Have you ever dreamed of making a profit by being at home without any special efforts? Then become a Forex trader! If you don't know how to start trading currencies, learn this extensive guideline for beginners . Here, you will get to know what the Forex market is, how to become a Forex trader from scratch and the most popular tips on how to get a profit while trading on the Forex market.
- Forex is a market where the currencies are exchanged.
- Currencies are always traded in pairs, so a trading instrument of the forex market is called a currency pair.
- Forex offers a few benefits compared to other markets, including high liquidity, low transactional costs, and low minimum deposit requirements.
- The main risks associated with forex are a misinterpretation of trends, leverage risks, and broker risks.
What is Forex and the Forex Market?
Forex market is a network allowing sellers and buyers to interact with each other while being in different corners of the Earth. Currencies are transferred between different market participants, including individuals, companies, and central banks, at an agreed price.
While a huge amount of foreign exchange is done individually, most currency conversation is processed for commercial purposes. Price movements occur every day during the currency conversion process because of a high level of Forex market volatility. A high level of volatility has a positive and negative impact on the participants of the market. On the one hand, this increases the chances of getting a profit. On the other hand, it enhances the chances of losing.
Anyone exchanging currency is a forex market participant. As for the volume of trades, the most prominent market players are central and commercial banks. Large corporations and hedge funds also play significant roles in the forex market. Brokers and dealing centers serve as mediators between buyers and sellers and make trading accessible to other market participants. And the last group is individual traders, including those who exchange money for non-commercial purposes and those willing to speculate on rate fluctuations and make a profit. Thus, if you have ever exchanged money, you can consider yourself a forex market participant as well.
Hedging vs. Speculation
When talking about forex in a commercial sense (beyond our travel example), we usually talk about hedging or speculation.
"To hedge" in the financial world means to limit exposure to the risks associated with an investment. In terms of forex, these risks are unpredictable currency rate changes. Companies dealing with international trade and operating huge sums of money bear the risk of financial losses due to currency rate fluctuations. To protect themselves from this risk, they use the foreign exchange market.
Speculation in forex implies trading for profit. And this is the side of the market that catches the attention of individual traders. So, in the narrow sense, forex is simply a process of exchanging currencies for profit-making purposes. The trading decisions are based on predictions about the future price of a currency.
A Brief History of Forex
In its broad definition, currency exchange appeared thousands of years ago following the first usage of money (rocks or shells back then). However, the contemporary interpretation of forex began to develop after one important historical event that took place back in 1973. That year the Bretton Woods system was abolished and replaced by the freely floating currency system. The floating exchange rate dominates in the world economies now and declares little or no intervention of regulators into determining currency rates. It basically means that a currency rate is fluctuating according to supply and demand for this currency.
Since 1973, forex has endured a few stages of transformation. The appearance of the Internet and the development of trading software has made it accessible to the general public. As the number of brokers was increasing and competition among them rose, spreads were falling, making forex an even more attractive market for retail traders.
Forex Trading Basics
If you are thinking about opening a trading account and starting to trade, let us introduce you to key forex concepts. Understanding those will help you find the answer to the question "How does forex work?".
Unlike quotations in banks, quotes in the trading terminal will look somewhat like 1.18096, showing the tiniest element of a currency’s price known as "points."
If Josh sees that EUR/USD = 1.18, he can easily count how much of a quoted currency (USD) he must pay. 500 × 1.18 = $590.
When exchanging big sums of money (and this is what professional traders do), the slightest movement of an exchange rate makes a difference. The tiniest change that may take place is one point. The picture below shows an example of a quotation. The point is the last number of a quotation. The pip is the fourth number of a quotation. If it changed from 1.17451 to 1.17452, we would say that the pair gained one point. 10 points equal to 1 pip.
Point in a quotation
When looking at a chart in a trading terminal, it’s easy to notice how frequently the quotation changes. One second it’s 1.18397, then it turns 1.18395, and then again bounces back to 1.18397. These moves are justified by the supply/demand ratio determined by all traders present in the market. When some big players like a car manufacturer exchange hundreds of millions of dollars, the quote may change more dramatically than just gain or lose a few points. Then the price move can be measured in pips.
Bid and ask
A currency price is usually reflected in two numbers. They are called the bid and ask prices. Ask price is the price you need to pay in order to buy a unit of currency. Conversely, the bid price is the price you would get by selling a unit of currency.
If Josh canceled his trip on the same day and decided to sell back €500, he would do it at a different rate – $1.16 for €1. So 500 × 1.16 = $580. As a result, he would lose $10 because of the bid and ask difference.
If you have ever exchanged money in a bank or a currency exchange kiosk, you too have probably noticed that the currencies’ buying and selling prices are always different. The selling price is always higher than the buying price. Buying currency at a lower rate and selling it at a higher rate makes these operations profitable for a bank.
In forex, the same thing applies to brokers. They benefit from the difference in bid and ask price, known as a spread. It is in a trader’s best interest to trade with a broker that offers the lowest spread. Let’s have a look at the example below.
Spreads are usually low (1-3 points) for the most popular currency pairs, including EUR/USD, GBP/USD, USD/JPY, USD/CAD, etc. Less frequently traded currency pairs tend to have relatively high spreads.
Currency pairs are traded in specific quantities called lots. The most common lot sizes are:
- A standard lot that equals 100,000 units of a base currency;
- A mini lot (or 0,1 lot) equals 10,000 units of the base currency;
- A micro lot (0,01 lot) allowing to trade 1,000 units of the base currency.
Forex broker is a company that serves as a mediator between a trader and a currency market, providing access to a trading platform. Every Forex broker offers different trading conditions, and it's in a trader’s interest to choose a broker with the most beneficial ones.
When choosing a broker, it is crucial to consider such factors as:
- Trading conditions (small spreads, no withdrawal fees, etc.);
- The variety of instruments (the more, the better);
- Efficient customer support (available round the clock);
- The license (considered to be more secure);
- Reliable trading platform.
Leverage is a tool that allows traders to gain more profit with a relatively small investment. In other words, it’s the money of a third party used in one’s trade with the aim to multiply income. If you, for example, are willing to deposit $1,000 of your funds and take advantage of 1:100 leverage, you can trade $100,000. Professional traders tend to use the leverage quite often.
Obviously, the use of leverage not only boosts potential profit but also multiplies risks of financial loss. Even though there are mechanisms that will protect a trader from ending up with a negative balance, it is essential to acquire risk management skills before turning to leverage.
Margin is a term associated with leverage. It is an amount of money a trader must deposit in order to enter into a leveraged position. The amount of money required for getting leverage is called a margin requirement. This requirement may be as small as 1% of a trade or as big as 20% of it. The size of the margin requirement depends on:
- the size of leverage a trader wants to get;
- the currency pair a trader is planning to trade.
In the example above, the margin requirement for 1:100 leverage is $1,000.
How to Become a Forex Trader?
Let's consider a step-by-step guide on how to become a Forex trader. Nowadays, everybody can become a trader due to many trading platforms offering diverse spreads, trading conditions, leverage, and different types of trading accounts. In addition, a wide variety of educational materials play a role. Everybody who has access to the Internet can learn to trade and get new trading skills.
To become a Forex trader, you need to follow the next steps:
1. Choose a Forex broker
Initially, you need to choose a reputable Forex trader offering profitable trading conditions, strong data analysis tools, and high-quality customer support. In addition, while choosing a trading platform, a trader needs to pay attention to reliable account features, including low spreads, fast transactions processing, and negative balance protection.
2. Follow a trading mentor or trainer
One of the most effective ways to reduce the level of possible losses during trading is to follow a trading mentor or trainer. By following the guidance of the professional trader, you will become a real pro adopting a proper trading mindset and skillset.
In addition, you should explore all the tools and resources offered by your brokerage platform, including guidelines, tutorials, articles, online webinars, etc. To learn more about Forex trading, you can find useful articles on our website. Don't forget to use the technical support of your brokerage platform to improve your trading strategy to the maximum and minimize available risks.
3. Train your trading skills on the demo account
If you have decided to become a trader, choose a demo account to try trading. You can develop your trading strategy and practice it on the demo account while trading without depositing real money in your account. This is a great time to learn the functionality of the trading platform and locate everything with ease. Using a demo account, you will get an opportunity to develop your trading skills and enhance your trading confidence.
Demo trading enables finding out what money losses mean while trading, exploring your feelings during this process, and preventing unexpected reactions while trading real money. This will help you develop a risk management strategy.
Any trader shouldn't miss the demo trading period. Everybody needs to trade on a demo account for a significant time and learn to get steady profit.
4. Start trading a small amount of money
If you have become a day trader, start trading small. Practicing on a Cent account for a few months, you are able to build your own effective trading strategy protecting you from available losses.
Read more: A Guide to Forex Day Trading
5. Follow the discipline
Discipline plays a very important role in Forex trading. If you want to trade with a solid profit, you need to implement stop loss and take profit orders to minimize losses risks. You need to define them before placing a trade and after an in-depth market analysis.
One of the most important conditions of successful trading is the strict following of your plan and maintaining your journal. This allows summarising all of your trades and provides a historical perspective.
A trading journal is a great way to find out how your trading strategy works in different conditions. Following a journal will help you improve your trading strategy and become more confident. Any trader can't get a profit from each closed order. It's normal to lose while trading, and you don't need to be frustrated if losses occur. The most widespread mistake is traders' attempts to control a market instead of controlling their strategy and writing down their results in the journal.
What Does a Forex Trader Do?
A Forex trader buys and sells currencies on the Forex market. A trader needs to perform an analysis on a currency pair. The responsibilities list of traders includes searching for situations when transactions can be profitable and purchasing on the trading platform. Traders can be either independent traders or work for banks and hedge funds. Traders can choose a technical analysis using technical tools, including charts and math, or a fundamental analysis making decisions based on news and economic data.
The Forex market allows purchasing and selling, converting currencies for international trade, and investing. While purchasing a currency pair, investors purchase the basic currency and sell the quote currency. The ask price means the amount of quote currency required to get one unit of the basic currency.
Otherwise, an investor sells the basic currency and gets the quote currency while selling the currency pair. So that, the currency pair's selling price is equal to the amount a seller gets in the quote currency for providing one unit of the basic one.
All the currency pairs include major, minor, exotic, and cross currency pairs. Let's consider each type of them in detail.
The Most Traded Currencies Pairs on the Forex Market
Major currency pairs include the most frequently traded currencies globally. Due to a high level of liquidity, they can be traded virtually always. Each major currency pair contains the US dollar on one side because the dollar is a leading reserve currency worldwide. Around 88 percent of currency trades include a dollar.
The major currency pairs list includes GBP/USD, USD/JPY, EUR/USD, USD/CHF, USD/CAD, NZD/USD, and AUD/USD.
If a currency pair doesn't contain the US dollar, it's called a minor currency pair or cross-currency pair. For instance, EUR/GBP, GBP/JPY, CHF/JPY, GBP/CAD, and others.
When it comes to the exotic currency pairs, they include a major currency and a currency of the country with a developing economy. Exotic currency pairs are traded less than major and minor currency pairs. Therefore, the spreads can be higher. Exotic currency pairs include EUR/TRY (Euro/Turkish Lira), JPY/NOK (Japanese Yen/Norwegian Krone), NZD/SGD (New Zealand dollar/Singapore dollar), and others.
Cross currency pairs are pairs that don't contain the US dollar whether it's the base or quote currency. For instance, USD/CAD is a major pair because it contains the USD dollar while EUR/JPY is a cross pair because it doesn't contain the US dollar.
What is a Forex Trader?
A Forex trader is a currency trader who holds a "position" in a currency pair. Every trader has a profit or a loss from closed trade. Positions can be short and long. Let's consider types of positions in detail.
A long position means that a trader purchases a base currency while its price is increasing. If the trader sells the currency back to the market, a long position is considered to be closed, and the trade is complete.
A short position means a trader sells a base currency while a price is dropping and wants to buy it at a lower price. This type of position is closed after a trader buys back a currency.
How to Trade Forex for Beginners
If you have decided to start Forex trading, you need to choose which trading analysis you will use during trading.
Fundamental analysis is an analysis of the Forex market answering the question "why" - why the Forex market is reacting to the worldwide events in such a way. A lot of outside factors impact the Forex market. A list of these factors includes political and social events, the country’s economic strength, and market sentiment. The fundamental analysis focuses on everything that can determine the future direction of the price trend.
Technical analysis is an analysis of the Forex market based on the exploration of the price charts and the prediction of the future price behavior on the market. According to the charts, a trader can identify levels of supply and demand on the market.
How to Predict Currency Price?
It must be clear by now that in order to make money in forex, one has to make the correct prediction of what the price of a particular currency pair will be in the future. Two main approaches to forecasting the price moves are fundamental and technical analysis. Fundamental analysis deals with political and macroeconomic events that can affect the price of a currency. These may include everything from the US presidential election results to the Bank of Japan’s decision regarding interest rate. Professional traders follow up on the news to enhance their trading plans.
Technical analysis, in its turn, involves the study of past market data, such as price and volume transformations. It employs various technical indicators that show the history of price moves in a given period of time. Technical analysis adherents believe that price action tends to repeat itself, and the study of price patterns helps determine where the price will be at a specific time in the future. Although both types of analysis have their pros and cons, most traders tend to make their trading decisions based on the combination of evidence.
Half the success in forex is a well-designed and backtested strategy. A strategy in forex is a fixed plan of actions aimed at profiting from currency trading. There are many strategies and their variations to choose from. Although, not each of them might suit any trader. A strategy choice must be justified by the aim and resources available to an individual trader. This is one of the reasons why picking the right strategy is essential and worth spending time on.
If you want to start with a simple and effective strategy, we recommend learning to trade based on Support and Resistance levels. These are two widely used technical indicators that help determine when the price will change its direction. This strategy can be implemented in 5 simple steps:
- Identify support and resistance.
- Wait for a directional move to resistance.
- Wait for price rejection at resistance.
- Open a short (sell) position on the next candle after the rejection, setting stop-loss right above resistance.
- Exit the trade once the price approaches to support.
The same steps can be made in the opposite direction (entry at support, exit at resistance). In the example above, the trader could lose if the price broke through the resistance level and hit the stop-loss. In this case, the order would be closed automatically, and the trader would suffer an insignificant loss. On the contrary, successful implementation would bring a larger profit. Thus, paying attention to the risk/reward ratio of every trade is the key to success.
Which Currency Pair to Trade?
The most commonly traded currencies in the Forex market are often called major currencies or simply majors. They include EUR/USD, GBP/USD, USD/JPY, USD/CHF, AUD/USD, GBP/JPY, EUR/JPY, and USD/CAD. These pairs make around 90% of all trading volume. All the other pairs are minor pairs (GBP/CAD, CHF/JPY, NZD/JPY, etc.) and exotics (currencies of the emerging and developing economies).
Traders choose a currency pair according to the potential profit opportunities they see in it. It is also worth noting that some currency pairs might work great with particular strategies and fail with others. For example, carry traders are interested in currency pairs with big interest rate spreads (AUD/JPY and NZD/JPY), while scalpers look for volatile pairs.
We recommend beginners practice trading one of the major pairs. The reason for this is that majors usually have pretty narrow spreads, which reduce your transactional costs.
How to Trade Forex
Like any other type of investment, forex trading is accompanied by certain risks. These risks can be divided into:
Leverage associated risks
Forex offers a high amount of leverage. On the one hand, it is a good thing as it allows traders with relatively small deposits to boost their income. On the other hand, leverage used by inexperienced traders in trades based on untested strategies may result in significant losses.
Misinterpretation of trends
One thing about currency is that so many things can affect its price. It has already been said that most of the world’s currencies are driven by supply and demand. What determines supply and demand? These factors include inflation rate, the economic performance of a particular country, interest rates, and so much more. This is why the future price movements of a currency may be so hard to predict.
Not paying enough attention to a broker’s conditions is one of the biggest mistakes a novice trader can make. To make sure that the broker you want to deal with is trustworthy and won’t trade against you, do your research. Check if the broker has a license, read carefully about trading conditions, and check reviews.
In conclusion, to become a successful trader, you need to start trading on the demo account and develop your trading strategy. Initially, you need to trade on the demo account to get to know what money losses you can face during the trading process and develop your trading strategy to minimize available risks. In addition, you need to follow experienced trader's tips. This will help you get trading skills and become a pro in the future. One of the most essential things while starting to trade is choosing a proper broker with profitable trading conditions and reliable customer support.
How difficult is forex?
In a nutshell, learning and trading forex is not that difficult once you prioritize discipline and patience. Yes, you do need to learn a lot, but this is where a step-by-step approach makes the difference.
It strongly depends on the amount you’re ready to invest. Let’s say a trader who conducts 50 trading operations per month (2-3 trades per day/20 days per month) with the capital in the amount of $500 can make around $10 per month.
How much do beginner forex traders make?
The amount of your profit depends on the amount of your investment. If you start with, let’s say, $100 (conducting 2-3 trades per day/20 days per month), you can make up to $6 per month.
Can you get rich by trading forex?
Of course. There are a lot of traders who share the best practices of their high-profit trades.
What should the forex trading plan include?
It should include anything you consider useful and important for achieving your trading objectives. Make sure your plan covers the following: timeframe you’ll be trading on (M1, M15, M30, 4H, Daily, Weekly, Monthly, etc.), trading session (Sydney, Tokyo, London, and New York), available capital for conducting trading operations, risk management techniques, trading strategy, period of time you’re ready to dedicate to trading, goals, exit and entry rules.
Can I teach myself to trade forex?
Absolutely. Due to its growing popularity, there are a lot of educational videos, courses, and recommendations available on the Internet. Discipline and patience will lead you to resultative self-education.
Forex trading is considered a beginner-friendly industry – novice traders can start trading on the demo account (training account). Once they get more experience and are ready to invest real money, they can open a standard account.
Can forex trading be a full-time job?
Forex trading can be a full-time job; however, it demands solid experience in this field. Make sure your current trading results meet your objectives.
Can forex trading be a career?
Forex trading is a great option for those who dream about a profitable professional activity with flexible working hours. However, as a full-time job, it demands solid experience in this field. Make sure your current trading results meet your objectives.
Why is forex trading a bad idea?
Forex trading can’t be considered a "bad idea." Devote your time to learning and start trading on the demo account just to understand whether this is the activity you enjoy. Yes, there are many stories of those who are constantly "losing" money trading forex, but it all comes down to trading expertise and feeling that it’s your cup of tea. If you expect to get rich overnight, then forex trading is definitely a bad idea.
How long does it take to learn forex?
Broadly speaking, learning the basics of forex trading could take up to four weeks if you devote 8-9 hours a day to the comprehension of the theoretical part. It’s also advisable to consider opening a demo account (training account) since it’s a risk-free way of practicing and getting a better understanding of how everything works in the forex market.