With the recent news about Robinhood, GME, and beginners jumping into the stock market and making thousands of dollars, more people than ever before are looking to start trading for the first time. But while many people will simply try to buy or sell stocks, others might be more interested in trading Forex.
Forex trading involves trading positions on currency pairs, the values of which are compared relative to one another. Because Forex trading is a little more abstract and requires more research, many people believe Forex trading is reserved only for professional stock market traders.
That’s certainly not true! Anyone can learn to trade Forex and make money on this unique market. If you don’t know where to start, you’ve come to the right place. This ultimate guide will break down everything you need to know about trading Forex, including which platforms to use, what strategies to follow, and more.
Let’s dive in!
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What is Forex Trading?
When most people think of trading on the stock market, they imagine buying or selling individual stocks, which are essentially ownership pieces of individual companies. Buy 10% of the available stock for a company, and you own 10% of the company.
However, the stock market also allows you to trade a variety of other financial assets and instruments, including currencies. That’s what forex trading deals with: buying and selling currencies, including commonly used currencies like the US dollar, the euro, and the British pound (represented by the acronyms USD, EUR, and GBP, respectively).
Currencies around the world have value relative to each other that can be affected by a variety of things, like market conditions, national decisions, and more. For example, the value ratio of a US dollar to a euro at the time of this writing is $1 to €0.82. In other words, one dollar is worth less than a euro.
So, why would you trade currencies? Forex trading doesn’t involve trading individual currencies but instead trading Forex “pairs”.
In a nutshell, the goal of Forex trading is to make money when the exchange rate between two currencies (called a “pair”) changes. With a given Forex pair, you’ll have two currencies on either side.
Let’s take a look at an example:
Say you have the above exchange rate of $1 to €0.82
When you trade Forex with this pair, you’ll speculate as to whether the price of the euro or the US dollar will go up or down
If you make the correct guess, you’ll make money on the difference
If you make the incorrect guess, you’ll lose money
What is Forex Trading and How Does it Work?
The above explanation touches on the most basic concepts involved with Forex trading. Let’s dive a little deeper and break down how Forex trading works in a practical sense. To do this, let’s use the above exchange rate once again, represented by this:
The price of the EUR/USD currency pair is 1.18, which shows that every euro is worth US$1.18 (since a dollar is worth €0.82)
Let’s say that, as a new Forex trader, you think the value of the euro will increase compared to the dollar. Perhaps you know about some upcoming European national news that will bode well for the shared economies of its member countries. Or perhaps you simply have a gut feeling.
Regardless, you place a “buy” order on the above Forex pair (EUR/USD 1.18). You spend $500 on this trade.
When you check back a few hours later, you find that the exchange rate difference between the euro and the dollar has increased by 10%. Now, each euro is worth US$1.19. Your trade was successful, so you pick up a trading profit of 10% of your initial investment.
10% to $500 is $50, so that’s the money you make.
With Forex trading, traders place buy orders when they believe the value of the currency on the left of a Forex pair will increase relative to the value of the currency on the right side of the Forex pair. If this occurs, the currency pair overall increases in value.
Of course, the opposite can also take place. Some Forex traders may predict that the value of a currency pair will decrease. In this case, they think that the value of the right-hand currency on the Forex pair will increase compared to the left-hand currency of the Forex pair. They place “sell” orders and hope that the value of the currency pair will go down so they can make a profit instead.
Popular Traded Forex Currency Pairs
Naturally, Forex trading can get quite complicated when you introduce more currency pairs, and most major world currencies are purchasable or sellable in pairs with each other. However, most Forex traders focus most of their trading activity on a handful of currency pairs.
That’s because certain currency pairs are deemed relatively stable and consistent. There are a number of reasons for this, ranging from the strength of the economies the currencies are based around (for example, the US dollar is considered to be a stable currency since the US economy is overall stable) to the volume of currency available (countries with more money will have a more stable currency in general then countries with less money).
The below currency pairs almost popular and frequently traded on the market. But note that these popular currency pairs can change, as the volume of trades can also affect which currency pairs are most popular over a given day or week.
| USD/CAD | EUR/USD |
| GBP/USD | NZS/USD |
| AUD/USD | USD/JPY |
| EUR/JPY | EUR/CHF |
| EUR/GBP | AUD/CAD |
Remember, the currency on the left-hand side of the Forex trading pair is higher in value than the currency on the right-hand side of the Forex trading pair.
How to Trade Forex
Trading Forex currency pairs is a complex and deep subject, and it takes a lot of practice to acquire enough skill to see profitable returns consistently. However, the below guide will serve as a relatively thorough deep dive into how you can place Forex trades, the strategies you should use, and what you should keep in mind to minimize your losses.
Let’s get started!
Key Forex Terms to Know
Before you think about trading Forex currency pairs, you need to grasp several key Forex terms that are frequently used both by other stock market traders and by the trading platforms you’ll need to place your buy or sell orders.
As with any kind of trading, you have to have a very firm understanding of how the Forex investment market works before you deposit any funds and before you select a broker or trading platform. Without understanding these terms, you won’t know which trading platforms or brokers are best for your needs.
Ask/Offer Price – The “ask” price is the lowest possible price that a trader will except for a Forex currency pair. As an example, our EUR/USD currency pair might have an ask/bid price of 1.0884/1.0885. In that case, a trader will only buy that pair of currencies at 1.0885
Big Price – This is the other side of the coin: it’s the price that a trader is willing to pay for a given Forex pair
Spread Price/Spread – The “spread” is the gap left between the ask price and bid price for a given Forex currency pair. In the above example, the ask price is 1.0884 and the bid price is 1.0885. The spread, therefore, is 0.0001
Pip – A “Pip” is a “point in percentage”. It’s the absolute smallest measure of change in a given currency pair. In the above example, the spread can also be represented as 1 Pip instead of 0.0001
Market Order – This type of order tells a trader’s broker to buy a given currency pair as soon as they can at the best possible price. In many cases, market orders are the standard “buy” orders given by Forex traders
Limit Order – A limit order is different from a market order in that it tells the broker to buy or sell a Forex pair at a particular price (for better, if possible). Some traders may place limit orders to ensure that they buy or sell a currency pair if the price reaches a particular financial threshold or to prevent themselves from losing money
Stop-Loss Order – Forex traders use stop-loss orders to limit their potential losses from a Forex trade. This order tells the broker or trader to buy or sell a currency pair when it either rises to or falls to a particular price
Fees – The majority of Forex brokers charge commission fees when their clients buy currency pairs. This allows them to avoid charging fees for executing trades. It’s typically the bid/ask spread described above
Leverage – The leverage or leverage ratio is a tool that lets a Forex trader open positions (i.e. buy or sell Forex currency pairs) even if they don’t have enough capital to cover the costs. This is usually done through borrowing. As an example, a leverage ratio of 50:1 means that a trader has a minimum margin requirement of just 2% to make a leveraged trade
Margin – The “margin” is how much money a Forex trader needs to open a new leveraged position. As an example, if a trader wants to buy $10,000 worth of our EUR/USD currency pair described earlier with a leverage ratio of 1:50, the trader needs $200 to cover the trade
Lot – A lot simply describes a Forex trading position size. “Standard” lots have 100,000 units of currency. “Mini” lots have 10,000 units of currency, while “Micro” and “Nano” lots have 1000 and 100 units of currency, respectively
Going Long – This term describes a purchasing position, indicating the trader wants to buy a currency pair and sell it later at a higher price to make a profit
Going Short – This term describes a selling position, in which the trader wants to sell a currency pair and buy it later at a higher price. Shorting traders typically anticipate that the price of a given currency pair will decrease in value over time
Exotic Pairs – Exotic currency pairs are simply Forex pairs that do not include a typical combination of major or minor currency pairs. These include HKD/SGD and USD/TRY
Standard Account – A standard type of Forex trading account. Traders usually trade standard lots of 100,000 units of currency (usually dollars) with leverage ratios usually equaling 1:100
No Swap Account – Also called an Islamic account, a no swap account is a Forex trading account for those who can’t pay or receive overnight interest rates
Slippage – The difference between the expected price for a trade and the actual price for a trade when it is executed. Slippage is higher during volatile markets (i.e. lots of buying and selling, which causes prices to fluctuate)
Scalping – A trading strategy focused on making lots of trades during the day and profiting from small price movements on specific currency pairs
Day Trading – A trading strategy where traders close their positions (i.e. sell their currency pairs) at the end of the trading day. Day trading is very common in the Forex market due to the inherent liquidity and volatility of trading national currencies
There are many more important terms than these, of course, but the above are the most important ones to grasp in the short term. Many of the best Forex brokers and trading platforms will offer additional tutorials and vocabulary guides so you can increase your skills as you gain experience.
Choose Your Forex Trading Platform
After familiarizing yourself with the above terms, the next big step is to choose a Forex trading platform or broker.
In a nutshell, a Forex trading platform is a digital dashboard where you can buy and sell currency pairs. Most Forex trading platforms are run by brokers or brokerage agencies; these are the professionals or companies that actually place your buy or sell orders for you. Only licensed individuals can buy or sell currencies or trade on the stock market.
Forex trading platforms, therefore, offer non-licensed individuals the opportunity to trade on the stock market without having to acquire licensure.
What to Look For in a Forex Trading Platform
As you browse different Forex trading platforms, keep these major factors in mind to select a platform that will be beneficial and easy to use:
Fully regulated. Brokers must be regulated with the FCA and CySEC. Any unregulated brokers or trading platforms should be avoided
Has the currency pairs you want. Most Forex trading platforms include major and minor currency pairs. But if you want to trade in exotic currency pairs, make sure your platform offers those trades before putting your money in an account
Has the payment methods you need. Some brokers only support specific payment methods, while others are more flexible
Tight spreads, which affect the commission fees you have to pay. Most of the best Forex platforms have tight spreads by default
Understandable and low commission fees or trading fees. Forex platforms with no commission trades are preferable if you want to make the most money
Good leverage levels. Leveraged trading is riskier, but it’s something you may want to dive into as you become more experienced. In that case, make sure your Forex trader has leverage options that will suit your financial goals
Good customer support. The best Forex brokers will offer 24/7 customer support for a variety of channels, such as live chat and email messages
Top Forex Trading Platforms
Not sure where to start looking for Forex trading platforms? Here are some of the top platforms you can and should check out if you want to get serious about Forex trading.
1. eToro
Thus, you can find successful traders on the social network and then copy their Forex currency pair trades for instant success. While the spreads between asking bid prices are not the lowest on the market, they are relatively competitive and slippage tends to be low.
| Pros | Cons |
| Very fast trade executions. | There are withdrawal fees. |
| Very easy platform to learn Forex trades. | Does not support the MT4 Forex trading platform. |
| Has tutorials and portfolio copying feature. |
67% of all retail investor accounts lose money when trading CFDs with this provider.
2. Forex.com
This professional Forex trading platform includes a variety of charts, research materials, and price indicators to help you make educated choices. It also offers a mobile version of its app, so you can check prices on the fly and execute trades anywhere you are.
| Pros | Cons |
| Has a mobile app and platform. | Minimum Forex trade of $1000 and regular fees. |
| Typically low spreads on Forex trades. | Does not offer negative balance protection on most accounts. |
| Has excellent research resources and charts for professional traders. |
67% of all retail investor accounts lose money when trading CFDs with this provider.
3. Plus500
The platform is also noteworthy for its leverage offerings, which go up to ratios of 30:1. If you qualify for a professional account, you’ll enjoy additional features like excellent charting tools.
| Pros | Cons |
| Has some of the lowest spreads among Forex trading platforms | Does not have many good research or educational tools |
| Has negative balance protection for all accounts | |
| Allows users to trade over 60 Forex pairs |
67% of all retail investor accounts lose money when trading CFDs with this provider.
Types of Forex Trading Platforms
Above, we mentioned “MT4” and Forex trading platforms as if they were separate from the brokerage firms and platforms above. That’s because they are, to an extent.
In today’s Forex trading environment, almost all trading platforms and brokers use the “Metatrader” platform. This is essentially a bit of software that serves as an industry base for brokers and exchanges to congregate and share information quickly and securely.
Think of the Metatrader platforms as digital interfaces that all the brokers use so that trades can be placed accurately and consistently. As a result, most popular Forex brokers use the Metatrader platform.
Metatrader 4 and Metatrader 5 are the two most commonly known and widely used variations of the core platform.
Metatrader 4 or MT4 is a streamlined and easy-to-use platform that’s ideal for new or moderately skilled traders looking for extra tutorial tools. This is considered by many professional Forex traders as the optimal platform through and through.
Many brokerage agencies also use it since MT4 allows workers to place trades through “broker linkages”. This platform is also notable for its advanced charting tools that are designed from the ground up to focus on the global currencies market rather than the broader stock market.
MT5, on the other hand, is a newer version of the Metatrader platform. It includes a variety of extra features and capabilities, such as complex order types, integrations for additional markets like stocks and equities, and more.
As a result, MT5 is more complex than its older cousin. However, note that MT5 doesn’t allow hedging on Forex positions, which MT4 still allows. In general, you’ll be better off picking a Forex trading platform or broker that uses MT4 unless you specifically want to use MT5 and have the experience to know what you’re doing.
Types of Forex Trading Accounts
Above, we also mentioned that different trading platforms offered special types of “Forex accounts”. These account types are designed for different users or financial strategies.
There are three main types of Forex accounts:
Standard accounts are the most basic type and allow Forex traders to trade lots equivalent to 100,000 currency units or dollars. In most cases, these will serve you just fine if you are just starting out with Forex trading and want to learn the ropes before branching out into different account types
Mini accounts let you trade Forex in “mini” lots, which include denominations of 10,000 monetary units or $10,000
Professional Forex accounts are designed for professional traders and will likely not be of use to you until you have plenty of experience. These accounts usually demand high initial account balances, like $50,000 or $500,000, but often include additional tools or chart information.
Again, standard accounts are best for most folks. If you are skilled and wealthy enough to use a professional Forex trading account, you’re more likely to be a Forex broker yourself!
Forex Trading Strategies
After you’ve familiarized yourself with Forex terms and selected a Forex brokerage or platform, you’ll next need to figure out a basic strategy. It’s never a good idea to simply jump into the Forex market and place money on the first currency pairs you find (even if you plan to use eToro’s portfolio matching feature).
Having a clear system or plan in place is key to ensure you don’t lose your money. However, Forex trading strategies are complex and necessarily individual; no single trading style or strategy fits every trader.
Here’s how you can break down a basic strategy even if you’re a newcomer to Forex trading.
STEP 1: Create a Trading Timeframe
First, consider when and how often you’ll be actively making trades, such as by placing buy and sell orders. If you plan to look at the charts daily and want to open positions each day and close them before market close, you’ll need to practice day trading strategies.
If you want long-term gains, you’ll practice a long-term strategy involving purchasing or selling currency pairs for longer periods of time. In this case, you’ll be a “swing trader”.
STEP 2: Decide on Risk Levels (and Entry/Exit Points)
The most important thing to decide of all is your personal risk level. Forex trading is volatile by its very nature, at least compared to typical stock market trading. You need to decide how much risk you are comfortable with, as it’s your money on the line.
To do this, figure out your entry and exit points. An entry point is a price at which you enter a Forex currency pair trading position. For example, say that your entry point is investing $1000 into the Forex market.
Your exit point is a financial goal you hope to reach through your positions or a point at which you decide to cut your losses. It’s never a good idea to ride losses all the way down to bankrupting your account.
The most successful Forex and stock traders always have an exit point planned if things don’t go correctly. By cutting your losses, you’ll lose less money over a bad trading period and save your finances in the long run.
Similarly, having an exit point planned if things go well is great to prevent yourself from getting overconfident and losing your money if the market suddenly downswings. Don’t get greedy when “chasing profits”.
Bottom line: have both entry and exit points planned that suit your personal risk level.
STEP 3: Use Your Charts/Technical Indicators
Every broker or trading platform you try out will have various charts and technical indicators to help you form your strategy and help you determine whether you think a currency pair will go up in value or down in value.
Use those charts! They are the best way to get real information about currency pairs and prevent you from following your gut too closely.
STEP 4: Do Your Research (Due Diligence)
Don’t be afraid of doing research (often called due diligence in stock market or Forex trading spheres). This involves researching currency patterns, price trends, and even national news so you can make better predictions and see more success over your Forex trading.
STEP 5: Practice on Niche Pairs
In general, it’s better for beginners to Forex trading to focus on a few pairs of currencies rather than spread their portfolios out too far. As you learn how one pair of currencies performs over the long term, you’ll eventually be able to take those lessons to other currency pairs and diversify your portfolio.
STEP 6: Expand Your Skills
Lastly, take what you’ve learned and start expanding your strategies and skills for future success. The great news about Forex trading is that it becomes easier as you get better at reading charts and making predictions.
Remember: the best Forex traders started where you are now. Successful Forex trading is possible for everyone if they put in the time and effort.
STEP 7: Make a Trade
At this point, you can finally make a trade! Choose your Forex pair, set your stop-loss limits, and go for it!
Trading Forex Charts Overview
While we described several excellent Forex trading strategies above, you won’t really understand how these strategies will play out or be able to leverage your broker or trading platform fully until you understand Forex charts.
Whether you trade Forex currencies, stocks, or some other financial asset, charts are incredibly important when planning your moves. If you learn to read charts, you’ll have a much higher chance of making money consistently and seeing trading success.
In a nutshell, Forex trading charts show you how different currency pairs or the broader currency market are performing. Most charts allow you to see market history up to weeks, months, or even years in the past. Here are some of the most common Forex price charts you should familiarize yourself with.
Price Charts
Forex price charts are the most common in Forex trading. They depict the performance of a single currency pair over whatever period of time you desire. Most price charts have a few parameters that determine what data they will depict, including:
- The trading pair you want to monitor
- The exchange rate or price of the currency pair
- The length of time on the exchange that the trading pair has been recorded for
The x-axis will tell you the start date for when data recording begins and an end date for when the data ends, usually the present state. The y-axis, on the other hand, shows you a scale of the prices that the trading pair reached in the past. Higher prices indicate more value and lower prices indicate lower value.
These basic charts form the cornerstone of all Forex trading analyses. They can tell you whether a Forex currency pair is trending upward (slowly gaining in value over time irrespective of daily dips and rises) or trending downward (slowly losing in value).
Candlestick Charts
Forex traders also often utilize so-called candlestick charts. These charts show how a currency pair performs over time through “candlesticks” which are visual representations of currency pair price movements. They summarize the currency pair’s opening price, closing price, and how much the price increased or decreased relative to the currency pair’s previous closing price.
It’s a little more complicated than the basic price chart described above, but it can help you see how much volatility a currency pair typically has over the course of a trading day. When set up next to one another, the candlesticks on a candlestick chart can also look like a typical pricing chart, showing the either upward or downward trend of a Forex currency pair.
Line Charts
Line charts are, in some ways, simpler to understand than candlestick charts. These offer preliminary overviews for rudimentary price action.
In short, line charts are line graphs that show the price movement of a given currency pair. The x-axis again serves as a time of measurement range in the y-axis shows you the price movements that a currency pair underwent.
All in all, learning how to accurately read Forex currency charts is the best way to make sure that your Forex trading is successful in the long term. Fortunately, many of the platforms and brokerages described above have tutorials to break down these currency charts in more detail.
Tips for Trading Forex
Trading Forex skillfully and successfully takes a lot of time and experience. But we can help jumpstart the process by giving you some key tips we heavily recommend you follow at all times.
Never Get Emotional
As with trading on any market, try to avoid getting emotional. Once you put your money into the Forex market, assume that it is gone until you withdraw it and you see it in your bank account again.
Forex or stock market trading is not really gambling, but thinking of your money this way will prevent you from making emotional decisions, like quitting your strategy when your chosen currency pair dips in value for a day.
Use Stop-Loss Controls
Almost every brokerage or trading platform has stop-loss controls. Use them! These controls of the best ways to avoid losing too much money if you have to step away from the computer or if sudden, unpredictable market events cause your positions to go south.
Avoid Leverage if You’re New
New Forex traders should never use leverage when making trades. It’s simply too risky, and new traders don’t have the experience necessary to know what separates a good trade from about one.
Don’t Rush Into Trades
Similarly, take your time before placing your first Forex buy or sell orders. Do not rush into trades based on Internet memes or artificial hype. Develop a solid, steady strategy to see the best results.
Start Following the News
You’ll be able to make more accurate positions regarding Forex currency pair movements if you follow national and global news. Big world events are easy to learn about if you subscribe to a few newsletters or simply check popular Internet news websites.
Stick to Successful Strategies
Once you have a successful strategy that is providing excellent returns, don’t leave it for the next new hot get rich quick tip or strategy. The strategies that work for you will not necessarily be the same as those that work for other successful traders.
Find a winning strategy and stick to it at all costs. Fickle, wishy-washy traders usually lose money in the long run on Forex and stock markets.
Conclusion
Ultimately, Forex trading is accessible for everyone. But successful Forex trading will only be within reach if you do your research, go over this guide thoroughly, and make use of all the resources available to you.
Once you sign up for your Forex trading platform of choice, be sure to use its tutorials and leverage its charts and other research tools extensively. The best Forex traders don’t make their decisions based on gut instinct. They do their due diligence, have solid strategies in place, and control their emotions.
Be sure to check out some of the Forex trading platforms we described earlier. Good luck!
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Forex Trading FAQs
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2021-06-25 19:38:48Z
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