements, providing valuable insights to traders and investors.
Forex Content Writer | Market Analyst