Forex Trading for Beginners 2020 – The Basics Explained

Forex Trading for Beginners

Forex is shorthand for foreign exchange and allows beginners and advanced traders to trade in various currency pairs through financial markets.

Here, then, is our forex for beginners’ survival guide. Mainly, trading forex takes advantage of fluctuating currency exchange rates to make a profit. The good news is that there are many ways into the forex marketplace.

In this forex guide, we will use the term forex, interchangeably with the forex exchange market and the initials, FX.

So, let’s dive in. Forex is massive; each day in the region of $5.1 trillion is traded. Currencies are paired together in trades, for instance, EUR USD, AUD USD, etc. As money is a very liquid commodity, there is a high volume of traffic. You are unlikely to be stuck with currency and have to wait to sell at the right price. However, ensure that you check the economic calendar to understand how, when, and why. 

Forex Trading for Beginners

Forex Trading for Beginners

Beginners should bear in mind that trading forex is global, so there will almost always be a market open somewhere, but the time od the market changes which currency pairs are active at the time. There are also many different types of forex market. Spot markets, for example, deal only in cash trades, while derivatives exchanges buy and sell options, currency swaps, forwards, and futures. All of them have the same basic principle, though, of buying and selling, whether that is short or long term. 

Forex Trading can be daunting. But they are many motivations for getting involved to trade forex.

Among these reasons are the need to diversify a portfolio, a fact of life that should concern every forex beginner. Forex can also be utilized as a hedge against risks such as international currency or interest rates.

 

Basic Forex Terminology

If you are a complete beginner, there are likely to be a lot of terms that you see bandied around that you will be unfamiliar with. This section will run over some of the most common phrases and words that you will see, and give you a brief explanation of them. 

  • Foreign Exchange Market. – The Foreign exchange market is the full description of Forex, and a global term used for exchanging currencies. 
  • Forex Traders. – A forex trader is a person who trades currency pairs with their own trading strategies. 
  • Trading Forex. – Trading forex is the action that traders take.
  • Technical Analysis. – Technical analysis is looking into the technical aspect of trading any currency pair to build a trading strategy. 
  • Base Currency. – The base currency is the first shown currency in a currency pair.
  • Exchange Rate. – You will see the exchange rate everywhere. It is the rate at which you can exchange a base currency with the secondary. 
  • Real-Time Trading. – Real-time trading is as it sounds; it is when the trading platform, such as MetaTrader 4, updates within a second or so of the real rate. 
  • Trading Strategy. – A trading strategy is what you create using a demo account to ensure that you make a profit from the exchange. 
  • Demo Account. – A demo is like trading for real, on a trading platform, but there is no real money involved. 
  • Trading Day. – Trading days are the days that the particular stock exchange is open; usually Monday to Friday.
  • Trading Account. – Like a demo account, but a trading account uses real money.
  • Meta Trader 4. – When you trade Forex, you need trading platforms to use. The most common and well known of those is Metatrader 4. 
  • Price Action. – This involves analyzing all of the sellers and buyers that are active in the market. 
  • Long position. – A long position is the name of a trade where a trader aims to buy a currency at a price, and then sell it at a higher price. 
  • Risk Management. – There is a lot involved in risk management, but the aim is to lower your risks when you trade forex. 
  • Second Currency. – The secondary currency is the quote currency in a pair. For example, in GBP/USD, USD would be the secondary currency. 
  • Risk Warning. – A statement telling you that there is a high risk of losing money when you buy or sell. All trading comes with a high risk of losing your money. 
  • Cross Currency. – A cross currency pair is one that does not involve the USD. 
  • Swing Trading. – Swing trading involves more liquidity and volatility so there is the possibility to gain profit in short times, many of which are around five days. 

 

Forex Trading explained

While we may see forex as no place for novices, but rather the preserve of multinational corporations and countries, nothing could be further from the truth.

However, a little background is useful. Modern-day trading between countries or by consumers across international borders involves the exchange of one currency for another, also known as currency pairs. And if you have traveled abroad, you will be familiar with the need to have local currency in your wallet. Regardless if you are a country, a company, or an individual, you will have used the foreign exchange market.

The forex market operates, not in a centralized exchange, but across computer networks in individual trades between dealers or brokers. Called over the counter trades (OTC), there is no central clearing house as such. Instead, the forex is a series of networks that operate 24 hours a day, five and a half days per week.

These networks are based in a series of major cities that stretch from Paris to Hong Kong and Sydney. As one market closes, another opens its doors, so forex trading for newcomers will involve juggling time zones. Trading occurs around the clock, with prices constantly changing, allowing even forex beginners to take advantage of price fluctuations within those currency pairs.

While stock markets have been established for hundreds of years, the modern market is a relative newcomer. It has only been around since 1971 as a result of an agreement to allow currencies to fluctuate valuations freely. Until then, exchange rates were pre-set, and it was impossible to turn a profit trading currency.

Fast-forward to today, and there are a diversity of services for currency traders, even total forex beginners. We will now look at the various kinds of forex markets.

 

Forex Trading Strategies

There are so many Forex trading strategies that you can use that it would be pointless to write them all into this article. However, the idea of all of them is to take the exchange rate into account and attempt to make money through Forex brokers on the trading platform that suits you the best. There are also many trading platforms that you have the option of, but as the markets are what they are, the trading strategies will work, or not, on all of the trading platforms in the same way. Take the time to learn all of the trading strategies that you can before you start trading. Otherwise, you are likely to take the high risk and that’s likely to be one you cannot afford to take. 

 

What is a forex spot market?

The largest forex market is the spot market. The spot market deals in actual hard currency and forms the basis for other markets like the futures and forwards markets.

Individual traders, as well as novices, and beginners, will trade here. You use a forex broker for spot market trading. There are many around, with trade on the spot market now being incredibly dynamic.

As its name suggests, the spot market buys and sells currencies at their current price, the valuation placed on a currency by supply and demand. Spot markets are fuelled by factors such as financial news, interest, and guesswork as to the future. Trades in this market are called ‘spot deals.’ Deals are made in electronic cash, with each side exchanging an agreed amount of currency.

Unlike the spot market, forwards markets do not trade actual currencies but rather their relative valuations in the future. Contracts specify the currency, the rate, and date when the deal will be settled.

Meanwhile, the futures market is the third kind of forex market, which forex beginners should have some awareness. The trade here is not in currency either but futures contracts. They are traded on commodities markets, including the Chicago Mercantile Exchange.

Being contracts, the trades in this forex market are not flexible and are binding on details such as size and settlement date. The only movement that is allowable is to specified price increments.

Contracts can either be cashed in when they expire or sold on before the expiry date. Forex beginners should probably leave the futures markets alone until they have a good understanding of how it works. However, the markets in forwards and futures can shield a trader from risk when transacting currency exchanges.

The forex market is nothing if not dynamic. Relative values of currencies are continually shifting. Savvy FX traders, or forex beginners, can take advantage of these fluctuations to make a profit.

The keys to success are indisputably knowledge and information, whether you are an experienced trader or novice Forex trader. A whole host of factors have to be weighed up, including interest, trade outlooks, economic strength, and trade forecasts. Getting the timing of a trade correct is crucial if you wish to make a fast profit by buying one currency and paying with a different currency. Profits are made via the ‘carry trade.’ That means shorting one currency with a low-interest rate and buying another with a high-interest rate.

Potentially, these trades can be highly profitable, but only if you know what you are doing. Forex beginners should shy away from these deals initially as losses can be as significant as profits.

 

What are Currency Pairs?

Currency pairs are a pair of currencies that you can trade between. All Forex brokers use the U S Dollar as the main currency to either buy or sell, no matter what trading strategy you use on the trading platform. For example, the largest major currency pairs on the market are the EUR USD pair, USD JPY, and USD CAD. However, currency pairs are often described as the price quote of those currencies against each other whether that is USD/CAD, or involving other currencies such as the Japanese Yen. 

The first currency listed in any currency pair is the base, often the U S Dollar, and the second is the quote. The prices are what varies between the two, and it is picking a time to make a trade that is the idea of Forex trading. The way that you see the currency pair will determine the price that you need to pay, in one currency, for one unit of the other currency. For example, if you see EUR/USD = 1.2513, you need to pay one euro (EUR) to get 1.2513 USD. 

Currency Pairs

Currency Trading info

Pre-internet it was for individuals to trade in foreign currency pairs. It demanded a hefty amount of money and was only conducted by big corporations or hedge fund managers.

Today, the landscape has changed dramatically. Individuals and even forex newbies can get a slice of the action for relatively modest amounts of capital.

An entire ecosystem has evolved to help small individual traders, often with high levels of leverage. This means taking out a loan, so you don’t have to commit your cash to make a trade. This is the most common route into the forex market for beginners and small investors.

Currency Trading

This activity by traders and forex novices has helped make forex trading a burgeoning market. What is driving this growth is the number of very active traders entering the market, the increasing number of small investors, and the rising importance of retaining foreign currency as an asset. Thanks to electronic trading, too, the path was laid for forex beginners to participate in this market.

 

Role of the Central Banks

Central banks like stability, so it is inevitable that they wish to have a measure of control over their currencies. They strive to influence on the forex market to avoid dramatic volatility that can impinge on their domestic financial objectives such as interest rates and inflation, etc. Using their vast national reserves of currency, they will act, with varying degrees of success, where necessary to ensure the stability of their money.

Traders, and especially forex beginners, should be aware of the banks’ motivations and keep these in mind. Even a rumor concerning a central bank taking action can be enough to nudge their currency in the right direction of travel within currency pairs such as EUR/USD. Tales, though, are frequently followed by action, sometimes many times a year. So traders and forex beginners should always factor banks into their calculations.

 

Other Forex market considerations

In much the same way as a central bank, a change in government fiscal policy can exert a pull on the forex marketplace. A growing budget deficit, for instance, can cause a currency to lose value. The opposite is true if a budget deficit shrinks. Likewise, the balance of trade between the two countries can affect the relative valuations of their respective currencies. So, too, will the overall health of their economies.

 

What are the risks involved in Forex trading?

Knowing the risk is the number one priority for all forex traders. But none more so than for beginners as it can be somewhat of a jungle for the unwary.

The interbank market – the market for banks – is not wholly regulated or standardized. In some countries, for example, there is no regulation of forex trading for beginners. But when banks trade, they factor in risk and mitigate against, something that is not available to small investors. Unsurprisingly, the banks have agreed on industry standards for trading.

But none of the bank safeguards apply to the individual trader. For solo trader and Forex beginners learning the ropes, the danger is substantial. The onus is on the individual forex trader to do their homework about the regulation in the countries with whom they trade.

Brokers, meanwhile, are also not entirely trustworthy; some have even been known to trade against their customers. Do check the reputation of any broker you plan to use. The US and the UK regulate their forex brokers, but the same cannot be said of other countries where there is little or no regulation. It is up to forex novices and all other traders to carry out their due diligence and establish the protections on offer, as there is always a risk of losing your money. Therefore, it is wise to consider whether you understand the risks, and only trade what you can afford to take a loss of. 

 

Pros and cons of Forex Trading for Beginners?

The big plus of the forex markets is their size. You can trade wherever and whenever you want via the internet. The liquidity of the marketplace also guarantees there is no shortage of buyers and sellers. This liquidity also makes it easy for forex beginners to enter the market quickly and get back out again to back quick profits on even small currency pair fluctuations.

On the downside, forex brokers enable a high level of leverage in trading. While this may appear a great idea, it can often lead to unwary traders, particularly those new to forex trading, overextending their credit. The result is they have borrowed so much money, and they run out of cash. Buyer beware, for sure, where high leverage levels are concerned.

Forex for beginners means possessing the necessary knowledge and understanding to interpret economic conditions in several different countries. The effective and much risk-prone trader will be able to comprehend indices and other fundamentals that can play a part in affecting a currency’s value. Forex trading is not something you go into to wing it and learn on the job.

 

Our Beginners recommendations

Trading courses are one of the best ways in which you can learn Forex trading strategies for all major currency pairs from many different forex traders. Ensure that you learn forex in as much detail as you can. Furthermore, remember to take time to look through the economic calendar, and take note of other pairs such as USD/JPY. Learning the fundamental analysis basics of buying and selling a wide range of trading currencies will help you to trade the Forex market. 

Start small with modest sums that you can afford to lose. Furthermore, use a common currency pair such as the EUR/USD. Forex is easy to get into, so don’t be too ambitious, to begin with, and learn the basics. Do not take the high risk of losing money, get a trading strategy before you start trading! 

It is possible to start trading with small amounts, part of the reason why there is so much activity in terms of forex day trading. So, too, with swing trading where you hold a position for several days to benefit from currency fluctuations.

But forex trading is about more than hit and run trading. If you can take a longer-term view and the money to back it up, long term investing is available too. In these circumstances, traders will need to have a firm grasp of the foreign markets and currencies.

Forex Trading For Beginners

 

Conclusion

Forex newbies should find a reputable broker to do the heavy lifting. Find a broker that is regulated and has a proven track record stretching back at least five years.

A reputable broker will follow government regulations to the letter and be happy to do so. Once you have found your broker, open an account, download a trading platform and start with baby steps at the beginning. Don’t put your shirt on the line until you fully understand what you are doing.

If you are new to forex trading, your number one priority should be to educate yourself about the forex marketplace. The phrase, knowledge is power, has never been more apt. For this purpose we wrote an additional article about the Best Forex Book for Beginners.

 

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