Forex trading is the process of buying and selling currencies to try and make a profit. They are grouped together in currency pairs (such as EUR/USD) and any profit or loss is calculated on the movement of these currencies against one another.
What is the forex market?
This is the world’s biggest financial market, with trading carried out around the globe on a 24/5 basis. In 2019, the total amount traded on the forex market was $6.6 trillion. Among the people who trade foreign currencies are banks, companies and individual traders. They all make trades on the currencies that they predict will move in the right direction to make them a profit.
What is forex trading?
Every currency is given a three-letter code, as shown in the following list. Understand the most important of these codes and you take the first step on how to trade currency.
- GBP – British pound
- USD – US dollar
- EUR - euro
They are then grouped into pairs and each currency pair has a price attached to it.
- The most common combinations when buying and selling currency are known as major currency pairs. These all include the USD, such as the GBP/USD, EUR/USD and USD/JPY pairs.
- Minor currency pairs are strong currencies from stable economies but don’t include the USD. These include GBP/JPY, EUR/GBP and EUR/CHF.
- Exotic pairs are based on one of the most popular currencies and another that is less heavily traded, such as the national currency of an emerging economy. Among these pairs are the likes of USD/RUB, USD/HUF and EUR/TRY.
Is forex trading suitable for beginners?
Newcomers can start off gently, with a low-risk currency pair and strategy. Once you understand the basics, the first step is to choose the currency pair you want to trade. Unless you have some sort of specialist knowledge or relevant information on other currencies, sticking to a major pair is the most sensible move. This is because they are relatively stable and easy to find analysis on.
The next step in forex trading for beginners is to identify a particular currency that you think will rise or fall against another. The factors that influence the value of a national currency include the inflation rate, interest rates, the country’s debt levels and political stability. There are many ways to analyse this situation, from looking at the latest financial news to simply following forex tips from expert traders.
What are forex quotes?
Forex quotes tell you the current price to buy one currency, based on buying it with another currency. It is always expressed as a price quote to buy/sell a particular pair.
If we look at the example of the EUR/USD price, a value of 1.17 tells us that you need $US 1.17 (the quote currency) to buy €1 (the base currency). If you buy at this price, any movement before you sell will lead to you making a profit or loss.
How do I know the spread?
The forex spread is another crucial piece of information. You will always see two prices quoted for a currency. These are:
- The bid price - this is the price at which you can sell the base currency.
- The ask figure - this is the price you pay to buy the base currency.
Calculate the difference between them by subtracting the lower figure from the higher one, to see what the spread is for the pair. The spread varies according to factors such as the market conditions and the currency pair you are trading. The major pairs have narrower spreads, which makes it that bit easier to sell at a profit if there is a small degree of movement in the price.
If we go back to the EUR/USD example, the bid price could be 1.1700 and the ask price 1.1750. This leads to a spread of 50 points. It is also expressed as 50 pips. So, the value needs to move more than this for you to sell at a profit.
What are pips and their value?
The word ‘pip’ is used in forex trading to express the value of a single unit. It is the final decimal point of the quote price, and they are also often called points. If the price of the EUR/USD pair goes from 1,1700 to 1.1701, that is a one pip rise.
What are lots and how do I calculate my risk?
Lots are fixed amounts of currency units in forex trading. You can trade a certain number of lots or choose exactly how many units you want when buying and selling currency. The following terms are widely used:
- Standard lot – 100,000 units
- Mini lot – 10,000 units
- Macro lot – 1,000 lots
- Nano lot – 100 units
This leads us to the question of risk. The more units you buy, the higher the potential return and also the bigger the risk becomes. It is also worth remembering that leverage is used in forex trading. This means that you don’t need to pay for all of the currency you buy. Instead, you pay for a fraction of it, even though the final profit or loss is calculated on the basis of the full lot that you chose.
Set a limit you are willing to risk on each trade. Make this a percentage of your overall account or a monetary amount. Look at the volatility on the trade you are interested in, which is usually expressed in terms of pips.
How does forex trading work?
Every trader needs to choose a currency pair and decide whether to take up a buying or selling position. The former is when you think that the base currency will rise in value. The latter is used when you think that the base currency will fall.
In our EUR/USD example, you would choose to buy if you think the euro will rise, and sell if you believe the dollar will go up. How does forex trading work in terms of getting the timing right? Like any form of trading, the key is in buying and selling at the right time.
How to place forex market orders
Place your order and it will be carried out right away, at the stated price. However, it is a good idea to use stop orders and limit orders, to ensure that you buy and sell at the right times.
- A stop order - this is something you place when you only want to buy or sell at a specific price, or better. You want to buy below the current price, or sell above it.
- A limit order - this specifies the maximum or minimum price that you want to buy or sell at. This is done when you buy above the market price or sell below it.
- While a limit order is used to achieve a profit objective, a stop order allows you to limit any losses.
What are the pros and cons of trading forex?
Forex trading is easy to get started on, and the amount of leverage involved means that there is a high potential for profit. The size of the market also means that there is a good amount of liquidity in the most heavily-traded currency pairs. Anyone can pick up the basics, and there is a lot of information that is widely available to help you decide how to trade.
In terms of negatives, it can be too easy to rush into without being fully prepared. The leverage aspect means that large losses can be incurred by someone who makes uninformed decisions without fully understanding the risks.
How do I start forex trading?
The process of signing up to a forex platform and choosing what to trade is simple enough. After you have funded your account, you need to choose a currency you are interested in and the type of trade. The following are useful ways of getting some extra help as you begin to trade.
The benefits of social trading
This is a clever, modern approach that builds a community of traders on a particular platform. Newcomers can follow experts and influencers, while everyone shares their knowledge and earns rewards. The social trading method is the simplest way for a newcomer to start forex trading.
Getting a good education
Understand how the markets work and follow the latest news to be a successful forex trader. This is where the education aspect comes in, as the more you learn the more confident you will feel.
The importance of customer support
The best forex platforms are simple enough to use, but be sure to use one that offers good customer support. This means that you will be able to quickly resolve any issues.
Forex trading FAQs
What currency pair should I trade?
Beginners should look for a major currency pair that they are familiar with or can research before making a move.
What are the benefits of following an influencer on social trading?
This is a way of copying an expert’s trading moves or learning from what they do. It is an easy approach to getting started that could make you feel more comfortable. However, you should always be confident in your own knowledge before you begin trading.
Is forex trading for beginners or only for experts?
Beginners can get started pretty easily. But it is important that you understand the basics before you go ahead and make any trades.