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.
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.
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.
How much do I need to start forex trading?
Some brokers allow traders to open accounts with as little as £100. Brokers that offer micro-lot trading accept even as low as £25 for initial account opening. However to make real progress in trading, it is better to ensure you have a well-capitalised account.
Some say forex trading is a scam because lots of people lose money. Is this true?
Forex trading is not a scam. The reason why many people see it as scam is because many traders enter the market and trade the wrong way. This is because they are inexperienced, lack insufficient training and employ poor trading techniques. People make money from it every day. Bill Lipschutz and George Soros are examples of people who have made fortunes from forex.
How do I make money from forex?
In order to make money from forex, you have to accurately predict the direction of the exchange rate (rise or fall), using a good lot size and correct entries and exits. This requires proper training and practice.
How do Identify a good broker?
A good broker would usually be one that is licensed by a reputable regulator and has a good track record. In the UK, such licensing is provided by the Financial Conduct Authority (FCA). Online reviews by verified users on trading forums also provide some insight into how a broker treats its clients.
What are forex robots?
Forex robots are automated software that open and close trades on a forex platform automatically. They are also known as expert advisors or EAs.
What documents do I need to start trading?
A proof of identity document, such as international passport, driver’s license or national ID card is required. You may also need a proof-of-address document such as a utility bill or bank statement.
How safe is my money?
Your forex funds are safe as long as you use a regulated broker and you protect your login details.
Must my forex account be held in US dollars?
Many brokers allow you to fund your account is US Dollars, British Pounds and Euros. Some also provide local currency options.
I have no computer skills. Can I trade forex?
You do not need complex computer skills to trade forex. If you can use the mouse button and you have some trading knowledge, you can trade forex.You do not need complex computer skills to trade forex. If you can use the mouse button and you have some trading knowledge, you can trade forex.
Are commissions charged for forex trading?
Brokers classified as market makers will only charge on the spread (difference between the bid and ask price). If you use an ECN broker or a non-dealing desk broker, you will be charged on the spread and also pay commissions for opening and closing trades.