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?
The Forex market is a network that allows buyers and sellers in different parts of the world to interact with each other. Currencies are transferred between different market participants, including individuals, companies and central banks, at an agreed price.
Although a huge amount of currency is traded by individuals, most currency trading is done for commercial purposes. Price movements occur every day during the currency conversion process due to a high level of volatility in the Forex market. A high level of volatility has both a positive and negative impact on market participants. On the one hand, it increases the chances of making a profit. On the other hand, it increases the chances of losses.
Anyone who trades in foreign exchange is a participant in the foreign exchange market. In terms of trading volume, the most important players in the market are the central and commercial banks. Large corporations and hedge funds also play an important role in the foreign exchange market. Brokers and trading centres mediate between buyers and sellers and make transactions accessible to other market participants. And then there is the group of individual traders, including those who trade money for non-commercial purposes and those who are willing to speculate on rate movements and make a profit. So if you have ever traded money, you can also consider yourself a participant in the foreign exchange market.
Hedging vs. Speculation
When we talk about Forex in a commercial sense (beyond our travel example), we usually refer to hedging or speculation.
"Hedging" in the financial world means limiting exposure to the risks associated with an investment. In Forex terms, these risks are unpredictable changes in exchange rates. Companies that trade internationally and manage huge amounts of money run the risk of incurring financial losses due to fluctuations in exchange rates. To protect themselves from this risk, they use the foreign exchange market.
Speculation in the foreign exchange market involves trading for profit. And it is this side of the market that individual traders focus on. Thus, in the strict sense, Forex is simply a process of trading currencies for profit. Trading decisions are based on predictions about the future price of a currency.
A Brief History of Forex
In its general definition, Forex originated thousands of years ago as a result of the early use of currency (stones or shells at that time). However, the current interpretation of Forex began to develop after an important historical event that took place in 1973. In that year, the Bretton Woods system was abolished and replaced by the floating currency system. The floating exchange rate dominates the world economies today and results in little or no intervention by regulators in the determination of exchange rates. This essentially means that the rate of a currency fluctuates according to supply and demand for that currency.
Since 1973, Forex has undergone a number of phases of transformation. The advent of the Internet and the development of trading software have made it accessible to the general public. With the increase in the number of brokers and the competition between them, spreads have decreased, making Forex an even more attractive market for retail traders.
Forex Trading Basics
If you are considering opening a trading account and starting to trade, let us introduce you to the key concepts of Forex. Understanding them 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.
Bid and ask
The price of a currency is usually expressed as two numbers. These are called the bid and ask rates. The ask price is the price you have to pay to buy a unit of currency. Conversely, the bid price is the price you would get for 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 at a bank or exchange kiosk, you too have probably noticed that the buying and selling prices of currencies are always different. The selling price is always higher than the buying price. Buying currencies at a lower rate and selling them at a higher rate makes it profitable for a bank to do so.
In the foreign exchange market, the same applies to brokers. They profit from the difference between the bid and ask price, called the spread. It is in a trader's interest to trade with a broker who offers the lowest spread. Let's look at the example below.
The bid price of the EUR/USD pair is 1.17451, and the ask price is 1.17461. 1.17461 - 1.17451 = 10. The spread is 10 pips or 1 point. 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. Practice 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 allows you to discover what it means to lose money when trading, to explore your emotions during this process and to prevent unexpected reactions when trading in real money. It will help you develop a risk management strategy.
All traders should consider a demo trading period. Everyone needs to trade on a demo account for a significant period of time and learn how to make steady profits.
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.
Read more: The Importance of Discipline and Patience in Forex Trading
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.
Understanding Currency Pairs
The Forex market is used to buy and sell, convert currencies for international trade and invest. When buying a currency pair, investors buy the base currency and sell the quote currency. The ask price means the amount of the quote currency needed to obtain one unit of the base currency.
An investor may also sell the base currency and obtain the quote currency by selling the currency pair. Thus, the selling price of the currency pair is equal to the amount a seller obtains in the quote currency to provide one unit of the base currency.
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 should be clear by now that in order to make money in the foreign exchange market, one must make a correct prediction of what the price of a particular currency pair will be in the future. Two main approaches to predicting price movements are fundamental analysis and technical analysis. Fundamental analysis focuses on political and macroeconomic events that can affect the price of a currency. This can be anything from the outcome of the US presidential election to the Bank of Japan's interest rate decision. Professional traders follow the news to improve 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.
Successful trading decisions are made by using a calculated strategy. Otherwise, trading turns into a gamble, where profits or losses are determined only by luck. The problem is that luck is rare, and the stakes are high. This is why it is crucial to stick to a sound strategy that will keep you on the right track. A well-designed plan will help you answer the question of how to trade currency in the most profitable way. Some of the most common trading approaches include position trading, day trading, swing trading, and scalping. These approaches, in their turn, offer multiple strategies to help traders reach their goals.
Best Trading Strategies for Beginners
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.
How much do forex traders make a day?
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.
Is forex trading good for beginners?
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.