How to Trade Forex for Beginners

Even for seasoned traders, trading forex is quite difficult because of the emotions involved in trading aside from unexpected market volatility. To be successful in this field of investment, the trader must be prepared for whatever the market throws at them.

This guide is for forex newcomers who want to learn more about how forex trading works and how they could capitalize on this opportunity. We will be teaching the basic terms, how to choose your ideal broker, and we’ll be giving tips on how to trade like a professional.

Different terminologies encountered when trading forex

#1: CFD

CFD is an abbreviation for Contract for Difference. This contract for difference enables investors and traders to profit from the directional movement of an asset. They would consequently earn or lose the difference of the contract cost from the beginning of the trade up to when the trade is closed.

Purchasing a CFD does not entitle the buyer to direct ownership of the asset, but in return, there are numerous benefits in trading this derivative. These benefits include flexible lot sizes, greater leverage opportunity, lower trading costs, and no expiry dates. Clients can choose to go long or short on a trade with CFDs depending on their directional bias.

CFDs come in many forms, such as CFDs for stocks, commodities, forex, and indices. Forex CFDs function much like regular currency pairs and, as mentioned, are tradeable with higher leverage most of the time. Forex CFDs, like other CFDs, are available whenever their base asset is tradeable in the market. Since forex trading is available 24 hours a day, five and a half days a week, CFD forex pairs are likewise available during this duration.

As previously mentioned, contracts for currency pairs are cheaper than trading regular currency pairs. This is because of the lack of commissions. With CFDs, you will not be paying for opening or closing a trade. Instead, you will be paying in the form of spreads which will be discussed later on.

#2: Leverage

Leverage allows traders access to more capital so that they could earn more, but in return, the risk is also higher. This is especially useful when dealing with currency pairs because of how minuscule the movement of forex pairs is.

With more capital, traders will either be able to trade more of a single currency, or they will be able to trade different assets at the same time. More exposure and diversity are key to being successful in the forex market.

#3: Margin

If margin is available, the trader is able to borrow cash from their broker to use for trading. For every asset offered, there is a margin requirement that the trader must meet to be able to borrow cash.

For example, if the margin requirement is 1%, you would need to set aside $100 to be able to borrow $10,000. Keep in mind that if your portfolio falls a certain amount in which you would not reach the margin requirement, your positions might be liquidated if you can’t provide enough funds.

#4: Pip

A pip is the smallest standardized unit in the world of forex. It stands for “price interest point” or “percentage in point.” This term is widely used in forex and is used to denote the changes or differences in price between the same asset.

The pip is usually the number on the fourth decimal place on a forex pair’s price. For example, if a pip is added to EUR/USD’s price, which is at 1.16789, its price will become 1.16799, and a ten pip increase would result in a price of 1.16889.

The digit that follows the pip is known as the pipette. The pipette is 1/10th the value of a pip and is used to denote an even smaller change in price. This benefits clients as they can monitor even the slightest movement in price. Although this value might seem insignificant, multiple trades that involve multiple pipettes add up to a significant value once you’ve traded for a long time or if you’re taking high-volume trades.

Keep in mind that for currencies that involve the JPY, the pip is located on the second decimal point. For example, a one pip increase of USD/JPY, which is at 109.880, would result in a price of 109.89. In this case, the number after the 2nd digit is the currency’s pipette.

#5: Spread

Spread is an important factor in trading, especially in forex, where prices move in minuscule trends. The spread is essentially the difference in pips between the bid and asks the price of the same asset. If the bid price of EUR/USD is 1.16789 and the asking price is 1.16849, the spread or the difference in pips between the two is 6.

This difference in pips would act as a sort of charge for the trader. To profit from a trade, a trader must have a gain that is bigger than the spread. If they choose to immediately convert their EUR/USD trade again, they will lose 12 pips on the roundtrip trade.

#6: Bullish and Bearish

Bullish and Bearish are both terms used to describe one’s sentiment on a certain asset. The bullish sentiment means that you expect prices to go up while being bearish means that you want to see prices go down. Being bullish on an asset such as EUR/USD means that the trader is bullish on EUR more than USD, or they could even be bearish on USD.

#7: Broker

A broker is your gateway as a forex trader to currency pairs. Through your broker, you can access multiple currency pairs that include major, minor and exotic pairs. These brokers also are the reason why you can use margin and leverage.

Most likely, you will be using an online broker and not a traditional broker. An online broker allows you to adjust your portfolio manually online without the need to have a call with a registered broker. You can even set up your desired margin and leverage as well as the lots you want to trade.

Depending on your broker, you will have access to different features, including charting, research materials, customer support, copy trading, and even trading bots.

Your broker will also automatically determine the spreads of the assets offered based on the asset’s volatility. Through your broker, you might also trade forex derivatives, which will be discussed later.

#8: Exchange

An exchange is where transactions in the market are made. The forex exchange market, in particular, is a decentralized market because instead of one financial hub, it has multiple financial centers through which trades go through. Forex market prices are decided by exchange participants and can be accessed online anytime the market is open.

#9: Spot Forex

Spot Forex involves trading the underlying financial asset or the real forex pair. You will be directly dealing with the price action of your chosen currency. A direct example of this is if you decide to go long on EUR/USD. You will be profiting if EUR/USD’s value goes up.

#10: Derivatives

Derivatives are contracts that heavily value dependent on the price movement of their base asset or underlying financial asset. Forex derivatives such as options, futures, and forward contracts rely on the volatility of their vanilla forex counterparts. These derivatives have a lot of forms and could be traded either bullish or bearish.

#11: Day trading

Day trading is a strategy traders use when they open and close a position on the same day. This type of trading is more popular in forex because of the leverage that traders used and the presence of overnight risk.

Although day trading only provides small gains, it is a consistent method to earn. With the consistency to trade every profitable opportunity, a trader could then compound their gains to achieve bigger portfolios.

#12: Quote, Price, Bid, and Ask

The quote and price are essentially the prices the trades can be entered immediately. Specifically, it could be either the bid and ask prices.

Bid prices showcase a list of all the buyers of a particular asset, while the ask prices are all the pending orders that would want to sell their assets. To immediately buy a forex pair, you must match the asking price, and subsequently, you should match the bid price if you want to sell your asset immediately.

#13: Opening and closing a position

Opening a position means starting a new order or perhaps buy an asset immediately. On the other hand, closing a position means selling your previously bought order to acquire cash in return. Closing a position could either be done to take profits or to cut your losses.

#14: Dovish or Hawkish

Monetary policies are significant, if not the most impactful, piece of news that moves the forex market. These monetary policies aim for one goal, which is to maximize employment while keeping prices stable. These policy changes or even a hint of it from a speech of an important financial or political figure can either be viewed as dovish or hawkish.

Dovish news is pieces of information that want a currency’s interest rate to go lower while hawkish events are pursuing a higher interest rate. Both of these classifications can also be used to describe the members of the FOMC or the Federal Open Market Committee, which consists of members that could either be doves or hawks.

The members of the FOMC are not required to choose a side and may even change their stance depending on the circumstances of the country. Additionally, members may also be centrists or those that do not want to see any significant changes in the monetary policy.

Trading as a beginner – Understanding the basics

Aside from the terms listed above, it is important to know basic trading terms that you can use to avoid entering the wrong position.

Short trades

In forex, a short trade is selling a currency because you expect its price to go below its current price. Although you are selling an asset, you will be earning from the price appreciation of your asset’s pair. 

Long trades

Long trades are more straightforward than short trades. When longing for a currency such as EUR/USD, you are betting that EUR will rise in value more than the USD. You will be profiting from either the price appreciation of EUR or the price depreciation of the USD.

Different charts and how to read them

Traders must be able to read charts to understand the price movement on a daily, weekly, monthly, and even on an intraday basis. Reading charts is one of the most basic and important skills to have as a trader as these charts can tell you where supports and resistances are.

Listed below are the three most popular charts that traders use.

#1: OHLC bar charts

OHLC stands for Open, High, Low, Close. The OHLC bar chart showcases a vertical bar that features a line on both sides. Each bar represents a day, a week, or a month depending on the timeframe you’re using.

Each vertical bar also has a line to the left and right. The line on the left shows the opening price of the asset, and the one on the right represents the closing price. The highest point of the bar is the highest point achieved in your chosen timeframe, while the lowest point is the lowest price on the same timeframe.

#2: Line charts

Line charts are the simplest of all the charts available on any broker. Each point on the chart represents the closing price on your chosen timeframe, and a line connects all of these points.

This kind of chart allows traders to focus on the closing price without considering the volatility experienced in lower time frames. This makes trading simpler and makes your charts look cleaner.

#3: Candlestick charts

Candlestick charts, much like the OHLC bar, show the open, high, low, and close prices of your chosen asset in your chosen timeframe. This kind of chart was first developed and used by the Japanese to plot out the price volatility of rice.

To read each candlestick, you must first notice the color of the body or the box of each candle and the wick or lines that appear above and below the colored body. If the box or body is colored red, it means that the top part of the box is the opening price while the bottom part is the closing price. 

If the box is green, both the opening price and closing price positions are reversed relative to a red candlestick. The prices in which the wicks or lines appear on the candlesticks signify that prices have reached this price level during the same timeframe.

Some traders are candlestick traders. They trade based on the patterns that appear on the formed candlesticks.

How to trade forex

The first step to trading forex is to choose a reputable and transparent broker that you will be working with for a while. We listed a few tips on choosing a broker and trading platform below so that you could get the best broker for you.

Once you have set up your account, you must then deposit funds to your account to start trading. Keep in mind that some brokers have a deposit requirement as well as a trading requirement for you to have access to some of their services.

You could then start trading, but we suggest trying out their demo account first or only risking a portion of your capital to gather some trading experience first. A lot of traders lose money because of the overconfidence they have when they first start trading.

We suggest looking up guides first on how to read charts. Aside from that, being familiar with news articles in the financial world is a plus. Having experience or at least knowledge of some trading strategies will also give you a higher chance of success in this investment. There are tons of trading strategies out there that include the usage of moving averages, pivot points, or even just trading impulsive moves out of market-moving news.

Once you think you’re ready, you could then try to enter your first trade by inputting your ideal buy price for your chosen asset as well as allocation in terms of lots. Your trades, if executed, will appear in your portfolio with their corresponding profit or loss depending on your chosen asset’s price action.

How to choose a forex trading platform for beginners

The client should feel comfortable when using their chosen broker and trading platform because they will be working with it for multiple months or even years. Your chosen platform should live up to today’s standards and should have everything you need to navigate the financial world of forex trading.

Multipurpose charting software is essential to succeed in trading forex. This application, either built-in on your broker’s platform or accessible through third-party downloadable software, should contain important features such as the standard charts, customizable candlestick bars, and a wide array of indicators. Although you might need a few indicators, it is best to test out which works best for you,

Aside from that, your charting software should allow you to draw lines and add annotations to mark important price points with corresponding notes. Your application should also allow you to save your charts so that all your settings and modifications will be saved and would be loaded immediately upon logging in again.

Your platform’s interface must also be easy to use. Customizable and adjustable tabs for your trading tolls are a must so that you get access to everything you need on one screen.

It is a plus if your broker has research materials provided by their in-house market analysts so that you don’t have to do the research yourself. For forex, it is important to analyze the whole market and each individual asset you’re interested in.

Your broker, at the very least, should also publish their opinion on market-moving news. This would allow beginners to learn as to which news updates would show hawkish or dovish sentiment.

Some clients may even opt to choose a broker based on their accessibility to trading bots. Not everyone is built to be a trader, or some might not have the time to execute their trades. To remedy this, they could choose to use trading bots or even copy trade other portfolios. This also opens up more options for diversification and automation.

Tips and tricks for beginners

Beginners need to understand that trading forex is not a get-rich-quick scheme. Forex takes time to master and also execute. Instead of having a really big win, it’s more probable to have consistent small wins that can transform your portfolio into a bigger one.

A lot of people now advocate holding losing trades until they break even or until they become profitable. This usually only leads to more losses. Instead, stop loss points should be set in place to save capital for future profitable trades. Additionally, having a smaller loss is easier to recover from.

To trade better, it is recommended to set your ego aside and trade what the chart or the asset gives you. This means that you shouldn’t force trades, and you should accept your losses. Being wrong in the market is okay but staying wrong is definitely wrong.

When choosing a broker, you should take note of all the assets this broker offers and if it fits your trading profile and trading goals. As a forex trader, you would want to find the major currency pairs in their list of tradable assets. But it is best to also have backup assets to trade, such as stocks and commodities, if there is an obvious and low-risk opportunity that you could take.

Forex traders must also look for brokers that offer up-to-date services such as research materials and as well as an updated economic calendar so you don’t miss a beat. Having access to customizable charts and even a journal is also good to have to take your game to the next level. Being able to capitalize even on the small upgrades to your trading lifestyle could lead to great profits. 

For beginners, we suggest following a few people in the trading scene. These people might include famous traders that you can easily look up on Twitter or on your favorite TV shows. These traders have years of experience that can probably influence your next probable trade.

Reading books about investing and about forex also helps. Not only do they give an idea about market conditions, but occasionally, trading strategies can also be taken away from these books as golden nuggets. If you’re trying to find a new strategy or trying to refine your current one, you can ask the financial community for a book suggestion.

Speaking of communities, a lot of traders are part of trading groups that are either public or private. You can even create a trading group with your friends that you’ve made while trading. With this, you can make each other accountable for each trade the group does, and each one could give their own opinion on how to make these trades better. This group would also function as a support system when you’re in a trading slump to avoid you trading recklessly.

Looking for a mentor is hard and tasking, but it is worth it. Having someone with experience directly guide you on what to do and when to do it is probably the best thing to streamline your learning experience. Doing what the pro does will allow you to pick up on good trading habits that you could use for the rest of your trading career.

Having an edge in the market is the best way a beginner can transition to becoming someone better. An edge is a tool, either physical, digital, or even mental, that you can use to overcome the market’s difficulties. An example of an edge is only trading when you’re not hung up on something. Being able to focus on the task at hand, which is to profit from the market, will allow you to set aside emotions that may otherwise cause you to take unfavorable trades or close good ones.

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