Our easy to follow forex trading guide offers an invaluable introduction to the 24/7 cut and thrust of the forex market. If you’re keen to start your forex trading journey but need to brush up on the basics you’re in the right place. We’ve put together an array of easy to digest forex guides that should fill you in on the essentials before you dive in.
Invest in forex, right now
If you’re ready to start trading, look no further than our pick of tried and tested trading platforms. If you’re not quite up to speed yet, read on.
What is forex trading?
Put simply, forex trading is the trading of one currency against another in order to benefit from variations in the exchange rates of those two currencies.
To trade in the forex market, you’ll need the following:
- Some knowledge of how to trade. You’re in the right place! Read on if you want to get to grips with the fundamentals of forex trading.
- Access to the global forex market. This is provided by forex brokers using a trading platform. This trading platform could be a desktop client, a browser-based web portal (webtrader) or a mobile app/mobile-friendly browser platform. Check out our forex broker comparison tools to find a trading platform that suits your needs.
- Trading account. You need a trading account to be able to trade forex. This is also provided by the forex brokerage. Certain personal and financial information will be required of you before a trading account is allocated to you. The trading account comes with login details and other user information.
- Trading capital. Needless to say, you’ll need some capital to buy currency pairs to trade with. You need trading capital to buy and sell currency positions. Forex brokerages now provide traders the opportunity of choosing from a basket of currencies to fund trading accounts.
- A payment gateway. You need to have a means of transferring funds from your local payment method to your trading account. The broker provides the gateway in collaboration with the payment processors.
How to Trade the Forex Market
Once you’ve set up a verified trading account and funded it, it’s time to contemplate your first trade in the forex market. But hold on, let’s cover some basics before you get started!
How are profits made in forex?
Currencies are traded in pairs with one currency effectively being pitted against another.
So if you trade EURGBP, you’re trading the Euro against the British Pound. The currency listed on the left is the base currency and is always represented as having a value of 1. The other currency, to the right, is known as the quote currency or counter currency. When you see the price or exchange value of a currency pair, know that this is the number of units of a counter currency that can buy 1 unit of the base currency.
Any changes in the exchange value of the currencies are always reflected as number of units of the counter currency that can purchase 1 unit of the base currency.
For instance: EURGBP = 0.8626 means that 1 Euro can be exchanged for 0.8626 British Pounds.
If the counter currency (GBP in this example) weakens relative to the base currency, the exchange value expressed as the price quote will increase. For instance, if the exchange rate of EURGBP was 0.8626 on trade entry, and it increases to 0.8735, it means the GBP has weakened relative to the Euro.
If the counter currency strengthens relative to the base currency, the exchange value which is expressed as the price quote will drop. If the exchange rate of EURGBP was 0.8626 on trade entry and it drops to 0.8527, it means the GBP has strengthened relative to the Euro.
The whole essence of forex trading is therefore to buy the currency pair in anticipation to profit when the exchange rate goes up, and to sell the currency pair when you expect that the exchange rate will drop.
So trading in forex is a two-way street. You buy (i.e. go long) when you expect the exchange rate to go up, and you sell (i.e. go short) when you expect the exchange rates to go down. All trades are therefore made in reference to the base currency.
Forex trading is not only about direction; it is also about trade volume and extent of movement. Trade volume is measured in lots, while extent/range of movement of a currency pair is measured in pips.
A Standard Lot is expressed as 1.0 lots and is worth $100,000 on most currency pairs (except the Yen crosses and Swiss Franc pairings). A Standard Lot can be divided into mini-lots (1/10th of a lot), or micro-lots (1/100th of a lot). So a mini-lot is equivalent to 0.1 lots (worth $10,000 for 0.1 lots), while a micro-lot is equivalent to 0.01 lots (worth $1,000 for a 0.01 lots).
- The micro-lot’s size range is from 0.01 to 0.099 lots (also 0.1 mini-lots to 0.99 mini-lots).
- The mini-lot’s size range is from 0.1 lots to 0.99 lots.
The pip is the smallest unit of price change in a currency pair. 1 pip is equivalent to 0.0001 points and is expressed in 4 decimal places. Most brokers have adopted a 5-decimal pricing format, where the 5th decimal is actually a tenth of the 4th decimal. This is to allow for more precise pricing of currency pairs.
How much money you actually make in the forex market is determined by two key factors:
- Direction. You have to predict correctly where the exchange rate of the currency pairs will move.
- Volume. You need to buy an appropriate volume of positions.
The size of the move with respect to the monetary returns (or loss) is determined by the number of pips that the currency pairs have moved.
Let us assume that the EURGBP has moved from 0.8626 to 0.8606, and that the trader bought 0.2 lots of this position. How much has been made from the trade?
The first thing to do is to calculate the range of movement. This is worked out by subtracting the new price from the old price, since the market went south. This is 0.8626 – 0.8606, which is 0.0020 or 20 pips.
A trade volume/lot size of 0.2 lots is equivalent to $2 per pip. This is because 0.1 lots is equivalent to a $10,000 position size. A move of 1 pip of a mini-lot is 10,000 X 0.0001 = $1.
So a move of 20 pips for a 0.2 lot size is 20 X 2 = $40. This is the value of the exchange rate differential between the old price and the new price.
Different ways to trade forex
Execute your own trades manually
Online trading platforms have made manual forex trading incredibly convenient. Traders who like to do their own market analysis and pull the trigger themselves do not need to watch charts all day long. There are different types of orders to use, including stop loss, take profit, and pending orders with which you can enter trades when the market reaches a certain price. Trailing stop loss orders can also be used to automatically lock in gains as the market moves in your favour. You can also enter a trade with a market order which is executed immediately at the first available price. Besides these orders, there are other more advanced order types available at some brokers.
With online forex trading platforms, traders and investors have excellent trading tools and charting software at their disposal. Here are some examples:
- Demo forex trading accounts – Practice forex trading without risking your capital.
- Live price charts – Trades can be executed while you watch your charts. Different types of charts are available: candlestick, bar, line, and other types of charts.
- Technical indicators – For example, moving averages, oscillators, sentiment indicators, volume indicators, candlestick pattern recognition, etc.
- Newsfeed and economic calendars – Alerts you of important economic news and other market moving events.
- Drawing tool – To draw lines, channels, shapes, etc, on your charts.
- Price alerts – Alerts you when the price of a currency pair reaches a certain level.
- Email alerts – Receive emails when certain orders are triggered.
Traders who choose to execute their own trades need to learn how the forex market works and how to place and manage trades on a forex trading platform. Technical and fundamental analysis are commonly used to interpret current market conditions and to predict future price movements.
Different types of forex trading techniques include scalping, swing trading, carry trading, day trading, position trading, and different types of arbitrage trading. When comparing traders with investors, the latter are typically more likely to engage in long-term trading. Traders can also execute long-term trades but will usually not keep trades open for longer than a few months to a year.
Algorithmic trading (using robots)
Certain forex trading strategies can be automated by programming its execution logic into a computer algorithm or trading robot. Trading robots built for the popular MT4 forex trading platform are called EAs (expert advisors).
Algo trading can be done without any human intervention but some traders will frequently monitor the current market conditions and the performance of their algorithm(s).
Trading robots can analyse numerous currency pairs simultaneously and execute trades much faster than humans. Trading robots can also be a great way to eliminate human errors when it comes to trade execution and management. Of course, trading robots can monitor financial instruments continually, which is obviously a great advantage when compared to human beings’ capabilities and interruptions due to lifestyle requirements.
Modern trading technology makes it possible to automatically copy the real-time forex trades of other traders. This can be a great way to invest in the forex market because you can make money from forex even if you don’t have the experience, skill, or time to be a profitable trader.
Copy trading can often be done without paying commission directly to copied traders, although the brokers who facilitate copy trading will often be slightly more expensive in terms of trading costs (spreads, commissions, and rollover) in order to compensate copied traders for their services.
Some forex trading platforms are purpose designed for copy trading while others have incorporated copy trading mechanisms into their existing trading platform infrastructure. eToro and ZuluTrade are examples of brokers with platforms specifically designed for copy trading.
A good advantage of copy trading is that your capital remains in your own trading account. This means that you can combine your own trading with that of other traders. You also don’t need to transfer money to an individual or company who performs fund management for you.
You can also invest in the forex market by means of fund management firms. These firms usually have a team of professional traders who manage client accounts. In most cases, you will have to transfer your capital to the firm and pay a yearly management fee plus a certain commission on the profit they make.
Besides spot forex trading, there are other ways to invest in the forex market as well. Some are really complicated while others are really basic. Let’s take a brief look…
Investing in physical currencies (banknotes)
This is the most basic way to invest in currencies. On the one hand, this is the most efficient way to invest in currencies but on the other hand, it is the most inefficient.
Why is it the most efficient? Because if you get a good deal, you can exchange currencies for a better price than which is available in the spot market. You don’t need to pay the spread or any commission. In fact, you can earn some commission.
An why is it also the most inefficient? Because of the physical limitations and drawbacks of exchanging physical cash. Let’s say you have $25,000 and for some reason, you need to get rid of it quickly. Because you’re in a market with limited liquidity and counterparties, it may take quite some time to get a buyer or buyers for your dollars. You could probably exchange it at a bank but that’s not a very attractive option because of the transaction costs.
Other drawbacks of investing in physical cash are:
- The risk and potential expenses of storing and handling the cash.
- Dealing in different denominations of physical cash may be illegal in your country.
- No access to leverage.
- You cannot earn interest as with a carry trade.
Trading vanilla currency Options
This is probably one of the most complex instruments with which you can trade or invest in the forex market. A vanilla currency option gives you the right but not the obligation to buy or sell a certain currency pair at a predetermined strike price, at or before a certain time in the future.
Trading currency Futures
Currency futures are traded on exchanges like the CME Group, which is the largest futures market place in the world. A currency future is a contract to exchange a certain amount of currency at a specific price on a specific date in the future.
Trading currency ETFs (Exchange-Traded Funds)
ETFs are complex financial instruments that track the value of an individual underlying asset or a basket of underlying assets. ETFs offer investors a convenient way to invest in several underlying assets at once, with a single financial instrument. Currency ETFs are not as well-known and often traded as spot forex instruments.
What to look for in a forex broker
Your forex broker is your gateway to the global foreign exchange trading market. The forex market is a virtually connected set of computers that connect all the parties in the forex market together. Access to this virtual network is granted by using the trading software and portals provided by forex brokers. Without the forex brokers you’d have no access to forex trading.
Forex brokers work with payment gateways to provide you with ways to fund your accounts and withdraw your profits. They also provide software for mobile trading (via smartphones and tablets), and provide access to various assets and markets across the world.
Which payment methods do they accept?
You need capital to be able to trade forex. Forex trading is a business, and you can’t operate a business without capital. You need funds to purchase currency pairs to trade. Therefore, you need a means of sending money to your forex broker for crediting of your trading account. Then, when you make a profit, you need a means of withdrawing those profits from your trading account.
Forex brokers work with payment gateway providers and payment processors to make this happen on behalf of their clients. In the early days, the only method that could really serve this purpose was the use of bank transfers. This involved transferring money from the trader’s bank to the broker’s bank. This method is now widely regarded as slow – it involves a lot of paperwork and limits traders who want to profit quickly from setups that may have profit potential.
This is why various e-wallets have emerged over time to make the process faster and more seamless. Payment processors such as PayPal offer instant forex account funding and same-day withdrawals. We have a guide that will show you how to use PayPal as to deposit and withdraw your trading funds.
Can they serve your device?
You can’t talk about forex trading in the 21st century without talking about the use of mobile devices. The advent of the smartphone and tablet in 2006 has proven to be a game changer. In the early days, you had to move around with a laptop to be able to trade on-the-go. Those days are long gone. There are now a plethora or mobile trading applications and add-on apps that can be used to achieve an excellent mobile trading experience.
If you’re choosing a forex broker, the ability to offer mobile trading software for your hand-held devices should be a major consideration. Even if the broker doesn’t have a proprietary app, you should at least be served with generic trading apps, such as the MT4 or MT5 mobile apps. If the broker offers a web-based platform, this should be compatible with your device so you have the optimum interface display.
We have a guide that will teach you all you need to know about forex trading using mobile devices and mobile apps. You will learn how to turn your smartphone or tablet into a trading station that can analyse the markets and execute trades swiftly. You will learn to use your mobile devices in ways never thought possible to trade forex like a pro.
Do they offer the markets you want to invest in?
The forex market has seen a lot of evolution and innovation in the last couple of decades. One area where change has been particularly significant is the number of market offerings available to the average trader. The early forex brokerages exclusively offered currency pairs for trading. Even at that stage, the number of currency pairs offered was some way short of the number you typically have access to today.
With time, forex brokers began to offer contracts for difference (CFD) on assets traded in other markets (stocks, commodities and indices). These CFDs allowed traders to trade on contracts based on the price movements of the underlying assets or markets, without physically owning those assets. For instance, you could buy or sell a stock such as Apple or Microsoft without necessarily owning any of those stocks. You could also trade Brent crude without owing a drop of crude oil. CFDs enabled brokers to expand the assets and markets their clients could trade on.
Market expansion didn’t stop there. In 2014 cryptocurrency trading exploded. As Ethereum and other cryptocurrencies launched into the blockchain space, the number of cryptos that were available to trade shot up. These cryptos formed the basis of a whole new asset class for retail trading and brokers began to add new cryptocurrencies to their charts. This has allowed forex brokers to expand their product offering.
As a forex trader in 2020 and beyond, you now have the ability to trade more markets and more assets than your predecessors, giving you more choice and flexibility in what you can trade.
When choosing a broker, select one that gives you access to a comprehensive choice of markets.
What to invest in
When it comes to forex trading and investing, you can choose to invest in forex from several standpoints. You can trade manually on your own, or you can trade using automated software (known as forex robots). You can also use a managed account service such as PAMM (Percentage Allocated Money Management) in which a master trader pools money from investors and trades it, allocating profits accordingly. PAMM is a form of forex investing where your money does the work for you. You may also decide to copy trade, in which a platform replicates the trades of professional traders onto your account.
In terms of what assets to invest in, you have to remember that the news moves the markets. For instance, Brexit is the hottest thing right now, and GBP pairs such as GBPUSD, EURGBP, GBPJPY, GBPNZD and GBPCAD are very hot right now.
Always invest in currency pairs that are linked to trending news in the market.
Can you still make money with forex trading?
Some people believe that it’s harder to make money from forex trading these days, especially given the new trading laws that have been passed in the UK and EU for retail forex trading.
These rules were passed by the European Securities and Markets Authority (ESMA) and impact on the allowable leverage and margin requirements for forex trading within the UK and EU. The new rules have made it more expensive to start forex trading – because traders now require higher capital to commence trading and hold positions – but they haven’t eliminated trading opportunities.
The economic indicators listed in the economic news calendar are what drive the forex market. Some call these indicators “the news”. Lately, we have had a lot of news: Brexit, EU quantitative easing and US interest rate cuts are just some of the recent hot button issues that have impacted on the markets. Trading opportunities abound right now.
A look at the major currency pairs featuring the US Dollar, British Pound, Euro, Swiss Franc, Australian Dollar, New Zealand Dollar and the Japanese Yen will show that there has been a lot of volatility in recent months.
Volatility (or the extent to which exchange rates change at any given time) is what produces trading opportunity.
Remember, we pointed out earlier that one of the factors that determines profits or losses in the forex market is range of movement. A static exchange rate produces no movement and therefore no profit. Furthermore, choppy price movements (whipsaws – when a price moves sharply but with no clear-cut direction) do not produce tradable situations. The pairings mentioned above have offered direction and a good range of movement.
The market news that’s been moving the markets recently is expected to continue having an impact well into 2020, which means this is a good time to start trading forex!
You may trade forex directly, or you may carry out forex investing by deploying your funds in a managed account or by copy trading more experienced traders.
Apart from the trading of currencies, your forex broker should be able to offer you the opportunity to trade CFDs on stocks, commodities, indices and cryptocurrencies. This way, you always have a chance to trade and potentially profit from the forex market.
Read on to find our answers to a number of frequently asked forex trading questions.