A Beginners Guide to Forex Trading

It may be tough for a beginner when going into forex trading for the first time.

Most people who are new to forex trading have a very high and sometimes unrealistic expectation of the outcome of the trade.

For beginners, the first thing you have to note is that the business of forex trading is not a scheme to make you get rich instantly.

This beginner’s guide is to introduce the business of forex trading to you by letting you know how forex trading works and how a beginner can find the right broker.

We shall also look at different trading strategies and how beginners can test their trading skills.

What is Forex?

what-is-forex-trading

Credit: Adobestock

Forex is a market where trading of currencies is carried out. It is estimated that over 5 billion dollars are traded daily in the foreign exchange market between banks, governments, speculators, and corporations.

It is essential to understand what forex trading is all about. The foreign exchange market is a collection of all the parties involved to create a competitive market environment.

Currencies are usually traded in pairs. The movement of each currency pair is used as an index in measuring the value of one currency in comparison to another.

The euro may be measured in comparison to the United States dollar. When there is an increase in the value of one of the pairs, it can be interpreted that the euro is said to have gained over the US dollar.

When there is a decrease in the value of the pair, it is said that the euro value has fallen or the dollar has risen.

Different pairs of Forex you can trade

The categories of forex pairs include exotics, minors, and majors. Currencies that are frequently traded in the foreign exchange market are referred to as major currencies.

They include the United States Dollar, British pound, Swiss franc, Canadian dollar, New Zealand dollar, Japanese yen, Euro and Australian Dollar.

Exotic currencies include Hong kong Dollar, South African Rand, and Thai Baht. It also includes a major currency and an exotic currency pair.

Most beginners to forex trading focus more on trading major currency pairs due to the tight spreads and daily volatility.

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However, numerous opportunity abounds from the trading of exotic pairs commodities, stocks, indices, energy future, etc.

knowing how to make money trading forex, means that you do not have to limit yourself to a particular instrument in the market.

Issues of over trading arise due to market limitations. Diversification is the key when it comes to investing in foreign exchange.

What is the idea behind forex quotes?

forex-quotes-on-forex-trading

Forex quotes. Credit: shutterstock

Quotes for Ask and Bid prices are stated during forex trading. The price at which a trader can buy a particular currency is referred to as bid, while the price at which one can sell is called ASK price.

Buying a currency during trading with the hope that it increases in value so that the trader can sell at a higher price is known as long trading.

It is also the same when you sell a currency pair because you hope that there will be a fall in the value of the currency.

The current exchange rate of each currency determines the number that will be quoted for either the ASK or Bid price. The ASK and Bid price is quoted for each currency pair.

How often does the value of currency change?

How often does a forex trader expect the value of a currency to move? The changes in the value of currency depends on how liquid the currency may be.

The currencies that have the highest demand and supply index is regarded as the most liquid currency. The demand and supply of currencies in the forex market is generated by businesses, banks, exporters, importers, and traders.

The most liquid currencies are usually pairs of major currencies, the pair of Euro and USD is said to move by about 90-120 pips daily.

What is the meaning of Forex Spread?

The difference in the Ask and Bid price of a pair of currency is referred to as the forex spread.

Let's say, for example, that the bid price of USD/EUR is 1.15555, and the Ask price is 1.15554; the forex spread would then be measured as 0.0001.

For you to make money trading forex, the currency pair value has to exceed the spread.

For currency pair with wider forex spread such as EURCZK, there has to be a large movement by the currency pair before it can be seen as profitable.

What is Forex CFDs?

CFD is an acronym for Contract for Difference. It is a term that is used to measure the price movement of financial instruments.

What this means is that instead of selling and buying a significant amount of currency, a trader can make a profit from price movement without having to own ant asset.

CFDs are also traded on shares, bonds, indices, cryptocurrencies, and commodities. You may be able to trade on any of these instruments without buying any of them.

CFD trading is beneficial to traders because they can trade on price margins. Predictions of likely price increase may prompt traders to buy and a trader may sell if he predicts a fall in currency price.

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CFD trading can be accomplished through a contractual agreement between a broker and the client. It also provides traders with much higher leverage than other traditional forms of trading.

Terms used in foreign exchange trading

To make money trading forex, then you have to be familiar with the following terms.

  • Pip: The word pip is used in forex trading as the unit of currency pair's price. It is also used to represent 0.0001 of the price that is quoted. Let us take, for example,, that the bid or sale price of EUR/USD rises from 1.15557 to 1.1557; this is said to represent a pip increase of one.
  • Spread: Spread, as earlier mentioned, is the difference between the bid and ask price of currency pairs.
  • Margins: The money that is available in a trader's account is known as margins. Because forex traders do not have sufficient margin to trade on a volume of currency, they are offered leverage by forex brokers.
  • Leverage: Leverage is like an investment capital given to traders by forex brokers to enable them to boost the volume of their trading.

Benefits of foreign exchange trading

What would make you want to engage in forex trading since you have been given a brief introduction about forex trading? There are several reasons why people trade Forex.

The most significant of all is to earn money while sitting in the comfort of your home.

Another reason people trade Forex is that it gives them the platform to learn a viable skill that may help them attain financial independence.

Forex trading is seen as the largest financial market in the world. It is staggering to know that over 5 trillion dollars are traded daily in the financial market. Let us put it in a clearer way.

More money is said to be traded on the floor of the forex market than the total gross domestic product (GDP) of Japan. CFDs and other instruments get as much as 254 billion dollars trading each day in the financial market.

Speculation of Forex prices

Buying low and selling high is a philosophy that is common among Forex traders. Selling your currencies when the value is low and purchasing when the currency value is high can help traders make money from Forex trading.

In a long trade investment, a trader may open his bid at a particular price and hopes to close the bid at a much higher price to ensure that profit is made.

Forex traders can also carry out short term trades by selling Forex CFDs at a higher price and waiting until the price goes down so that they can buy it again.

How to start your first Forex trading

You can begin your first Forex trade by carrying out the following steps

#1  Look for a trusted Forex broker

Finding a good broker is key if you want to go into the business of trading Forex. Forex brokers or Forex brokerage companies provide traders with easy access to the foreign exchange trading market.

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It is important to find a trusted and reputable broker.

You can make use of Google search in finding forex brokers, or you can join different Forex forums so you can get a recommendation from the forex community for a trusted broker.

#2  Open a Forex trading account

After finding a reputable broker, the next step is to open a Forex trading account. Your broker can offer you advice on the best way to go about it. Fill in the necessary information and move on to the next step.

#3  Analyze the Forex market

Your trading decisions are dependent on the analysis of the forex market. You can carry out technical, fundamental, or sentimental analysis of the Forex market with the help of your broker before starting your trade.

#4  Define your trade margin

You have to define your trade margin in line with your Forex broker’s policies to determine how much you would pay as your investment capital.

#5  Place your order

Your orders are the instructions you give to your broker to carry out in the cause of your trading. You can place market, limit or stop orders depending on your analysis of the market.

#6  Watch as you make profit or loss

You do not have to get too emotional about the outcome of your trading. Currencies are volatile, and their value rises and falls due to several factors. Just ensure you do proper research and follow the right trading strategy.

Trading Forex with a demo account

Beginners who are new to the Forex trading platform, you may choose to use a demo account to carry out trading in a risk-free environment.

With a demo trading account, you get to understand the entire procedure and strategy needed to be successful in the business of Forex trading.

Several trading accounts provide a demo trading platform. After a good understanding of the intricacies involved in Forex trading, you may then go on to trade live.

Conclusion

If you're willing to make money with Forex trading, I would advise you to do an in depth research on how to make money trading forex, I  hope that this guide will be a starting point for you. I have explained what Forex trading means and have identified some common terms used in the Forex trading market.

I have also discussed how currencies are paid. You can choose to trade on the movement of Forex without owning any currency or asset. Like any other form of business, I advise that you trade with caution.

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