Forex Trading for Beginners
Are you right at the beginning of your forex trading journey? Then this Forex Trading for Beginners guide is perfect for you. We cover the basics of what forex trading is and how does it work, go into details about how to start forex trading and evaluate how much you can make from forex trading.
But one step by the other, let’s begin with the basics, and if you want to expand your knowledge even further, consider taking one of the best forex trading courses to become a Forex professional.
What Is Forex Trading, and How Does It Work?
The term Forex stands for Foreign Exchange, which basically means that you change currencies either locally when traveling around the world or via trading one currency for another online.
Let’s say you live in the U.S. and visit the most popular international travel destination of Americans – Mexico – for a holiday. To pay offline in stores, you need Mexican Pesos, so you have to sell US-Dollars in exchange for Mexican Pesos. If you pay per credit card, exactly the same happens, and your bank or credit card provider takes care of the conversion in the background.
And, finally, if you day trade forex with a brokerage account, then you speculate on moving currency prices by buying or selling one currency or the other.
The big difference to the stock market is that the Forex market is traded globally over the counter with individual pricing schemes along major banks, commercial companies, market makers, central banks, etc. So, while you always see the most current price for stocks on a stock exchange like Nasdaq without differences since there is only this one central exchange, the Forex market is different.
The prices from broker to broker do not fluctuate that much, but there are differences in bid-ask spreads, price highs and lows of candlesticks, and you will never see any total amount of traded currencies as you know it from the stock market volume with traded shares per stock symbol.
You, as a trader, use a market maker or ECN broker to connect with the global banking network, but institutions like banks and hedge funds are those who really drive the volume in the Forex market.
Forex Trading Advantages
High liquidity: Forex is by far the largest market globally, with over $5 trillion daily trading volume. That’s 12 zeros behind the five. Think of this. This makes it much more difficult to manipulate prices, as it frequently happens with pump-and-dump schemes in the penny stock sector.
Low entry barrier: Getting into Forex trading requires a budget of about $100 – $200, depending on the broker and most of the time, you can trade 30 times more than what you have in the account by using leverage.
No pattern day trader rule: Day trading Forex can be done freely without any limitations. There is no PDT rule that holds you back from day trading your favorite currencies as often as you want, as long as you keep your account positive.
Good risk management: Stocks gap up frequently overnight when companies announce their earnings while the stock market is closed. With Forex, it is different since the market is open 24 hours, 5 days a week, and market news gets absorbed immediately without gaps. Still, the volatility can be immense when news comes out, but then you have the chance to use good risk management to participate in those movements directly.
Trade anytime: No matter where you live, you can place your trades all day long, Monday through Friday, all around the clock. Still, there are times when the Forex market is more or less active and volatile, so depending on your strategy, you have to consider it for trade planning.
Low transaction costs: Depending on the forex broker you choose, you either pay no commissions but the bid-ask spread, or you get an exceptionally low bid-ask spread and pay a small commission. Either way, the overall commissions are extremely low compared to the amount traded.
What Is a Currency Pair
If you trade a currency, there is always one currency to buy and the other to sell in exchange. That’s why it’s called a currency pair. To go with our example at the beginning, if you travel to Mexico, you exchange your US Dollars for Mexican Pesos. In this case, your currency pair is USD/MXN, where USD stands for US Dollars and MXN for Mexican Pesos.
5 Most frequently traded forex pairs in the world:
- EUR/USD (Euro – US Dollar)
- USD/JPY (US Dollar – Japanese Yen)
- GBP/USD (Great Britan Pound – US Dollar)
- AUD/USD (Australian Dollar – US Dollar)
- USD/CAD (US Dollar – Canadian Dollar)
Some of the most volatile forex pairs are USD/TRY (US Dollar – Pakistan Rupee) and USD/MXN (US Dollar – Mexican Peso).
How to Properly Read and Understand Currency Prices?
No matter if you go to a local currency exchange or trade currency with your favorite Forex broker, you’ll always see the currency pair and a number behind it. The way it is structured can be confusing for beginners since there is a big difference in trading either the EUR/USD or USD/EUR currency pair. Both pairs are totally priced differently, and for both, a long-position or short-position can be taken.
So, no matter what currency pairs you want to trade, you better first decide which one of the combinations. Let’s say you decide to trade the EUR/USD currency pair, which is priced at 1.1260.
So, what exactly does it mean if you see a quote in your broker dashboard EUR/USD 1.1260?
It means that 1 Euro is currently worth 1.1260 US Dollars. That’s it. It’s simple. So, the first currency mentioned in the pair is always valued at 1, and the conversion rate behind it expresses how much you get in the currency that’s at #2.
So, for the GBP/USD, you see a conversion rate of GBP/USD 1.2839 – What does that mean? It means that for any 1 Great Britan Pound (in first place in the pair), you get 1.2839 US Dollars (2nd place in the pair).
Do you plan your next holiday to Mexico and want to exchange money at a local currency exchange office? You will see quotes like USD/MXN 16.8344, meaning that for every 1 USD, you get 16.8344 Mexican Pesos.
What Is a Pip in Forex?
If you come from stock trading, you know that you have your bid-ask spread, the bid price, and the ask price and everything is noted in dollars and cents. So if your stock moves 1 cent, then it moves one cent.
In Forex trading, things are a bit different because currencies are typically quoted at the 4th decimal place. That’s needed because not every currency pair is priced as high as the USD/JPY but often relatively close to a 1:1 ratio like the EUR/USD. So, it is needed to have a differentiator far behind the comma at the 4th decimal place – the smallest incremental value of a Forex pair.
This smallest incremental value of a Forex pair is called a Pip, and it stands for a move of 0.0001 in the currency pair. If the conversion rate of the EUR/USD moves from 1.1260 to 1.1261, then the market moves by 1 Pip. If the EUR/USD goes from 1.1260 to 1.1360, it moves 100 pips, so every cent is 100 pips.
What Is a Spread?
I’ve already mentioned the term spread a couple of times before, but what exactly does it mean? The spread is the difference between the best bid and best ask price, so the price difference between the best price is the demand and the supply side offer.
Let’s go with the example holiday in Mexico again. You have USD cash in your hands and want to exchange the money with a person you meet on the street. You say hi, I want to exchange 100 USD in Mexican Pesos, and I’d like to get 100*16.8344= 1,683.44 Mexican Pesos in exchange for the 100 USD. But the person you talk with offers to give you only 1,500 Mexican Pesos for your 100 USD. Now you have the spread, which leads to a difference of 183.44 Mexican Pesos, which you can accept or not.
On the Forex exchange, this spread is visible between the bid and ask columns in your trading platform. Let’s say you trade the EUR/USD, and you see 1.1260 in the bid and 1.1270 in the ask. In this case, the spread is 0.0010, which equals 10 pips spread.
The bid always reflects the price you currently can sell a position for if the immediate trade execution is important for you (e.g., with a sell market order), while the ask always reflects the best possible price you can buy a currency for if an immediate order execution of priority (e.g., with a buy market order).
Forex Trading Sessions Explained
In Forex trading, you have four main Forex trading sessions, which reflect the most volatile times for the Forex market. While you can trade 24 hours a day any Forex pair, you should consider when big institutional traders influence the market prices since they bring in the most volatility and trading volume.
The four main forex trading sessions are the London, New York, Sydney and Tokyo session. In every country, institutional traders are most active when it’s day in their time zone.
Let’s say you live in New York and you are 4 hours behind Greenwich Mean Time (GMT). The London session will be from 3 AM to 12 PM in the morning your time, the New York session starts at 8 AM your time and goes until 5 PM, the Sydney session is from 5 PM your time until 2 AM in the morning, and Tokyo is open from 7 PM to 4 AM.
The most active trading sessions are those where is an overlap between multiple forex sessions, which is between 8 AM and 12 PM (New York + London), then 7 PM to 2 AM (Sydney + Tokyo) and once again 3 AM to 4 AM (London and Tokyo).
Knowing the main Forex trading sessions and most active Forex trading hours helps to understand the market patterns and high volatility times better. This is great for planning your trades ahead an aligning the right time spots for your Forex trading since you are likely not gonna sit in front of your trading computer 24 hours a day.
Forex Order Types
Luckily, the order types in Forex trading are exactly the same as when trading stocks. The two most common order types are:
- Market Orders
- Limit Orders
A market order is used to quickly get into a trade when your preference is to get a trade execution. You never know the fill price if you place a market order, but you can expect your order to get executed immediately. You can use a buy market order to buy or a sell market order to sell currencies.
Let’s say the current EUR/USD rate is at 1.1260, and you want to get into the market now. Just place a buy market order, and your order will get executed immediately at the current ask price.
It works the same if you want to sell or short-sell a currency. Just enter a sell market order, and you sell the currency at the current bid price.
Stop Variation of the Market Order
There is also a buy-stop market and sell-stop market order type, where you trigger an order once a specific price is reached, and then the order becomes active and gets executed market.
A limit order is used to enter the market at a specific price limit. That can mean that your order will never get executed when your limit with the order amount was never reached. Sometimes limit orders get only partially filled if the price gets reached, but the market maker cannot fill the full amount of requested currencies.
Let’s say you want to buy the EUR/USD for 1.1000, but it is currently at 1.1260.
In this case, you place a buy order to go long in the EUR/USD with a price limit of 1.1000.
If the market ever goes back to 1.1000 and below, your order gets filled. If the market never goes back below your limit again, your order will remain open.
It works similarly for the sell limit order to either close an existing long position or open a short position. Enter your limit (which is higher than the current price if you want to sell via limit) and place it. For example, place a sell order to sell EUR/USD at 1.2000 while it is currently at 1.1260. Your order will get executed if the EUR/USD will ever go above 1.2000 again.
Stop Variation of the Limit Order
You can also use a buy-stop limit or sell-stop limit order, where a resting order gets active once a specific price level gets hit, where the order then becomes an active limit order.
How to Utilize Fundamental Analysis for Forex Markets
You might know the term fundamental analysis from trading other securities like stocks. In conjunction with stocks, fundamental analysis means that you analyze the company’s financials and compare it vs. peers.
Forex trading is different since nobody cares about company fundamentals if trading currency pairs. But fundamental data goes beyond company data and includes important news and announcements which are typically set to be released at specific dates and times.
Non-Farm Payrolls (NFP)
If you are looking for ultra-high volatility and price spikes in the EUR/USD, watch out for the Non-Farm Payrolls, which are released on the first Friday of every month. The NFP indicate the strenght of the US economy, based on job creation and consumer spending, and higher or lower than expected number can cause a real roller coaster when the numbers get released between 8:30 and 8:45 AM EST.
The US central bank releases its interest rate decisions via announcements of the Federal Open Market Committee (FOMC). The FOMC announcement times are often volatile, but sometimes the market just goes sideways without any clear movement to the up or downside.
Per year, there are eight scheduled meetings, and the minutes of the meetings are released three weeks after the policy decision. Those minutes and interpretations are not that important. The important part is the release dates when the policy decision is announced at 2 PM Easter time.
The European Central Bank is for Europe, what the FOMC is for the US. The policymakers in Europe also announce their interest rate decisions multiple times per year, which then leads to market volatility in the EUR USD around 8:30 AM EST.
For all types of news and data announcements, you can use a Forex calendar of your choice. The three announcements above are those that dive into the market the most, but there are others you can use for day trading forex or planning swing trades and long-term investments.
If news trading of fundamental data releases like job market data or interest rate changes becomes your focus, consider choosing the best forex broker to ensure instant trade executions and low bid-ask spreads.
How to Utilize Technical Analysis for Forex Markets
Technical analysis mainly focuses on the visualization of price data, evaluation of support and resistance zones and using trading indicators on a chart.
No matter what financial underlying you analyze, the technical analysis concept remains the same, and you want to make sure to use the best forex charts.
You open a chart and select the underlying you want to analyze. Now choose your favorite time frame. As a day trader, you likely go with lower time frames like the 1, 3 or 5-minute chart, but as a Forex swing trader, you want to use higher time frames like the popular 4 hours chart. For even longer price swings, the daily chart combined with higher times frames like the weekly or monthly chart is a good combination.
Many traders solely use the price information on a chart and use it with chart types like the candlestick chart, bar chart, line chart or Point & Figure charts. That’s okay, and it helps focus on the most important component – the price of the currency pair.
In addition, you can use some of the best forex indicators to add an additional layer of confidence or use them as a filter focusing on the best setups.
One thing to remember is that while you can apply a volume indicator when trading stocks that shows you the total number of traded shares or evaluates a relative volume ratio, with Forex, you can’t do that. That’s because every market maker and broker counts its own currency trading volume, and no global system maps all currencies traded in real time accessible for retail traders.
Forex Trading Styles
Three trading styles are frequently used by investors when trading currencies.
Day trading forex is one of the most popular trading styles because of the minimal account size requirements and immense leverage ratios offered by forex brokers. Day traders hold der positions intraday for a couple of minutes or even shorter. Excellent order executions are of high priority due to the immense amount traded per trade. So, a small slippage or too high spreads can make a whole difference in profitability.
Swing trading forex is another popular trading method, where most of the time, trading decisions are made based on setups visible on the 4-hours charting time frame. The holding duration of the position ranges from hours to a few days. The overnight margin is not that high like the intraday margin for day traders, which results in lower leverages possible when holding positions overnight. Therefore the trade execution price is not of that high importance, but still crucial.
Position trading of Forex pairs is often used when the overall monetary policy of a state lets investors assume that the market will rise or fall longer term. Position traders hold their positions for weeks, months, or even years. And if you still have some currencies from a country where you were on holiday at home, you also have a position in that currency.
5 Forex Money Management Tips
Understanding basic money management principles and sound risk limiting techniques when trading forex can really make the difference between a consistently profitable trader and one whose broker liquidates their trading positions when their losses exceed margin requirements.
To remain successful as a forex trader, you really want your profits to be substantial and your losses minimal. You also need to know when to take profits and how to remain emotionally prepared to accept losses and bounce back from them so you can regain the confidence to keep trading.
Any forex trader who does not pay attention to money management is gambling instead of trading. Incorporating sound money management principles in your trading plan generally helps boost your income and keep you in the forex trading business over the long haul. Forex Trading for Beginners – Read on for some key money management tips you can implement when trading forex.
Knowledge is power, and while education is not exactly part of money management, learning about what money management involves should be an early step you take to help boost your future income as a forex trader. Forex training courses help you develop the skills you need to succeed in the forex market.
To make money consistently when trading forex, you will need to understand how to manage the funds in your trading account more professionally. Take some time to thoroughly research the topic of money management and resolve upfront to put sound money management principles into your trading plan before you start using real money to trade with.
Trading forex involves knowledge of the foreign exchange market, which means that the more you learn about the fundamental and technical aspects of analyzing currencies, the more prepared you’ll be when trading positions. Keeping a keen eye on relevant news also helps traders deal with the geopolitical and economic forces that continuously interact to impact the forex market.
2. Analyze Before Trading
You will also generally want to incorporate a form of market analysis into your trade plan that will help make your trading decisions more objective. You can base such decisions on fundamental analysis, technical analysis or both.
As a forex trader, you should also know what moves any currency pairs you intend to trade. You will also typically want to start off by operating in the most prominent and liquid currency pairs to minimize order slippage and avoid excessive transaction costs due to wider dealing spreads.
Furthermore, selecting a competent broker with tight dealing spreads and little or no slippage on stop loss orders could save you considerable money if you’re an active trader. Choosing a good broker, you’ll feel comfortable with can be done by checking them out through their demo or practice accounts.
Demo account trading will give you a good idea of the broker’s dealer spreads and how they behave in a fast market without committing your funds. The sophistication and ergonomics of a broker’s trading platform can also make a significant difference to your profitability.
Ideally, you’ll want a trading platform that’s got the functionality you need and is easy to use immediately. Many forex brokers support the popular MetaTrader4 and 5 trading platform available free from MetaQuotes with an extensive user community.
Most day traders prefer trading the most volatile forex pairs, while investors focus on the most smoothly trading forex pairs.
3. Start Small
Starting out trading in small positions and then keeping your trade size appropriate relative to the amount of money in your forex account will help you avoid drawing down more than you feel comfortable with on any particular trade. For example, you might want to risk only a certain percentage of your account at any one time to help safeguard your remaining funds.
Many successful forex traders only risk 20% of their account at any particular time. Even if that amount is entirely lost, the trader can still recover that loss relatively quickly using the funds remaining in the account. Some traders might also adjust their position size based on their estimate of how likely a trade is to become profitable, taking lower probability trades in smaller amounts and higher probability trades in higher amounts.
Furthermore, remember to use only risk capital when trading, which consists of funds that can safely be lost completely. Risking funds that you need for basic necessities could cause you to undergo excessive emotional stress when faced with a losing trade. Operating under such stress can affect your judgment severely and impede you from making sensible and objective trading decisions.
4. Protect Your Money With Stops and Profit Targets
Protecting the capital in your trading account from losses and knowing when to take any accumulated profits is essential as a forex trader. Trading with stop loss and take profit orders, therefore, comprises an important part of forex money management that can both make and save you money in the long run.
Before initiating a position in a currency pair, it first makes sense to determine at which point your position should be liquidated just in case it turns out to be a loser. You can then place a stop loss order with your broker to close out the trade automatically at that level once the trade has been entered into.
Some traders might also use a trailing stop loss order that moves in a favorable direction as the initial position becomes more profitable. This type of order helps the trader avoid turning a profitable trade into a loser in case the market reverses substantially.
When it comes to taking profits, make sure you allow them to run, but avoid getting too greedy. You might therefore enter a take profit order for each trade around the target level you have in mind when you initiate the position. Even if the underlying trend you were following persists, corrections are common, so taking profits can allow you to get back into the market later at a better level once a pullback occurs.
5. Learn and Adjust
An important part of learning how to do anything well involves keeping track of your mistakes and using them as an educational opportunity. In an analogous way, once you identify an issue with your trading activity that has been causing suboptimal results, you can then adjust your future trading behavior in order to avoid that issue whenever possible.
One helpful tool you can use in the process is a trading journal where you record the details and outcome of each trade along with your reasoning for taking it and your analysis of the results. After a period of trading, you can review your journal to help you with this learning process and make necessary improvements to refine your strategies.
The best forex indicators can be used to determine an optimized entry point alongside with fundamental analysis.
Forex trading can offer a decent long term business opportunity for a good money manager. Without the use of sound money management techniques, however, trading forex can instead completely consume your risk capital, as many unprepared novice traders have quickly discovered.
Furthermore, keeping realistic boundaries on profits and losses by the use of the established money management principles outlined above lets you remain relatively impartial as a trader. You can therefore avoid sabotaging your currency trading activities due to excessive emotional reactions, which presents one less obstacle you have to overcome on your way to becoming a successful forex trader.
Our Forex trading for beginners guide summarized the most important aspects of Forex trading. Hopefully, you found the information helpful to leave this page better educated and ready to take the next steps. And even if you no longer consider Forex trading as a potential source of income, it was worth it reading the article when it prevented you from making mistakes.
Let’s close the article with some frequently asked questions about forex trading often asked by beginners.
Great article about forex-trading on benzinga.com: How to Trade Forex
How Much Money Do You Need to Start Forex Trading?
Forex trading has ultra-low entry barriers, and live accounts can be opened with $100 among most forex brokers. However, no matter if you want to fund your account with $100 or $1,000 – make sure to first practice forex trading by using a simulated trading account, where you simulate your trading tactics and strategies with paper money.
Platforms like MetaTrader 4 and MetaTrader 5 have integrated fully-functional demo accounts where you can trade nearly as realistically as you would by trading with real money. That’s a great thing to practice using the trading platform but also to test and fine-tune your trading strategies.
How to Make Money Trading Forex?
Forex traders make money in forex trading by buying and selling currency pairs based on their preferred trading style, strategies and risk management parameters. Every forex broker charges some time of commissions, either by widening the bid-ask spread or by charging a commission for every trade executed.
To make money in forex trading, your profit needs to cover all expenses like commissions, account fees, trading infrastructure and subscriptions. The net positive value should be meaningful enough to make the time invested reasonable.
Let’s say you make $30 per hour in your 9-5 job. If you make less in Forex trading, consider another method to make money.
How Much Do Forex Traders Make?
Let’s get it straight. Most Forex traders lose money in the long run due to impatience, lack of impulse control, too high leverages or undercapitalization. No matter with what account size you start, every return of more than 10% per year is already above the market average. So 10% return per year should be the minimum you want to archive. Otherwise, you could save all your time and invest in ETFs with zero effort.
Forex Trading Course Review: Asia Forex Mentor Review