How To Learn Forex Trading: A Step-By-Step Beginner’s Guide

The world of forex trading is exciting and offers the opportunity to make substantial profits. However, as well as reward, it also carries significant risks. That’s why it’s important to learn as much as possible about the process before you dive in. Here’s how to learn to trade forex the right way, so you will be ready and prepared to take on the challenge. 

Step 1: Learn about the forex markets

The first step is to learn about the forex markets and how they operate: essentially, they are global marketplaces where national currencies are exchanged. You’ve probably exchanged one currency for another when travelling abroad, but travel and tourism is a minor part of forex market activity. The majority of activity is driven by commerce and financial traders. 

Until the rise of fast digital communications, trading for financial purposes such as hedging against currency value changes, diversifying portfolios or speculating on price differentials for profit was carried out by employees of commercial and investment banks. 

These traders might be acting on behalf of high net worth individuals, but forex trading was largely inaccessible to independent traders. However, the rise of online trading platforms has been a real game-changer. It’s now possible for anyone to open a forex trading account.  

Different types of forex market

There are different types of forex markets, including the spot market and the derivative market, which includes the forwards, futures, currency swaps and the options market. 

However, as a beginner, it’s most likely that you will start with the spot market, which is the most commonly used market for forex trading. It’s the fastest and most straightforward type of forex trading, where currencies are bought and sold based on the current market price and transactions are usually settled within one or two working days. 

Time zones

The forex markets have no central marketplace or physical trading centre; all the action takes place electronically, and the markets are accessible almost round the clock. However, the most active trading hours occur within the time zones of the world’s major financial centres, including New York, London, Tokyo, San Francisco, Sydney and Hong Kong. 

Currency pairs

Forex trading offers high liquidity, meaning that it’s always easy to find buyers and sellers. The basic principle is to make money by accurately anticipating currency price movements. Currencies are traded in pairs, so if you believe the value of one currency pair will rise in the future, you would calculate the peak time to sell that currency in order to make a profit.

Most beginners start trading with the major currencies, such as the US dollar (USD), the Euro (EUR), the pound (GBP) and the yen (JPY). The fluctuations in the value of currencies are driven by a combination of economic and geopolitical factors. 

The currencies are always bought and sold in pairs, such as the EUR/USD. The first currency listed in the pair is known as the base currency, and the second is the quote currency that you are exchanging it for. Currency pairs are divided into three categories: majors; minors; and exotics. 

Majors are the most frequently traded currencies from the world’s major economies, and include the USD, GBP, EUR, JPY, and commodity based currencies, such as the AUD, NZD, and CAD. Minors are currency pairs from the major economies that do not include the USD, such as GBP/EUR. 

Exotics are pairs that include a major currency with one from a developing economy, such as USD/MXN (Mexican peso). It is not advisable for beginners to trade with exotics, because they have less ‘liquidity’ in the market, meaning that it will be more difficult to find buyers or sellers, and the currency price changes may be more volatile. 

Learn key terminology

Beginners often rush into trading without acquiring a basic level of knowledge, and are flummoxed by forex trading terms that can come thick and fast. 

Key forex terms to know:

• Pip: The smallest price movement in a currency pair. For most pairs, it represents 0.0001 of the exchange rate.
• Leverage: Borrowing funds from a lender such as a prop firm, in order to trade larger positions than your account balance. Leverage can amplify both profits and losses.
• Lot Size: The amount of currency units you trade. A standard lot equals 100,000 units of the base currency, while mini and micro lots are 10,000 and 1,000 units, respectively.
• Spread: The difference between the buy (ask) and sell (bid) price of a currency pair. Tight spreads are generally better for traders as they reduce trading costs.

Step 2: Develop a trading strategy

The next step is to develop a clear trading strategy. This could involve fundamental analysis, technical analysis, or a combination of both. It’s important to realise that forex trading isn’t a ‘get rich quick’ scheme. Successful trading requires strategy, discipline, and emotional intelligence. 

Fundamental analysis

This involves studying the macroeconomic factors that influence the forex markets, such as inflation, interest rates, GDP growth, and unemployment figures. It also encompasses geopolitical events such as elections, wars, and natural disasters. 

Technical analysis

This involves using charts, graphs, and other tools to analyse historical price data and predict future movements in order to make informed decisions about when to enter and exit trades.

Types of trading strategy

Trend trading 

Trend trading is one of the simplest ways to trade forex, so you may wish to start out with this method. It involves using technical or fundamental analysis, or both, to identify the direction of the market. For example, if prices are trending upwards, then the trader would look for opportunities to sell at a profit or buy to sell when prices peak.

Breakout trading

Breakout trading involves identifying a currency pair that is breaking out of an established pattern. This type of trading can be very profitable, but it can also be risky for inexperienced traders. 

Scalping

Scalping is a short term strategy that involves making a high frequency of trades in order to profit from small price changes within a brief period of time, sometimes less than a minute. It requires intense focus, so it’s best for traders who have sharp reactions, good concentration skills and can work uninterrupted for a defined period of time.

Swing trading

Swing trading involves holding a position for a few days to weeks, while monitoring price movements over the medium term to identify opportunities to buy or sell. 

Position trading 

Position trading is a long-term strategy where traders monitor long-term market trends. The position may be open for weeks, months, or even years. It may suit new traders who need to combine trading with a full time job, because it doesn’t require close daily monitoring. 

Include a risk strategy

Your trading strategy should include a risk management strategy. Forex trading has the potential to make heavy losses. New traders should learn how to use leverage wisely: these are borrowed funds that allow you to control large positions with a small amount of capital. This amplifies the size of potential losses, but also increases the risk of incurring losses. 

Understanding the risks of forex trading

Market volatility

The main risk of forex trading is market volatility, meaning that the currency price changes rapidly. While this can bring the opportunity to make big profits, sudden price swings can also cause substantial losses, particularly if leverage has not been used with reasonable caution. 

Geopolitical and economic risks

Geopolitical events or economic announcements can cause sudden volatility in the markets, particularly if the outcome was contrary to expectations. Inexperienced traders may panic and follow the herd, only to be caught out if the markets suddenly rebound in the other direction. 

Unmanaged emotions

Trading is a psychological game, and new traders can often underestimate the importance of managing their emotions. Money brings out primal emotions such as fear and greed in people, because it’s so fundamental to our survival and comfort. When combined with the pressure to make quick decisions, this can lead to biassed thinking and impulsive behaviour. 

Therefore it’s important to work on mental resilience and always stick to your trading plan, rather than allow your instincts to take over. Successful traders always make objective decisions based on evidence and research, and do not react to market panics or allow themselves to become overconfident or too fearful and cautious. 

Step 3: Choose a trading platform

The next step is to select a trading platform that allows you market access from your device. One of the best ways to do this is to complete a free trial with a prop firm. This means that you can gain experience of using a trading platform of your choice such as Matchtrader, DXTrades and Tradelocker, with no fees and no pressure of losing real money. 

You’ll be trading in simulated market conditions, so your experience will be exactly the same as live trading, except that any profits or losses will be virtual. This is an invaluable opportunity to familiarise yourself with the platform interface and tools, test out your strategy, and gain risk-free experience of market dynamics.