How to Trade Forex

Introduction 

When individuals from different countries need to swap one currency for another, the exchange is called foreign exchange (or forex). Similarly, the forex (or FX) market is a global decentralized market where people can exchange different national currencies for one another. As of April 2022, the forex market is the world’s largest and most liquid market, with a daily transaction average of $7.5 trillion. 

The forex market is a significant part of the global economy, as it impacts the general prices of goods and services. The demand and supply of a country’s currency ultimately affect its value and exchange rates. However, some people profit from these exchange rates through forex trading. This article answers the question, “What is forex trading?” to help beginners understand how to trade forex. 

Highlights and Key Takeaways 

• The forex market is the most liquid and largest market in the world

• The daily transaction volume in the forex market is an average of $7.5 trillion

• Forex trading is regulated in different parts of the world 

• You can use the P2P market to trade forex without a broker

Basic Concepts of Forex Trading 

While forex trading may initially seem complicated, understanding its concepts can make a lot of difference for beginners. At its core, forex trading involves buying and selling different currencies in exchange for one another. For instance, if you live in the US and travel to an EU country, you’ll likely need to trade in your USD (US dollars) for EUR (euros), which is the legal tender across Europe. 

However, when it comes to forex trading, the goal is different. Instead of trading in one currency to get another to spend, forex traders plan to profit from the difference in the exchange rates between the two currencies. So, a typical forex trader may buy USD and sell EUR in a forex market to pocket the profit from their floating exchange rates. 

All trading activities happen on a forex trading platform or an online brokerage, so the first thing you need to trade forex is a new forex trading account with the best forex brokers. The online broker connects you to the FX market, where you can buy, sell, and exchange different currencies for profit. 

After that, you’ll need to deposit funds into your trading account, with which you can begin your trading journey. Once the funds are in, you can place a buy or sell order using different currency pairs. For instance, you can set a buy order for the EUR/USD pair. This is called a long position (or going long), and you’re betting that the EUR will appreciate against the USD. 

Conversely, if you create a sell order with the same pair, you’re taking a short position and predicting that the USD will appreciate against the EUR. The trading platform will provide real-time prices of these assets, and you’ll make a profit if your guess is correct. 

Trades are categorized in lots; a standard lot represents 100,000 of the base currency, the first currency in a pair. For instance, a EUR/USD pair has the EUR as its base currency. You can trade with leverage by borrowing funds from the broker to enter a position or trade without leverage using your funds. 

However, forex trading isn’t as easy as it seems on paper. You need a trading strategy to help you stay on track and mitigate risks. You can build a strategy using current market conditions, price histories, market news, and technical analysis. 

In addition, you can lose money when trading forex, so it’s advisable to employ risk management tools like stop-loss and take-profit to allow the broker to make certain decisions at specific price points while the trade is ongoing. These tools can help limit your potential losses after taking a trading position. 

Still, you should remember that specific regulations exist in different countries that safeguard forex trading activities. You should understand your country’s position on trading forex and comply with the broker’s terms and conditions to avoid trading pitfalls. 

Steps to Trading Forex

Now that you have answers to the question, “What is forex trading?” let’s dive into how to trade forex as a beginner by opening a forex brokerage account. 

Step 1: Choose a Reputable Broker 

The first step is to find a reputable broker to trade with. Since many online brokers are on the market, choosing the ideal option can take time and effort. The best approach is to research the most reputable options and compare the ones that initially tick your boxes. 

Some selection criteria include their core offerings/features, ease of use, regulatory compliance and security measures, fees and rates, customer support, and mobile compatibility. The best brokerage platforms rank high using these criteria. 

Step 2: Open a Forex Trading Account 

After finding the broker that fits your needs, open a free trading account. Usually, the account creation process will require you to provide your personal information, including your name, email address, date of birth, residential address, and other financial-related information. 

You may also need to fill out some questionnaires to understand your financial strength, knowledge base, and investment goals. Note that most brokerages require that customers enter a margin agreement since trading includes leverage. You may also need to enter an options agreement to use the options trading options from the broker. 

Step 3: Complete Identity Verification 

Per the regulatory guidelines in the forex industry, online brokers mandate that customers verify their identities as part of the company’s know your customer (KYC) process. In other words, you must complete identity verification to access the platform’s full features. 

The verification process usually requires submitting proof of identity and proof of address. The supported identity documents include a passport or driver’s license, while a utility bill or bank statement will do for proof of address.

Step 4: Deposit Funds into Your FX Account 

After verifying your account, the next thing to do is deposit funds, as you’ll need capital to begin trading. Use the accepted payment methods to deposit the minimum trading amount into your preferred brokerage. 

Forex trading platforms like Capital.com have a minimum deposit of $20, making them more accessible to beginners. 

Step 5: Start Trading 

Finally, you can start trading currencies in the forex market after the deposited funds arrive in your FX account. We recommend that you paper trade with a demo account first to familiarize yourself with the trading platform and how forex trading generally works.

Afterward, you can switch to a live trading account to start trading with real money. You should also stay on top of your game by constantly researching the market to identify new trading opportunities. 

To set up a demo account, log in to the trading platform and click on the “Demo Trading” feature. This should be easily accessible before launching the trading market. 

What Are the Best FX Trading Platforms?

As stated earlier, there are a myriad of forex trading platforms to choose from. To make the selection process easier, we at Investing.com have researched and curated a list of the best online brokers in terms of reliability, ease of use, and low costs. 

Our top choices include:

• Capital.com

• Plus500

• eToro

• Pepperstone

• BitMex

• FXTM

• FxPro

• Swissquote

You can read our review of each platform to see how they stack up compared to their competitors. 

Forex Brokers 

So far in this article, we’ve been talking about forex brokers and their role in connecting users with the FX markets. If you’re familiar with the regular stock market, you may confuse forex brokers with stock brokers. In the section below, we highlight what forex brokers do and why they are crucial to forex traders. 

What Does a Forex Broker Do?

A forex broker provides financial services to traders who buy and sell currencies in the forex market. These currency trading platforms operate 24/5, allowing traders to trade currencies with no time restrictions like the regular stock markets. 

In other words, the brokers take users’ orders to buy or sell currencies and execute them on users’ behalf. 

Differences Between a Forex Broker and a Regular Stock Broker 

The stock and forex markets are two of the most traded markets for financial investment enthusiasts. However, they have unique features and distinct modes of operation. 

First, a forex broker operates 24 hours daily, allowing investors to trade anytime and anywhere. On the other hand, a stockbroker runs 8 hours a day, limiting the trading hours for stock investors.

A forex broker requires low minimum deposits to trade on its platform, while a stock broker typically charges higher amounts to trade. The low entry barrier makes starting forex trading easier. 

In addition, the forex market is a high-liquidity market, making it easy to buy and sell currencies. Conversely, the liquidity in the stock market is lower, as it offers shares of publicly listed companies instead of free market currencies. For instance, the forex market averages $7.5 trillion in daily transactions, while the stock market has a significantly lower trading volume. 

Finally, most forex brokers don’t charge commissions for trading. However, stock trading platforms charge commissions you must pay alongside the spread. 

Advantages of Having a Forex Broker

What are the perks of trading on forex brokerages? We highlight them below. 

• Security: One of the top features of online brokers is security. The leading forex trading platforms have stringent security measures in place to safeguard players and their funds. For instance, you’ll realize that most brokers have a mandatory KYC process that you must undergo as part of their anti-money laundering (AML) measures. 

At the same time, the platforms employ secure SSL encryption to secure their websites from third-party hacks. Forex brokers are also insured with amounts enough to cover a certain percentage of traders’ funds, offering investors more reliability. 

Additionally, every country has a regulatory authority with rules and guidelines managing the operations of forex companies in their locations.

• Information: Another reason to trade using forex brokers is because of the range of information they offer their customers. The best brokerages send users various information, including market news & trends, information about the best trading pairs, learning materials about how to trade forex, etc. 

The information will come in handy as you continue your trading journey. 

• Technical Advantages: Finally, forex brokers provide customers with adequate tools and resources for technical analysis. These include trading charts, leverage trading tools, price action history of trading pairs, etc. 

You can develop a formidable trading strategy using the various technical tools and offers from an online broker. 

Can I Trade Forex Without a Broker?

A forex broker is an intermediary between traders and the foreign exchange market. While brokers are important, it is possible to engage in forex trading without brokers using a No Dealing Desk (NDD) or a peer-to-peer (P2P) platform. 

These platforms offer lower costs and transparency. All you have to do is register on them and enter a trade. For instance, an NDD platform will accept your order and send it to financial service providers in the global forex market. 

On the other hand, a P2P allows you to exchange currencies directly on its platform without a third party. 

Note that both platforms have their fees, which can sometimes be higher than what you’ll get on a broker. Similarly, trading forex without a broker doesn’t offer the same level of support and resources, which may be what you need to elevate your trading experience. 

How to Develop a Forex Trading Strategy 

As stated earlier, becoming a successful forex trader requires having a viable trading strategy. The strategy includes your trading style and other personal factors that can influence your trading decisions. But before we discuss the forex trading strategies, let’s touch on the different forex trading styles you can choose from.

• Scalping, which involves opening different trading positions simultaneously for a few seconds or minutes, with the aim of profiting cumulatively. 

• Day Trading, which involves opening short-term trades with positions that will be liquidated within a few minutes, hours, or the same day. 

• Swing Trading, which involves opening a trading position for days or weeks. 

Determining which trading style suits your needs before building a strategy will leave you working to your strengths and choosing a style that suits your personality. You’ll also work in line with your risk tolerance instead of gambling and making mistakes. 

For instance, if you want instant profits, scalping and day trading may be best for you. But if you prefer long-term investments, swing trading is ideal. 

Basic Strategies for Forex Trading 

Developing a forex trading strategy requires a bit of time and knowledge because of the efforts and technicalities involved. Nonetheless, you can have an effective trading strategy using two major analyses: 

• Fundamental Analysis: As the name implies, fundamental analysis involves understanding the significant events in the forex space and using them to predict market sentiments. For example, you execute a fundamental analysis when you analyze the economic, social, and other external forces that can impact a currency’s price. 

Some macroeconomic events that can influence market sentiments include central bank policies and geographical events in a country at a particular time. With these economic indicators, you can build a strategy.

So, to stay updated with the latest market trends and events, you can employ tools like economic calendars, government reports, political and geographical analysis, news feeds, and central bank statements – all of which are available in our news section. 

• Technical Analysis: Technical analysis (TA) is another crucial trading strategy tool used by seasoned traders. Technical analysis aims to study the historical prices of specific currencies to discover patterns and make predictions based on them. 

Conducting technical analysis before trading is important because it helps traders interpret accurate data to infuse into their trading strategies and make informed decisions. 

However, traders use different tools and technical indicators when conducting technical analysis. These include:

• Chart Patterns form shapes representing various price actions from time to time. The trendlines from charts can help forecast a currency’s future price behavior. 

• Volume Analysis helps understand the closing and opening prices of a currency pair to determine whether to go long or short. 

• Moving Averages help calculate the average price of a currency pair to determine if its price actions are real or influenced by other factors.  

• Relative Strength Index (RSI) measures the price momentum of selected trading pairs to see how quickly traders are bidding up or down for them. 

• Bollinger Bands are trend lines that help traders predict where the market is moving in terms of prices. With these, you can determine when the market is overbought or oversold. 

• Fibonacci Retracement Levels help identify the key support and resistance levels of specific trading pairs. That way, you can determine the projected price level after the market corrects off the back of an uptrend or downtrend. 

• MACD uses combined moving averages to help traders identify high bullish or bearish market momentums and ultimately determine when to enter or exit trades. 

• Stochastic Oscillator helps traders identify oversold or overbought market territories to determine when to short or long a currency pair. 

Getting Into the Action 

After all is said and done, the most important thing is to start trading. Before you begin, there are a few things to do.

First of all, set a financial goal for your investment journey. Don’t just trade forex because everyone is doing it. With clear financial objectives, you can work toward your individual vision and in line with your strategy to avoid being swayed by the noise. 

In addition, you should hedge against losses using risk management tools when trading. For example, when trading with leverage (borrowed funds), you can enter positions and set stop-loss and take-profit levels to avoid liquidation if the market doesn’t go your way. 

However, your entry and exit levels depend on your trading strategy, which is why you must have one to begin with. 

Practice and Preparation 

Learning forex trading doesn’t happen in a day, so as a beginner, you must practice as many times as possible to improve your skills and get more confident. The best way to practice is by using the demo account feature on online brokers. 

With a demo account, you can trade with paper money and get used to an online trading platform before committing real money to trading. You can also backtest your trading strategy with the demo account to determine its effectiveness.

Steps to Trading Forex Live 

After building confidence with a demo account, you can switch to a live account to start trading with real money. Here are some steps to follow when trading with a live forex account. 

• Start Small: Losses are part of the trading experience, so you want to limit how much money you lose by investing in small bits to avoid burning all your capital in no time. You can start with the broker’s minimum deposit amount and increase it as you go. You can employ various risk management tools even when trading with limited funds.

• Have Emotional Discipline: It’s very easy to lose yourself on bad trading days. You’ll be under pressure to turn things around by chasing your losses and making bad investment decisions. The hack is to remain disciplined on such days to avoid losing more money. After a series of simultaneous bad trades, you can take a break instead of being desperate. 

• Monitor the Markets: Up your trading game by staying updated with the market news and trends. These can help with your fundamental analysis to determine potential market trends based on the current sentiments. 

• Keep Trading Records: Create a habit of recording your trades – including losses and profits – to see your financial health. The records can also be used for future analysis and to create trading improvement plans.

Improving Your Forex Game 

The forex market is constantly evolving, so traders must keep up with the latest market realities from time to time. You can be informed of the latest trends by keeping up with daily updates on Investing.com – a reliable platform for market updates across the financial and forex markets. 

You can also get mentorship sessions from market experts, seek knowledge from top voices, and continually tweak your trading strategy to align with the current market demands. Refrain from mindlessly following opinion leaders on YouTube and other channels, as they may misguide you. Instead, stick with experts and do your research before investing.

Conclusion 

In this guide, we’ve thoroughly reviewed how to trade forex and answered, “What is forex trading?” It’s important to note that forex trading can be profitable when you choose a trading strategy that fits your budget. For example, day trading and swing trading are suitable for traders with limited funds. 

Nonetheless, stay updated with market news and trends, continually improve your knowledge base, and conduct your research before trading.

FAQs 

Is Forex Trading Suitable for Beginners?

Forex trading requires a decent amount of knowledge and training. However, beginners can easily get started with trading forex with various tools and educational resources from online brokers and expert trainers. 

How Can I Choose the Right Currency Pairs to Trade?

The best way to choose the right currency pairs is to select pairs with high liquidity and low spreads. Examples include EUR/USD, GBP/USD, and USD/CAD. 

How Do Economic Indicators Impact Currency Prices?

Economic factors like inflation, interest rates, and economic recession can impact currency pairs because traders act on them to buy and sell currencies, resulting in price changes. 

How Does Technical Analysis Come into Play?

Technical analysis is a trading tool used to predict the price actions of certain currencies. It leverages past data to predict future price actions that traders can infuse into their trades.