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ALL YOU NEED TO KNOW ABOUT FOREX TRADING – FOR BEGINNERS
The foreign exchange market, or forex (FX) for short, is a decentralized market place that facilitates the buying and selling of different currencies. This takes place over the counter (OTC) via the interbank market instead of on a centralized exchange. Without knowing it, you have probably already participated in the foreign exchange market by ordering imported shoes, or more obviously, buying foreign currency when on vacation. Traders are drawn to forex for several reasons, including:
  1. The size of the FX market
  2. A wide variety of currencies to trade
  3. Differing levels of volatility
  4. Low transaction costs
  5. 24 hour a day trading during the week
This article will benefit traders of all levels. Whether you are brand new to forex trading or looking to build on your existing knowledge, this article seeks to provide a solid foundation to the foreign exchange market.

THE FOREX MARKET EXPLAINED

In a nutshell, the foreign exchange market works like most other markets in that it is subject to demand and supply. Using a very basic example, if there is a strong demand for the US Dollar from European citizens holding Euros, they will exchange their Euros into Dollars.
The value of the US Dollar will rise while the value of the Euro will fall. Keep in mind that this transaction only affects the EUR/USD currency pair and will not for example, cause the USD to depreciate against the Japanese Yen.
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What Moves the Forex Market?

In reality, the above example is only one of many factors that can move the FX market. Others include broad macro-economic events like the election of a new president, or country specific factors such as the prevailing interest rate, GDP, unemployment, inflation and the debt to GDP ratio, to name a few. Top traders make use of an economic calendar to stay up to date with these and other important economic releases that can move the market.

What Makes Forex so Attractive?

The foreign exchange market allows large institutions, governments, retail traders and private individuals to exchange one currency for another and takes place via the interbank market (between banks). The benefit of having forex trade between global banks is that forex can be traded around the clock (during the week). As the trading session in Asia comes to a close, the European and UK banks come online before handing over to the US. The full trading day ends when the US session leads into the Asian session for the following day. What makes this market even more attractive to traders is that it is by far the most liquid market in the world, with an average daily trading volume of $5.1 trillion according to BIS Triennial Survey 2016. This means that traders can easily enter and exit positions as there are many willing buyers and sellers for foreign exchange.

Find out more about the size and liquidity of the forex market.

Who Trades Forex?
There are essentially two types of traders in the foreign exchange market: hedgers and speculators. Hedgers are always looking to avoid extreme movements in the exchange rate. Think of big conglomerates like Exxon and how they look to reduce their exposure to foreign currency movements. Speculators, on the other hand, are risk seeking and always looking for volatility in exchange rates to take advantage of. These include large trading desks at the big banks and retail traders.
Reading a Forex Quote
All traders need to understand how to read a forex quote as this is will determine the price you enter and exit the trade. Looking at the currency quote below, the first currency in the EUR/USD pair is known as the base currency, which is the Euro, while the second currency in this pair (the USD) is known as the variable or quote currency.

WHAT IS FOREX TRADING AND HOW DOES IT WORK?

Many people wonder how to make money trading forex. Fortunately, the basics behind forex trading are quite straight forward. If you think the value of a currency is going to go up (appreciate), you buy the currency. This is known as going “long”. If you feel the currency is going to go down (depreciate), you sell that currency. This is known as going “short”.

WHY TRADE FOREX?

Trading forex has many advantages over other markets as explained below:
  1. Low transaction costs: Typically, forex brokers make their money on the spread provided the trade is opened and closed before any overnight funding charges are applied. Therefore, forex trading is cost effective when weighed up against a market like equities, which attracts a commission charge.
  2. Low spreads: Bid/Ask spreads are extremely low for major FX pairs due to their liquidity. When trading, the spread is the initial hurdle that needs to be overcome when the market moves in your favor. Any additional pips that move in your favor is pure profit.
  3. More opportunities to profit: Forex trading allows traders to take speculative positions on currencies going up (appreciating) and going down (depreciating). Furthermore, there are many different forex pairs for traders to spot profitable trades.
  4. Leverage trading: Trading forex involves the use of leverage. This means that a trader need not pay the full cost of the trade but instead only put down a fraction of the cost. This has the potential to magnify your profits but also your losses. At DailyFX we suggest a disciplined approach to risk management by restricting your effective leverage to 10 to one or less.
New to forex trading? We have a comprehensive guide designed with you in mind to learn the basics of trading.

KEY FOREX TRADING TERMS TO TAKEAWAY

Base currency:  This is the first currency that appears when quoting a currency pair. Looking at EUR/USD, the Euro is the base currency.
Variable/quote currency:  This is the second currency in the quoted currency pair and is the US Dollar in the EUR/USD example.
Bid: The bid price is the highest price that a buyer (bidder) is prepared to pay. When you are looking to sell a forex pair this is the price you will see, usually to the left of the quote and is often in red.
Ask: This is the opposite of the bid and represents the lowest price a seller is willing to accept. When you are looking to buy a currency pair, this is the price you will see and is usually to the right and in blue.
Spread: This is the difference between the bid and the ask price which represents the actual spread in the underlying forex market plus the additional spread added by the broker.
Pips/points: A pip or point refers to a one digit move in the 4th decimal place. This is often how traders refer to movements in a currency pair, i.e. GBP/USD rallied 100 points today.
Leverage: Leverage allows traders to trade positions while only putting up a fraction of the full value of the trade. This allows traders to control larger positions with a small amount of capital. Leverage amplifies gains AND losses.
Margin: This is the amount of money needed to open a leveraged position and is the difference between the full value of your position and the funds being lent to you by the broker.
Margin call: When the total capital deposited, plus or minus any profits or losses, dips below a specified level (margin requirement).
Liquidity: A currency pair is considered to be liquid if it can easily be bought and sold due to there being many participants trading the currency pair.
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

DISCLOSURES

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FREE RESOURCES AND GUIDES TO LEARN FOREX TRADING

  • If you are just starting out on your trading journey it is essential to understand the basics of forex trading in our free new to forex trading guide.
  • We also offer a range of trading guides to supplement your forex knowledge and strategy development.
  • Our research team analysed over 30 million live trades to uncover the traits of successful traders. Incorporate these traits to give yourself an edge in the markets.
  • Traders often look to retail client sentiment when trading popular FX markets. DailyFX provides such data, based on IG client sentiment
  • The forex market has evolved over centuries. For a summarised account of the most important developments shaping this $5 trillion a day market read our history of forex article.
FAQ’s

We Are Here To Help You With Any

FOREX BASICS

The foreign exchange market, also known as Forex, or FX, is the world’s largest financial market with over three trillion Dollars traded every day. The Forex market is based on the trade of the world’s currencies.
Forex trading is conducted in pairs. The trader always trades one currency against another. Some examples of the major pairs include the EUR/USD, USD/JPY, EUR/JPY, GBP/CHF, and CAD/USD among others. When you open a Forex trade, you go “long” on one currency and go “short” on the other. The Forex market does not have a centralized location and is therefore a very flexible trading option for people around the globe.
In one word, yes. However, there are various tools and techniques one can use to reduce the risk. These include market analysis (technical or fundamental), trading systems, signal providers, and Forex robots. However, the best way to avoid high risks in Forex is to educate yourself about the Forex market before trading real money. Additionally, experts recommended you use a demo account for an extended period of time before risking money.
The Forex market has the most flexible hours with true 24 hour trading. The Forex day starts in Sydney and moves around the globe first to Tokyo, then London, then NY.
Forex and stocks have a lot in common but generally speaking, Forex is shorter term trades than other markets. Most Forex traders do not leave positions open overnight, which involves a fee called a ‘Rollover Fee’. In addition, the stock market is significantly smaller than the Forex market making it a more difficult trade to master.
This very much depends on the preferences of the trader but statistics show that over 80% of Forex trades last for seven days or less and over 40% for two days or less. Generally speaking, Forex traders close their positions when they have achieved their profit goals for that trade, the Stop Loss is triggered as a result of reaching a maximum level of loss, or a new position has become available and the trader wants to reallocate the funds.
Since most brokers do not charge commission on opening a new position and the Forex market is open almost around the clock, most trades open multiple positions throughout the day. According to recent studies, the average Forex trader opens approximately ten to twenty new positions every day.
Leverage in Forex is a loan that is provided by the Forex broker to an investor. When an investor decides to invest in the Forex market, he/she must first open up a margin account with a broker. The broker then allows the investor to trade over and beyond the actual amount of money he has on deposit. Usually, the amount of leverage provided is either 50:1, 100:1 or 200:1, depending on the broker and the size of the position the investor is trading. In Forex, investors use leverage to profit from the fluctuations in exchange rates between two different countries. The leverage that is achievable in the forex market is one of the highest that investors can obtain.

FOREX FIRST STEPS

As opposed to other markets, you really do not need much to trade Forex. No license is required, and you can trade Forex with a very small initial capital. However, it is not recommended to jump into Forex trading without massive preparation before. This should include reading, studying, and familiarizing yourself with the ins and outs of the market as well as choosing a top reliable broker with whom you can trade. Read More: First 5 Steps
The Web is overflowing with trading webinars and articles about Forex, but we have worked long and hard to be the most informative source of Forex information for the beginner trader. You can read our best Forex articles or see a complete list of our Forex articles.

FOREX CURRENCIES

The Forex market is among the most volatile markets on the globe and with its 24 hour schedule, the market never rests. The prices are based on a wide spectrum of factors both economic and political. Anything can affect the movement of the Forex market, but the main factors that drive the currencies are interest rates, inflation, and political stability. Governments often jump into the Forex trading arena in order to affect the prices of currencies. They do this by flooding the market with their currency in order to lower its price or buy out large sums of their currency in order to raise its value. However, as a result of the Forex market’s size, there is no one entity that can truly affect the market is a serious manner.
There are many terms you must understand before your trade Forex. To become aquanited with the basic lingo, see our complete Forex glossary.

FOREX PROFITS

There are many ways to avoid high Forex risks, but the primary tools used by most traders are stop losses, take profits, and limit orders. Using these tools, you can minimize your risks while maximizing your potential for profits.
The possible rewards of Forex trading are pretty much endless. Most Forex brokers offer high leverage offering the ability to trade tens and hundreds of thousands of Dollars with as little as a few hundred Dollars of equity. Some brokers offer a leverage as high as 500:1. Obviously, the higher the leverage, the larger the potential for profit, but with that potential comes a higher level of risk as well. Read More: Forget About Money | Turning $10,000 into $1 Million
Well, that very much depends how you trade. However, unlike many other markets, Forex trading can be a very inexpensive habit. With most brokers offering at least a 100:1 leverage, traders can trade tens of thousands of Dollars with as little $500.
This is a question that occupies the minds of the world’s most well known Forex experts. There is no one right answer to this, but there is one basic principle when it comes to a Forex trading strategy. The important thing is that a trader has some sort of strategy. This is what differentiates Forex trading from gambling. You can use one of hundreds of available Forex trading strategies to maximize the potential of the Forex market. Many traders find it challenging to stick to their strategies when it dictates to pull out of a trade even when it is a winning trade. The important thing is that traders use strategies and stick to them. Read More: Forex Trading Strategies

FOREX BROKERS

Choosing an online Forex broker might be the most important decision a trader makes. It is therefore very important to make an educated decision. The Web is overflowing with reviews of Forex brokers. It is crucial that traders read them before choosing a broker. DailyForex has put together a comprehensive list of Forex broker reviews for your Forex research. Read More: Choosing an Online Forex Broker
There are a lot of characteristics a trader should look for in an online Forex broker. This can be anything from the website, to their customer support, their trading platform, their platform’s features, and their Forex trading spreads. It is important to read in depth reviews before selecting your broker, and a good start is reading DailyForex’s thorough Forex broker reviews. Read More: Choosing a Forex Broker
Proper financial regulation provides traders with a certain level of basic protection. For instance, traders depositing with brokerages regulated in the European Union will feel safe in the knowledge that some of their funds are insured through an authorized regulartory organization. Should the brokerage suddenly collapse or the broker abscond with the funds, a large percentage of the monies may be refunded to the broker’s clients. Among the most accepted Forex regulators are NFA, CySec for Cyprus, ASIC for Australia, FSA for the UK, MiFid for the European Union. Read More: Regulation Plays a Major Role | Regulation in Forex Markets
Forex scams are very common, and it is the trader’s responsibility to do the necessary research before selecting a Forex broker. Reading online Forex reviews is the first step, but then a trader should also read forums and experiences from other traders who used the specific broker. Read More: Forex Scams

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