Learn How to Trade Forex: Ultimate Beginner's Guide
Are you looking for the best forex trading guide for beginners? In this detailed article, you will learn all the basics that every beginner should know to successfully trade the currency exchange (FX) market.
Table of Contents
- What is Forex
- Currency Pairs
- Basic Terminology
- Pips (price increments)
- Spread (transaction cost)
- Lots & Units (trade size)
- Leverage & Margin
- Money Management
- Candlesticks Charts
- Technical Analysis
- Economic Calendar
- Platforms Trading Orders
- Risks in Forex Trading
- MetaTrader Trading Platform
- Best Time to Trade
- Practising on a Demo Account
- Choosing the Best Forex Broker
What is Forex Trading
Forex is the short name for the foreign currencies exchange market, also called the FX market. The forex market is a global decentralized market for exchanging currencies at the current prices (spot market) or determined prices (futures market). Forex traders attempt to make a profit by speculating on the future exchange rate of one currency vs another.
What are the Main Features of the Forex Market
- It is the biggest and most liquid financial market in the world.
- There is no single physical headquarters or location such as a stock exchange.
- Trades around the clock, 5.5 days a week, from Sunday 22:00 GMT/5 pm EST until Friday 22:00 GMT/5 pm EST.
- Profit and loss are enhanced with the use of leverage.
- Rarely manipulated due to the diversity of the market participants and volume.
- Closest to the ideal of a perfect market offering 'fair' competition.
What are Currency Pairs
A currency pair is the pairing of two different currencies, such as Euro and the United States dollar, expressed like EUR/USD.
If traders buy the EUR/USD they are speculating that the value of the Euro will increase relative to the US dollar. Selling the EUR/USD pair means the trader thinks the value of the USD dollar will increase against the EUR.
What are Major, Minor and Exotic Currency Pairs
The Major currency pairs are the most-traded in the world, and the EUR/USD is the most popular of all.
The 7 major currency pairs are:
|EUR/USD||€ / $||Euro vs. US dollar||Fiber|
|USD/JPY||$ / ¥||US dollar vs. Japanese yen||Gopher|
|GBP/USD||£ / $||British pound vs. US dollar||Cable|
|USD/CHF||$ / CHF||US dollar vs. Swiss franc||Swissie|
|AUD/USD||A$ / $||Australian dollar vs. US dollar||Aussie|
|USD/CAD||$ / C$||US dollar vs. Canadian dollar||Loonie|
|NZD/USD||NZ$ / $||New Zealand dollar vs. US dollar||Kiwi|
Minor currency pairs are less popular than the major currency pairs and do not include the US dollar (USD). Examples of the minor pairs are the EUR/CHF, GBP/JPY, GBP/AUD. Minor currency pairs are less liquid than majors.
Exotic currency pairs are traded even less frequently than the minors. Exotic pairs contain one major currency, paired with a currency of an emerging economy country such as USD/RUB (Russian Ruble), USD/MXN (Mexican Peso), and USD/PLN (Polish złoty). The exotic pairs are more volatile and less liquid than minors resulting in a higher spread or transaction cost.
What Makes a Currency Pair Change in Value
Currency pair prices are subject to several factors, mainly economic and geopolitical. For example, if a positive economic report is published regarding the Eurozone’s industrial output, this might create an open interest in buying the EUR against the USD. Consequentially, the Euro could strengthen and the EUR/USD price can rise in value.
The EUR/USD can also go up if the US Dollar loses value. For example, if the US publishes a negative report on its industrial output, this could weaken the US Dollar against the Euro, and the EUR/USD price rises.
Big factors affecting currency exchange rates include central bank lending/interest rates, inflation rates, economic growth and outlook, 'money-printing' and currency devaluation, geopolitical confidence, and central bank intervention.
Let’s look at the most important forex terms:
Ask and Bid Prices - The Ask price is the price an instrument can be bought at, and the Bid price is the price an instrument can be sold at. The Ask price is always higher than the Bid price, so initially every trade starts at a loss.
Spread in forex is the difference between the Ask and the Bid prices. This price difference is where the banks, brokers and dealers make their profits, in addition to commissions charged, if any.
Swap rate or rollover rate, is the interest added or deducted for keeping a currency position open overnight. The negative or positive swap rate is calculated based on whether the position is a buy or sell and is based on the interest rate differential for each currency.
Short & Long positions refer to selling or buying. When you sell you are entering a short position. When you buy you are entering a long position.
Bear & Bull market refers to whether the market trend is convincingly up or down. In a bear market prices are falling whereas in a bull market prices are rising.
CFD is short for Contract for Difference. These products enable traders to make a profit or loss based on the difference between the entry and exit prices of a trade, without taking ownership of the underlying assets. CFD's are popular in forex, stocks, indices and commodities.
What are Pips in Forex (price increments)
A Pip in forex means the smallest price change a currency pair can make, except for fractions of a pip or 'pipettes'.
For most currency pairs 1 pip is 0.0001; for currency pairs with JPY such as USD/JPY 1 pip is 0.01. When trading metals, 1 pip for Gold is 0.1 and Silver is 0.001.
Forex brokers may display currency pairs prices with the 4 decimals (i.e., EUR/USD 1.0925) or with 5-decimals (EUR/USD 1.09255). The latter is also called fractional pricing. The last decimal point is 0.00001, or 0.001 for Yen based currencies which represents fractions of a pip.
When the EUR/USD moves up from 1.0925 to 1.0926, the change is 1 pip. With a 5-digit broker, if the EUR/USD moves up from 1.09255 to 1.09260, the move would be half a pip.
The value of a pip varies depending on the base currency. We have an excellent pip calculator tool that you can use to quickly and easily calculate the pip values.
What is the Spread in Forex (transaction cost)
The spread of a financial instrument (stocks, forex, etc.), refers to the price difference between the Ask price and the Bid price. Spread is a type of transaction cost, along with commissions, if any. Due to the spread, each trade will start off at a loss.
EUR/USD spread example:
|Bid Price||Ask Price||Spread|
|4-digit quote||1.0926||1.0925||0.0001 = 1 Pip|
|5-digit quote||1.09256||1.09251||0.00005 = 0.5 Pips|
Variable and Fixed Spread Types
Most forex brokers today offer variable spreads or floating spreads which are constantly changing based on market demand and volatility.
Fixed spreads are found less frequently and do not change or change only infrequently such as during big news announcements when volatility is especially high.
What are Lots in Forex (trade size)
In forex a Lot defines the number of currency units to be bought or sold in a trade. One Standard Lot is 100,000 units of the base currency.
Most brokers allow trading with fractional lot sizes down to .01 or even less. Fractional lot sizes are sometimes referred to as mini lots, micro lots and nano lots. Please refer to the picture above to compare the sizes and units.
Calculating the proper lot size for your trade, based on your risk tolerance, can be easily done with our accurate position size & risk calculator.
For example, if you decide to open a trade, risking 2% of your account equity with a 200 pips stop loss, simply input those numbers and the calculator will show you the recommended lots.
Note: Units per 1 lot on non-forex pairs like cryptocurrencies and metals vary among brokers, thus the calculator will only display units on these pairs. You may need to check with your broker to find how many units are in one lot for a given symbol i.e. Bitcoin vs US dollar or BTC/USD.
What is Leverage & Margin in Forex
Leverage allows a trader to control a larger position using less money (margin) and therefore greatly amplifies both profits and losses. Leveraged trading is also called margin trading.
Margin is the capital a trader must put up to open a new position. It is not a fee or cost and is freed up again once the trade is closed. It's purpose is to protect the broker from losses. When losses cause a trader's margin to fall below a pre-defined stop out percentage, one or all open positions are automatically closed by the broker. A margin call warning from the broker may or may not precede such a liquidation.
How Does Leverage Work in Forex
With 100:1 leverage a trader can open a position 100 times greater than they could without leverage. For example if the cost to purchase .01 lots of EUR/USD is normally $1000 and the broker offers 100:1 leverage, then the trader must put up only $10 as margin.
Even if a broker offers 100:1 leverage, the trader can use as little as they please by simply making smaller trades. Maximum leverage is the highest leverage a broker will allow a trader to use and varies by the broker and their regulatory requirements.
Beware: Traders who employ high leverage are prone to blow their account. Most professionals use very small leverage or none at all, and a modest risk percentage per trade.
Example of amplified profit and loss:
EUR/USD is purchased at 1.1600 at 1:1 leverage (no leverage). The price of EUR/USD must drop to zero for the trader to sustain a total loss, or double for the trader to double their initial investment.
If the trade size were much larger in relation to the account balance and employed the full 100:1 leverage, a price movement in EUR/USD of 100 times less would produce the same doubling or total loss of initial investment.
Based on your account leverage, you can calculate the margin requirements using our handy Forex Margin Calculator. You will know exactly how much, in terms of account margin, is used to open a trading position depending on the trade size.
Leverage plays an important role in any successful trading strategy. Some brokers offer inappropriate leverage to lure new customers. For more on leverage check out our article What is Leverage in Forex and How to Use It.
What is Money Management in Forex
Money management is a set of rules that will help protect your capital and ultimately, assist you in growing your trading account.
The most important rule is to risk only a small fraction of your account at one time. By doing so you will be able to withstand the inevitable losing streaks. As a rule of thumb, many traders believe in risking 2%, or less, per trade.
What is Drawdown in Forex
Drawdown is the reduction of capital from an equity high to a subsequent low, typically expressed as a percentage. Maximal drawdown refers to the greatest historical drawdown an account suffered through.
It is important to understand the probability and effects of drawdown in order to formulate a sound money management plan. We have made this very easy and available for you. Just try using our risk of ruin and drawdown calculators below.
What are Candlesticks Charts in Forex
A candlestick bar is comprised of the body and lower and upper wick, representing the Open, High, Low, and Close (OHLC) prices during a specified period from 1 minute to 1 month.
If the price traveled down and closed lower the candlestick is colored red; if the price traveled up and closed higher it's colored green.
The main advantage of using candlestick charts in forex is the possibility of identifying certain bar formations and patterns that can show a trader potentially profitable entry and exit points in the market. Popular candlestick formations like the 'evening star' or 'hanging man' can be interpreted as a bearish signal that the market may trend downward. Conversely, formations like the 'hammer' or the 'morning Doji star' can be interpreted as bullish signal that the market may trend upward.
For more on candlestick patterns check our complete article Forex Candlestick Patterns: The Complete Guide.
What is Technical Analysis in Forex
Technical Analysis is the study of price action to determine whether to buy or sell an asset along with optimal timing.
It is performed straight on an asset’s price chart, with the aid of technical indicators like RSI or MACD, or with other tools like support/resistance, fibonacci retracements, or with combinations.
Successful traders know that 'the trend is your friend' or that 'don't try to ride a horse in the opposite direction that it's going'. More often than not you will have better success trading with the longer term trend.
When an analyst identifies a trend the next step is to try to identify how far that trend might go or when it might be exhausted to assess if it represents a trading opportunity. The idea is to buy at the lowest price on an uptrend and sell it at the highest price, or vice-versa on a downtrend.
Trends are made of pulses and retracements in a zig-zag shape which are also called support and resistance levels. The support level is the price where traders are willing to buy an asset, while the resistance level is the price they are willing to sell. Older levels are more powerful than newer ones and once a level is breached, it can invert so that an old support level becomes a new resistance level and vice-versa.
What is Multi-timeframe Analysis
Technical analysis should always be viewed from multiple timeframes, from a monthly chart (where each candlestick represents one month) down to 1 hour. Higher timeframe charts like weekly and monthly can confirm a major trend while lower timeframe charts like daily and 4 hour can help identify the best entry opportunity.
Economic Calendar Data and Volatility
Governments and other sectors around the world are constantly measuring and reporting on economic growth and data, and a reliable economic calendar is one of a trader's top tools.
The volatility created on a currency pair like the EUR/USD after key employment data like US Non-farm payrolls is announced can create huge moves and gaps so that you cannot easily exit a position. If prices gap 200 pips for example, it means within that 200 pip range there is no liquidity and you cannot exit a trade or enter a new one.
Having trades open during economic or geopolitical news announcements can be very risky. Always be prepared for the worst-case scenario. High volatility and huge price spikes can quickly annhilate your account if you are on the wrong side of the market.
The Swiss Central Bank had been intervening on their currency value and unexpectedly removed the EURCHF price peg on January 15, 2015. The EUR/CHF dropped 20% or around 2000 pips within a minute. Many forex brokers went out of business as a result.
Prior to the release of economic data, analysts try to forecast the results and a consensus estimate is formed. If the data is very important and the reported value is significantly different than estimates, extreme volatility can ensue.
How to Use the Economic Calendar in Forex
On most forex economic calendars, you will see the important values below.
Previous Month Value - Shows the results of the previous month, which may change because sometimes the prior month is adjusted. This surprise may cause volatility.
Forecast or Consensus Value - Shows the forecast based on a consensus of economic analysts
Actual Value - Shows the actual report value and may move cause volatility if it differs significantly from the forecast.
Impact - The magnitude of potential impact for a report is denoted with a colored icon next to the event name. Red means high impact and orange means medium impact.
Check out our Economic Calendar frequently to ensure you are always aware of high and medium impact upcoming events.
Which Trading Order Types are Available in Forex
Market Orders are orders to buy or sell immediately at the next available price. Market orders are fast, however the next available price could be quite different than the current price a trader is viewing, especially during volatile times. This is known as slippage. Placing market orders during volatility or illiquidity can result in high slippage.
Limit Orders are orders to buy or sell that are limited to a specified price or better. Unlike market orders they offer full control over execution price. Of course, if the order price is not available at the time of execution the order goes unfilled.
What are the Different Types of Pending Orders
Pending orders are set to execute in the future when price hits a certain level. They can set with an expiration date, or good until cancelled (GTC). Some are executed as limit orders and some as market orders depending on the type.
Take Profit is a pending limit order to close a trade once a profitable trade reaches a set price.
Trailing stop is a pending order to close a trade a certain number of pips away from the highest price reached.
Stop Loss is a pending market order to close a trade at the next available price once a losing trade reaches a set price.
Buy Stop is a pending market order placed above the current price to buy once the price rises above it.
Sell Stop is a pending market order placed below the current price to sell once the price falls below it.
Buy Limit is a pending limit order placed below the current price to buy once the price falls to it.
Sell Limit is a pending limit order placed above the current price to sell once the price rises to it.
Stop Limit orders function like the stop orders described only they execute as limit orders.
What are the Risks in Forex Trading
The biggest risk to any new trader is trading without adequate knowledge and experience and frequently results in big losses.
An over-leveraged forex account can quickly go to zero, or even negative if the broker doesn't offer negative balance protection.
Also, a broker can go out of business, and you could lose your entire capital if there is no insurance scheme provided by the government regulator.
Statistics out there show that the majority of forex traders fail. If you would like the reasons and potential solutions, please read our complete article Why do Most Traders Lose Money in Forex.
What is MetaTrader Trading Platform
MetaTrader is the most popular third-party forex trading platform and is offered by the majority of the brokers. Complete with charts and several technical indicators built in, it allows users an easy way for trading forex and, depending on the broker, also CFDs on shares and indexes, commodities and crypto currencies.
Automated trading robots (EAs) called 'Expert Advisors', technical indicators and scripts can be easily built in the MQL language editor using a simple programming language similar to C++. Expert Advisors can even be backtested on historical price data using the built-in strategy tester.
Many of these add-ons are available free for download or for purchase at various websites.
What is the Best Time of Day to Trade Forex
The 24 hour global forex market can be roughly grouped into 4 trading sessions, corresponding to the hours that major financial hubs conduct business and report on economic data.
- North America - New York, USA
- Asia - Tokyo, Japan
- Asia-Pacific - Syndey, Australia
- Europe - London, UK
During the periods of highest trading volume, fast-moving prices are more likely to create opportunities, while spreads are also at their lowest.
The most active trading period is usually the 4 hour overlap of London and New York between 8:00 - 12:00 New York time, generally regarded as the best time to trade forex. Sydney and Tokyo also overlap between 24:00-6:00 GMT.
If you would like to know more about the best and worst times to trade, check out our article What is the Best Time to Trade Forex.
How to Open a Forex Demo Account and Start Practicing
A demo trading account lets you practice trading without the risk of losing real money. It's the best place for beginners to learn the basics, like how to use the trading platform, proper position sizing etc. The emotions that accompany real money trading differ from practice trading, so once a beginner graduates to real money trading they should still proceed with caution.
To open a demo account and begin practice trading immediately, check the table below for links to a few of the most popular brokers globally.
|Broker||Countries Available||Open an account|
|Most, except USA||Free demo account|
|Most, except USA||Free demo account |
|USA||Free demo account|
How to Choose the Best Forex Broker
There are a few big factors to consider when choosing a new forex broker. These include regulation & deposit insurance, pricing, execution, and customer service.
Check our Forex Brokers List Page and use the filter to find the best broker for you based on virtually any criteria including regulation, deposit insurance, negative balance protection, leverage, pricing, user rating, cent accounts, etc. You can also live chat or email us for additional assistance.
The following additional articles may also be of help, when choosing the best broker:
- Best Forex Brokers in 2020: With Customer's Reviews
- Best Forex Brokers in the USA
- How to Find the Best Forex Broker: 7 Key Factors to Consider
Professional traders are very disciplined people, who regularly trade with pre-defined risk and money management rules. Before starting, you should evaluate your personal circumstances and you should never risk money that you can't afford to lose.
The FX market can present an exciting opportunity to earn an income. Educate yourself about this market, understand the risks, practice with demo accounts, be disciplined following your trading rules and seek independent financial advice where necessary.