What is forex trading? Trading for beginners

Foreign exchange trading, also known as forex, FX or currency trading, is a type of financial activity where individuals, businesses, and financial institutions buy and sell currencies from around the globe.

Investors trade forex across what experts consider to be the largest, most liquid market in the world. Forex average daily trading volumes exceeded $6.6 trillion in 2019, according to data from the Bank of International Settlements. How can beginners to forex trading best launch themselves into one of the most fast-paced markets available?

In this guide, learn the forex trading essentials, including:

  • What is the forex market?
  • What is forex trading?
  • Forex trading for beginners: how to get started
  • What forex terminology do I need to know?
  • What are forex pairs?
  • How does forex trading work?
  • The pros and cons of forex trading
  • How do you start trading forex?
  • What are forex trading platforms?
  • What are the most common ways to trade forex?
  • What is forex trading best practice?

Read on to take a closer look at forex trading and discover exciting opportunities that are tough to find with other investments.

What is the Forex Market?

The forex market is a financial market dedicated to the buying and selling of currencies from around the world. People use these markets to access currencies other than that used in their home territory. They then use this money to purchase goods or services in other countries where their own currency is not accepted.
If you've ever travelled overseas, you've made a transaction on the forex market. Take a trip to France and you convert your pound sterling into euros. Head to New York and it's sterling for US dollars, while in Japan it's Yen. These are all known as currency pairs.
Wherever you visit, the exchange rate between the currency pair determines how much foreign currency you get for your pounds. This exchange rate fluctuates continuously due to factors including supply, demand, and economic and political events.

A single pound on Monday could get you 1.19 euros. On Tuesday, 1.20 euros. This tiny 0.84% change may not seem important. In the business world, the forex trading stakes are even higher. Take a large, international company that needs to pay thousands of its overseas employees – costing £10,000,000 over the year, say. If sterling's value decreases by 0.84%, that would add £84,000 to its annual wage cost – capital that would be better used to hire more staff, buy new machinery, or expand into new markets.
That one euro cent change quickly adds up. In both cases, you – as a traveller or a business owner – may want to hold your money until the forex trading exchange rate is more favourable.

Past Performance: Past Performance is not an indicator of future results.

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What is forex trading?

Since the values of foreign currencies change, it's possible to make money trading forex. Currencies can be bought when they are cheap and sold when they increase in value. Or you can predict whether currencies will go up or down in value, making money when they do (and losing it when they don't).

Forex trading takes place across two levels:

  • Interbank market – This is where banks and financial institutions trade forex between themselves on behalf of their clients, either to speculate on their changing value or, in the case of central banks, as a means of controlling their currency's exchange rate.
  • Over-the-counter (OTC) market – This is where individuals speculate on the movements in currency values via brokers and online trading platforms. These markets typically feature trades not available on the interbank market or are derivatives that do not involve owning or borrowing the currencies themselves (such as CFDs or forex futures).

You can trade forex in the OTC market via a computer with an internet connection, using a forex broker to access the market. But how can beginners enter the forex market in the best possible way?

Forex trading for beginners: how to get started

If you're a beginner at forex trading, you need to educate yourself on the subject well before you make your first trade.
You should fully understand what forex is, what forex trading is, how it works, how to read a quote, how to make a trade, understand leverage, develop a trading strategy, and place orders upon the market. If you don't, you'll magnify your risk of losing money.

Boost your forex IQ with our free, in-depth forex trading training guide below. But don't let your education stop there. Be sure to attend our free morning webinars with Senior Market Specialist Russell Shor, who's to help you enhance your skills and learn about major economic events around the world.

FXCM offers a variety of webinar types, each designed to cater to your trading needs. Daily entries cover the fundamental market drivers of the German, London and New York sessions. In addition, a library of past recordings and guest speakers is available to access at your leisure in FXCM's free online classroom.

Learn to trade forex then get started below.
Learn how to trade forex
Join our live forex webinars
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What forex terminology do I need to know?

To learn to trade forex, it pays to have a sound understanding of the terms and terminology used by the experts.

  • Position – Your forex trading position is the amount of money you have exposed to the market and whether you think it will go up or down in value over a period. If you think its value will rise, you will 'go long'. Fall, and you 'go short'. You choose when to close your position, taking your winnings or cutting your losses.
  • Leverage – When you trade forex, you effectively borrow the first currency in the pair to buy or sell the second. Given the liquidity of the forex trading market is so deep, liquidity providers – big banks, essentially – let you trade with leverage, which is expressed as a ratio.
    If you're trading 200:1 leverage, for example, you can trade £2,000 in the market while only setting aside £10 in margin in your trading account. For 50:1 leverage, the same trade size would still only require about £40 in margin.
    This gives you much more exposure to the forex market while keeping your capital investment down. However, if your forex trading positions fail, you can be liable to pay back a much larger amount than what you put in. This is what makes forex trading potentially risky.
  • Margins – The minimum amount you need to pay to open a position. Margins give forex traders the ability to control positions much larger than their capital reserves. Margin requirements vary according to currency pair and market conditions. During times of extreme exchange rate volatility, brokers might increase the margin requirement of relevant currency pairs.
    To better understand the size of margins, use our free margin calculator.
  • Pips – A point-in-percentage, or 'pip', is the minimum price movement that a currency pair can make. Pips are standardised units that let traders quickly monitor the fluctuations of a currency pair's exchange rate. Most forex pairs are quoted to the fourth decimal place, or 1/10,000, making a pip 0.0001 (apart from when the Japanese yen is the quote currency, whereby a pip is 0.01).
    To work out the value of your pips, be sure to use our pip calculator.
  • Exchange rate – The rate at which one currency can be exchanged for another.
  • Base currency – In a currency pair, the base currency is the one being sold for the other; the first currency named in the pair.
  • Quote currency – In a currency pair, the quote currency is the currency being purchased; the second currency named in the pair.
  • Bid – The price traders or brokers buy a currency pair for.
  • Ask – The price traders or brokers sell a currency pair for.
  • Spread – The difference between the buy and sell prices on a trading platform. The lower the spread, the lower the cost to trade is. Lower spread typically is a symptom of a more liquid forex market. Note that spread of each product varies according to market conditions.
  • Major pairs – These are the most common forex pairs, such as EUR/USD. Their price movements are typically not too volatile, and markets tend to have the highest trading volumes.
  • Exotic pairs – These are the least common currency pairs, such as USD/SEK (Swedish krona). They are much more volatile but see lower trading volumes than major pairs.
  • Stop-limit order – A stop-limit order is an instruction to your broker to close your position once it reaches a certain limit of movement.
  • Stop-loss order – A stop-loss order is an instruction to close your position if your trade is about to make a loss.

What are forex pairs?

Forex pairs, also known as currency pairs, compare the values of two currencies. The first currency (known as the base – the currency being bought) is priced versus the second currency (quote), showing how much you need to pay in the quote currency to buy one base unit. Typically, each currency is named based on its three-letter ISO currency code (such as EUR for euro).

Common forex pairs include euro (EUR) to US dollar (USD), pound sterling (GBP) to euro, and US dollar to Japanese yen (JPY). In the first example, a currency pair might be expressed as 'EUR/USD: 1.01700'. This would mean that one euro is worth 1.01700 dollars.

Listings of forex pairs also show traders the bid and ask prices for the currency pair. These are the prices you must pay to buy or sell the pair respectively.

The bid price is always smaller than the ask price by a few pips, due to platform charges – this difference is called the bid-ask spread. Typically spreads are smaller on pairs with higher trading volumes. EUR/USD spreads are lower than those for JPY/HUF (Hungarian forint), for example. Note that the spread of each currency pair vary according to market conditions.

How does forex trading work?

At its most basic level, Forex trading works by buying currencies when their value is low and selling them when they increase.

This is done electronically over a trading platform. Forex trades can be made remotely worldwide, 24 hours a day, five days a week. Forex markets are open in every time zone, so as one closes, another opens:

  • Pacific session: Sydney, 10:00 PM to 7:00 AM UTC
  • Asian session: Tokyo, 12:00 AM to 9:00 AM UTC
  • European session: London, 8:00 AM to 5:00 PM UTC
  • American session: New York, 1:00 PM to 10:00 PM UTC

Whenever a trader sends an order to the forex market, brokers facilitate the transaction by extending margin. This allows the trader to open new positions far greater than the capital they have at hand to profit from beneficial increases or decreases in price. However, pricing volatility can pose the risk of rapid, significant loss.

To complete each forex trade, the market's technological infrastructure matches contradictory orders from market makers, individual traders, and other liquidity providers.

There are three ways that forex is most traded:

  • Spot market trades – The spot market is the main forex market that sees traders trading currencies over-the-counter (OTC) for real-time prices based on current supply and demand.
  • Futures market trades – This speculative trade sees traders enter contracts with one another to buy or sell forex at a specified exchange rate on a specific date. Futures trades are typically performed on a public exchange, for example, {suggest to list a UK exchange}. This benefits buyers if the seller agrees to sell at a rate that ends up lower than the future exchange rate, and vice versa.
  • Forward market trades – Forward market trades are the same as futures trades, except they are traded privately in an OTC market. That means they are less regulated and customisable. Non-deliverable forwards (NFDs) are a common type of forward market trade.

Note that FXCM only offers leveraged spot Forex trading.

What are the pros and cons of forex trading?

Forex markets feature a unique collection of pros and cons. For any aspiring forex trader, it's important to conduct adequate due diligence and decide if forex trading is suitable for you before you begin.

The pros of forex trading

  • High accessibility – Forex trades can be done from anywhere via an online platform. Signing up takes only a day or two, and the market is open 24 hours a day, five days a week. What's more, forex trading only really requires technical analysis of historical price moves, not the in-depth fundamentals and financial analysis required of shares traders.
  • Low capital requirements – If you want to start trading forex, the availability of leverage means you can start speculating with many times more than your initial margin.
  • Low operational costs – Trading forex typically means you'll be exposed to fewer fees and commissions compared to other types of investing.
  • Consistent depth and liquidity – Forex is the world's largest marketplace. This means that consistent depth and liquidity are all but assured, so you can trade whenever you want.
  • Diverse array of products – As a mature OTC market, there are plenty of different forex products you can choose from. This provides a great amount of strategic freedom.

The cons of forex trading

  • Need for discipline – Given the availability of enhanced leverage and abundance of trading options, forex traders' discipline is frequently tested. It's important to have the right mindset and attitude to risk so you don't get carried away.
  • Pricing volatility – Changes in pricing can be swift and dramatic, posing the risk of rapid, significant losses.
  • An ever-changing market – Past performance is not indicative of future results; forex trading is always changing, emphasizing the need for sound strategy and strong risk management.

Learn more about the pros and cons of forex trading.

How do you start trading forex?

If you've done your research and understand the fundamentals of trading forex, it's easy to start:

Step one: open an account
Open an account with a forex broker, inputting your personal details. It will take anywhere between one to three days to get fully set up and ready to trade.

Step two: pick a pair
Select a currency pair that you would like to trade: a major pair like EUR/USD or an exotic pair like JPY/SEK.

Step three: set your orders
Choose whether you wish to place stop or limit orders on your trade.

Step four: keep an eye on your position
Using trading tools, monitor the movement in your currency pair's price. In doing so, you can sell or buy at the correct time.

Step five: close your position
When the time is right, close your forex trade, and realising your profits or losses.

What are forex trading platforms?

The forex trading platform is the trader's window to the world's currency marketplace. To be effective, your trading platform must be up to the many challenges of the live forex market.

At FXCM, we offer a collection of capable and reliable forex trading platforms, each with unique features and functionalities.

Our flagship platform, Trading Station gives you everything you need to execute trades, perform in-depth technical analysis, and access your account wherever and whenever you need to.

We also support the industry-standard MetaTrader 4 (MT4) software and assorted speciality platforms. So, no matter what your approach to forex trading may be, rest assured that FXCM has your needs covered.

Explore our platforms

What are the most common ways to trade forex?

Unsure which strategies to use when learning how to trade forex? There are four main ways traders make money:

  • Day trading – Short-term day trading involves starting and completing a single position within a day. It's a straightforward way to trade, giving you lots of time and mental breadth to research and monitor a trade before closing your position in time. Read our guide to forex day trading.
  • Position trading – This long-term forex trade involves holding onto a pair for a prolonged period, waiting until it reaches a certain price level weeks or months into the future. It's great if you don't have plenty of time to spare or want to trade based on larger, long-term economic factors. Learn more about position trading.
  • Swing trading – A medium-term strategy, swing trading involves holding a pair for a few days and selling it when the price swings in a manner consistent with historical price charts and other forms of technical analysis. Find out more about swing trades.
  • Scalping – Scalping involves holding trades for a matter of minutes, profiting a small amount but highly frequently. This form of forex trading requires plenty of time, so suits traders who treat forex as their day job. Learn more about scalping.

What is forex trading best practice?

Unless you're playing the lottery, success isn't an accident. Mastering any discipline takes desire, dedication and skill. Becoming a successful forex trader is no different. To become an expert, there are some key best practices to follow:
Have a plan
The most common attribute among effective forex traders by far is that they have a plan. A trading plan is a structured approach to trade selection, trade management, and risk management. Without this, a trader is likely to flounder in live market conditions.

By incorporating a viable strategy to sound money management principles, a trading plan lets you consistently engage in forex, remove chance and generate statistically verifiable, repeatable results. So how does one build a successful forex trading plan? The answer lies in personal experience, technical analysis and input from market professionals.

Start small
If you're new to forex trading, it's best to start small. Trading lower leverage ensures you have enough capital to become experienced in the market. There's plenty of time to implement higher degrees of leverage once you gain competency and security in the marketplace.

Create objectives
Whenever you make a trade, understand at what price you want to execute your trade, and utilise stop-loss and limit orders to automate your loss prevention and profit taking.

Adopt the right mindset
While there is no exact science of profitable forex trading, establishing good habits regarding risk versus reward, leverage, and timing is a great way to enhance your performance.

In 2015, the team at FXCM conducted an in-depth study of client behaviour and identified three areas where winning traders excelled: cutting losses and letting profits run, using leverage properly, and trading at the right time of the day.

Discover the three traits of successful traders

Choose FXCM and become a forex trading expert

With FXCM, learn to trade forex and raise your trading IQ with expert courses, tutorials, blogs, guides, and expert webinars all readily accessible online 24/7/365. Then, use our trusted platforms to start your trading in the forex market.

Visit our online classroom or start trading with FXCM below. If you have any questions, be sure to visit our help and support hub or chat with a specialist today.

Visit our online classroom

Open your FXCM account today

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Forex Trading For Beginners

The forex market is the largest capital marketplace in the world. Featuring more than $5 trillion in daily turnover, forex is a digital trading venue where speculators, investors and liquidity providers from around the world interact.

For those new to the global currency trade, it is important to build an educational foundation before jumping in with both feet. Understanding the basic points of forex trading is a critical aspect of getting up-to-speed as quickly as possible. It's imperative that you're able to read a quote, quantify leverage and place orders upon the market.

If you are interested in boosting your forex IQ, completing a multi-faceted forex training course is one way to get the job done. To learn more, check out our currency market primer to get on the same page as the forex pros.

Best Practices for Forex Trading

Unless you are playing the lottery, success isn't an accident. Mastering any discipline takes desire, dedication and aptitude. Becoming a winning forex trader is no different. Without the want, will and know-how, your journey into the marketplace is very likely doomed before it begins.

By far, the most common attribute among successful traders is that they have a plan. The trading plan is a structured approach to trade selection, trade management and risk management. Without a plan, a trader is likely to flounder in live market conditions.
Through incorporating a viable strategy to sound money management principles, one is able to consistently engage in forex. In doing so, chance is removed and statistically verifiable, repeatable results are generated. So how does one build a successful trading plan? The answer lies in personal experience and input from market professionals.

Fortunately, some of the differences between successful traders and those who lose money are no longer a secret. Through conducting an intense study of client behaviour, the team at FXCM has identified three areas where winning traders excel. While there is no "holy grail" for profitable forex trading, establishing good habits in regards to risk vs reward, leverage and timing is a great way to enhance your performance.

To learn how successful traders approach the forex, it helps to study their best practices and personal traits. Trading doesn't have to be a mystery—much of the work has already been done for you.

Free Online Forex Trading Courses

One of the advantages of being a modern forex trader is the availability of expert guidance. Internet connectivity and systems technology have brought an abundance of useful information to our fingertips. The only thing needed to raise your trading IQ is a desire to learn. Trading courses, tutorials, blogs, guides and expert webinars are all readily accessible online, 24/7/365.

A webinar is one of the best ways to learn information online. They offer an unparalleled personal learning experience in an exclusive one-on-one format. Attending a webinar is the next best thing to sharing a desk with a forex professional. If you are interested in watching an FX market professional at work, then attending a webinar is a must.

FXCM offers a variety of webinar types, each designed to cater to your trading needs. Daily entries cover the fundamental market drivers of the German, London and New York sessions. In addition, a library of past recordings and guest speakers are available to access at your leisure in FXCM's free, live online classroom.

Disclosure

Leverage: Leverage is a double-edged sword and can dramatically amplify your profits. It can also just as dramatically amplify your losses. Trading foreign exchange/CFDs with any level of leverage may not be suitable for all investors.

Any opinions, news, research, analyses, prices, other information, or links to third-party sites contained on this website are provided on an "as-is" basis, as general market commentary and do not constitute investment advice. The market commentary has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and it is therefore not subject to any prohibition on dealing ahead of dissemination. Although this commentary is not produced by an independent source, FXCM takes all sufficient steps to eliminate or prevent any conflicts of interests arising out of the production and dissemination of this communication. The employees of FXCM commit to acting in the clients' best interests and represent their views without misleading, deceiving, or otherwise impairing the clients' ability to make informed investment decisions. For more information about the FXCM's internal organizational and administrative arrangements for the prevention of conflicts, please refer to the Firms' Managing Conflicts Policy. Please ensure that you read and understand our Full Disclaimer and Liability provision concerning the foregoing Information, which can be accessed here.

Past Performance: Past Performance is not an indicator of future results.

Spreads Widget: When static spreads are displayed, the figures reflect a time-stamped snapshot as of when the market closes. Spreads are variable and are subject to delay. Single Share prices are subject to a 15 minute delay. The spread figures are for informational purposes only. FXCM is not liable for errors, omissions or delays, or for actions relying on this information.

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