Modern forex trading has come a long way in the last few decades. It used to be the playground for banks and institutional investors. Nowadays, this market is truly universal. According to the 2019 Triennial Central Bank Survey by the Bank for International Settlements, the total daily trading volume in forex exceeds $6.6 trillion.
This makes foreign exchange the largest financial market by a mile. As expected, the interest in this instrument has exploded and will continue growing. When done correctly, forex can be a profitable endeavour.
However, it is a career like any other and requires immense dedication, education, and time, especially as a newbie. Let this article be a useful guide in learning how to start forex trading for beginners.
What is forex?
Forex (a portmanteau of foreign exchange) is a decentralized financial market for the trading of fiat currencies. By decentralized, we mean that the trading happens across a distributed network of financial dealers and institutions instead of a central exchange.
The main purpose of forex has always been for individuals and businesses to swap international currencies. For example, if you’re an American in the United Kingdom, you need to convert your US dollars to British pounds.
Alternatively, a UK company doing business in America would require swapping their pounds for US dollars. The examples given above are natural instances of exchange. Forex trading also involves speculation, where analysts buy and sell currency pairs for a profit.
They make decisions using a combination of technical and fundamental analyses determining exchange rates. At the retail or individual level, we trade through a broker. This financial services organization offers investors trading access to the markets on a dedicated platform.
Forex is open 24/5 and is closed on the weekend. The market is divided into four sessions, as illustrated in the image below. A new trading day starts at 17h00 Eastern Standard Time (or 18h00 EST during daylight savings).
We will now dive deeper into the basics of how to do forex trading for beginners.
Forex trading basics for beginners
Here, we’ll cover several key concepts in this section:
Currency pairs
When we observe a forex market, we look at it as a pair of two currencies. The left side of a pair is referred to as the base currency, while the right side is called the quote currency. A pair describes the relationship between how much of the quote you need to receive the base.
Let’s look at the image below.
Here, the price of EUR/USD is 1.14. It means that you need 1.14 US dollars to receive 1 euro. In forex, we have three different kinds of currency pairs:
- Major
- Cross
- Exotic
When you learn forex trading for beginners, the major pairs are the simplest to understand. These are seven selected currencies (AUD, CAD, CHF, EUR, GBP, JPY, NZD) paired against the US dollar:
- AUD/USD (Australian dollar/US dollar)
- EUR/USD (Euro/US dollar)
- GBP/USD (British pound/US dollar)
- NZD/USD (New Zealand dollar/US dollar)
- USD/CAD (US dollar/Canadian dollar)
- USD/CHF (US dollar/Swiss franc)
- USD/JPY (US dollar/Japanese yen)
A cross (or minor) pair is a non-USD instrument consisting of any of the seven major currencies paired with each other. In total, this gives us 22 markets:
- AUD/CAD
- AUD/CHF
- AUD/JPY
- AUD/NZD
- CAD/CHF
- CAD/JPY
- CHF/JPY
- EUR/AUD
- EUR/CAD
- EUR/CHF
- EUR/GBP
- EUR/JPY
- EUR/NZD
- GBP/AUD
- GBP/CAD
- GBP/CHF
- GBP/JPY
- GBP/NZD
- NZD/CAD
- NZD/CHF
- NZD/JPY
An exotic pair is a forex market consisting of an emerging economy tagged with AUD, CAD, CHF, EUR, GBP, JPY, NZD, or USD. Examples of so-called developing currencies include the South African rand (ZAR), Mexican peso (MXN), Turkish lira (TRY), and many others.
Unlike the others, there is a much broader selection of exotics. Here are a few examples:
- USD/ZAR
- GBP/MXN
- EUR/TRY
- USD/TRY
- EUR/ZAR
- EUR/MXN
- USD/MXN
Chart reading
A fundamental skill in learning forex is to understand a price chart. This allows you to read quotes, perform technical analysis and understand order types. We use three basic chart types in forex: bar, line, and Japanese candlesticks.
However, candlesticks are by far the most popular since they are visually aesthetic and the most versatile in representing price movements. Below is a daily EUR/USD candlestick chart from the MetaTrader 4 (MT4) platform:
MT4 is the best forex trading platform for beginners. It’s a super user-friendly platform with a stripped-down interface. Nearly all forex brokers support the software for their clients. Plus, MT4 works with even the oldest computers as it has low system requirements.
The blue-highlighted rectangle shows the time frames, which are different units of time that determine how long price activity has occurred. For instance, a candle on a daily chart takes one day to form. So a daily chart is a representation of all these candles.
Traditionally, we have nine standard time frames (although some advanced platforms can offer more), each of which shows price movements in vastly different ways:
- M1 (1 minute)
- M5 (5 minutes)
- M15 (15 minutes)
- M30 (30 minutes)
- H1 (1 hour)
- H4 (4 hours)
- D1 (daily)
- W1 (weekly
- MN (monthly)
Something else that you should learn about candlesticks is how they represent price. Although there are several patterns or formations that you will learn along the way, each candle gives you four bits of data:
- Open price
- Close price
- High price
- Close price
The picture below shows a basic bullish (in green) and bearish (in red) candle with each price:
Order types
As a trader, you execute your positions on a trading platform using certain orders. We have two kinds of orders:
- Market: This is when you request your broker to place a trade instantly at the current price:
- Pending: This is an order you set to be filled at a later time at a specific price.
We have a minimum of four pending orders: buy stop, sell stop, buy limit and sell limit. You place these based on the direction you want to trade and where you wish to place the order in relation to the current price.
The pictures below give a better demonstration.
There are two other orders to cover that help you manage risk and book profits.
The stop loss (SL) is an order you place to close out your position when it reaches a specific price resulting in a loss. However, traders also use it to take partial profits. The stop loss is the most critical order as it’s the one way to limit losses to a controllable level.
A take profit order (TP) is an order you place to close out your trade when it gets to a specified price in profit. If the market doesn’t reach the SL or TP, neither order gets filled.
Leverage/margin
Another key feature to understand in trading forex for beginners is leverage or margin. This mechanism allows you to ‘gear’ your account by opening a significantly larger trade with a relatively smaller balance.
Forex is currently the most leveraged financial instrument globally. This means that it offers the greatest opportunity to enhance profits (but also the same magnitude to amplify losses). We express leverage according to a ratio, e.g., 1:100.
Let’s demonstrate with a simple example using the picture below.
If your starting balance was $100 and you had 1:100 leverage, you could ‘gear’ your account up to 100 times. In other words, you could open a position worth up to $10 000 ($100 X 100).
You could make a massive profit if the market went in your favour. The opposite is true if the price doesn’t go your way, which can lead to losing an enormous portion of your funds.
Technical/fundamental analysis
Forex trading is about having a game plan or a strategy. Learning about technical and fundamental analysis determines the best forex trading strategies for beginners.
Technical analysis is the study of price by looking at chart patterns and indicators. On the other hand, fundamental analysis looks at the economic and geopolitical drivers behind the movements.
Once traders have observed either or both of these concepts, they make a probabilistic idea of whether a currency pair’s price will go up. If their decision proves correct, they stand to make a profit; the opposite is true if the trade turns out wrong.
Much of this activity is self-directed. The other alternative is to use automated trading through a robot like Galileo FX. It’s excellent forex trading software for beginners and experienced traders who are not interested in getting their hands dirty in the markets.
Most commonly used terminology in forex
As you learn about forex trading for beginners, familiarizing yourself with the vocabulary is essential. This helps you to navigate this often daunting market better.
- Bullish/bearish: In financial markets, we represent buying pressure or buyers as ‘bulls,’ while ’bears’ signify selling pressure or sellers. So, when prices are increasing, the market is bullish; when prices are declining, the market is bearish.
- Day trading: This is a trading strategy where investors trade frequently to capture intraday price movements.
- Long/short: This is another colloquialism used in the financial markets. ‘Long’ or going long means to buy, while ‘short’ or going short means to sell.
- Lot: A lot refers to the size of your position measured according to a certain number of units of the base currency. We generally have three lot types: standard (100 000 units or 1), mini lots (10 000 units or 0.1), and micro lots (1000 units or 0.01).
- Position trading: A trading style where investors hold their positions for several months or longer to profit from long-term price movements.
- Pullback: This term describes a short-lived counter direction to a trend. It is also called a retracement or correction.
- Range: When a forex market is ranging, or in a range, the price is moving ‘sideways’ or not in a defined direction.
- Scalping: A trading style where traders open multiple positions with a quick holding time (a few seconds or minutes) to book tiny profits.
- Spread: The difference between the bid (or buying) and the ask (or selling) of a currency pair. It’s essentially a mark-up or transaction fee you incur each time you execute a position.
- Support/resistance: Support describes a point at which the price falls before moving up (creating a ‘floor’). On the other hand, resistance happens when the price reaches the highest point before it bounces back down (creating a ‘ceiling’).
- Swap (or rollover): This is a small interest that traders pay or get credited with for holding a position overnight.
- Swing trading: A medium-term trading strategy where traders hold their trades for several days or weeks.
- Pip (point in percentage): The smallest measure of change in a currency pair, often to the fourth decimal place. For example, if EUR/USD went from 0.95360 to 0.95460, this would be a 10-pip increase.
- Trend: This describes the prevalence for a currency pair to move in a predominant direction over a certain period. An up or bullish trend describes increasing prices, while a down or bearish trend characterizes decreasing prices.
Conclusion: forex trading tips for beginners to start successfully
The massive financial potential of forex continues to lure many new traders. However, a huge learning curve exists before you can make consistent profits in the markets. As a closer, here are some useful tips to help you get started:
- It’s common knowledge that most traders, especially the inexperienced, can lose a lot of money in forex. So, to prevent this, it’s essential that you get educated. A popular resource with a decent forex trading course for beginners is Babypips.
- Never skip the demo phase until you have mastered your strategy. As a newbie, you may have to spend at least a year using a demo account before you commit to trading with real money.
- When you are ready to go live, start small with disposable funds.
- You should never treat trading as another pastime; take it seriously because it is.
If you prefer not to spend time analysing charts and getting intimidated by the markets, consider Galileo FX to put your trades on autopilot.
