How to Start Learning Forex Trading: A Beginner’s Guide
Forex trading is gaining momentum as a credible way to top up your income, or even as a standalone career. The barriers to entry have been significantly lowered in recent years, thanks to prop firms that offer access to funded accounts and leading edge online trading platforms.
However, it’s not just a case of signing up and pocketing the profits: forex trading can be complex, and there’s the potential to make losses as well as gains. Having said that, learning forex is not as difficult as some people would have you believe. Here’s a comprehensive guide on how to start learning trading for beginners.
What does forex trading involve?
Forex trading involves exchanging one currency for another, such as buying Euros (EUR) while simultaneously selling US dollars (USD). The transactions always happen in currency pairs, for example EUR/USD. The first currency is the base currency, and the second is the quote currency.
If the price of a currency pair goes up, it means that the base currency has strengthened against the quote currency. Various factors can influence the price of a currency, including global economic conditions, geopolitical events, economic data releases such as unemployment figures, and changes in interest or inflation rates.
Most of us will have exchanged foreign currency at some point as part of international travel preparations, but the majority of forex trading is carried out speculatively. This means that the trades are made to hedge against future changes in price, or to profit from the difference in value of two currencies by selling at a peak in the market.
How does forex trading work?
Forex trading is a decentralised system, meaning that there is no central exchange such as the New York Stock Exchange. Instead, it takes place across a global network of banks, financial institutions and brokers, described as over the counter (OTC). Solo traders access the markets through online brokers or prop firms.
If you choose to trade via a prop firm, you will be able to start trading with only a small investment of your own capital (or in some cases, none at all). With high leverage, round the clock market access and a fast turnover of trading activity, forex trading is an attractive option for many individuals.
It’s not necessary to have previous financial experience or a degree in economics to be a successful trader, but it’s necessary to understand that as well as the potential to make great profits, there is the risk of making significant losses. That’s why it’s important to devote some time and effort to learning the core principles of forex before trading in the live markets.
There is no need to invest a lot of money in your forex education however, as there are plenty of free online resources. These include courses that you can work through at your own pace, and will usually include materials such as quizzes, infographics, videos, and articles. Find one that suits your learning style and timescale.
You might find that some of the courses are free up to a certain point, and then will require a fee or subscription if you want to progress to the more advanced stages. Not all courses are worth your time, even if they are free: steer clear of any promises to ‘get rich quick’ or make a million bucks in six months: this is really not how forex works.
Successful traders build their careers on steady and consistent progress over time: expect it to take at least a year before you are making big profits, especially if you are trading around a full time job and other commitments.
Other good ways to learn about forex include joining an online trading community or forum where you can chat to other traders and exchange tips and ideas. You might even be able to find a more experienced trader who is prepared to mentor you.
Good old fashioned books are another affordable way to improve your trading knowledge, particularly when it comes to the psychology of trading (which we’ll discuss in more detail later). Acclaimed books on this topic include Mark Douglas’s Trading in the Zone, Denise Shull’s Market Mind Games, and Dr Brett Steenbarger’s The Psychology of Trading.
Step 1: Understanding the key terms
If you have no prior knowledge of trading at all, the first step should be to learn the key terminology of forex. This will familiarise you with the core concepts, and is also essential for understanding the next steps properly.
Currency Pairs
We’ve already mentioned the basic function of currency pairs. Currencies are generally divided into three groups: majors, minors, and exotics.
Majors
The majors are the most frequently traded currencies from the world’s largest or most stable economies, and include a pairing of the US dollar (USD) with any of the following: the Euro (EUR), the pound (GBP), the Canadian dollar (CAD), the Australian dollar (AUD), the New Zealand dollar (NZD), and the Swiss franc (CHF) and the Japanese Yen (JPY).
Minors
The minors refer to a currency pair that includes one of the currencies mentioned above, without the USD. For example, EUR/GBP or CAD/AUD.
Exotics
The exotics refer to currencies from smaller or emerging economies, such as the Mexican dollar or the Hong Kong dollar.
As a beginner, you will be strongly advised to trade major currency pairs, because of their high liquidity. This refers to the ease with which the currency can be bought and sold in the market without significant price slippage. They are generally less volatile and easier to predict than minors or exotics as well.
Pips and lots
Pip is short for ‘percentage in point’, and it’s the smallest whole unit price move a currency pair can make. A pip’s value is one-hundredth of one per cent. A single pip is represented by the fourth decimal place in a currency pair quote price.
A lot refers to the standard size of a trade. A standard lot size is 100,000 units of the base currency. It’s also possible to trade with mini lots (10,000 units), micro lots (1,000 units) and nano lots (100 units).
Leverage and margin
Leverage is borrowed capital that allows you to control larger position sizes with a small amount of capital. Typically, forex brokers and prop firms offer the potential for high leverage, maximising the potential for profits (but also losses).
Margin refers to the minimum amount of money required to open and maintain a trade. In forex, this will typically be a small percentage of the full value of the trading position, because of the high leverage available.
Technical and fundamental analysis
Forex traders use a combination of technical and fundamental analysis to predict price movements in the market, which allows them to plan their trading strategies. Technical analysis involves using charts, graphs and indicators to review historic price patterns and forecast future movements.
Fundamental analysis involves using economic indicators such as GDP, inflation, unemployment figures, interest rates, inflation and geopolitical events to predict which way the markets will move.
Creating a trading strategy
Before attempting to trade, you need to put together a strategy that should cover the following points:
- Entry and exit criteria
- Risk-reward ratio
- Timeframes you’ll trade (e.g. daily, hourly, 15-min)
- Rules for managing losses and taking profits
Risk management is a crucial part of a trading strategy. Beginners should always use stop-loss orders to minimise potential losses, and take-profit orders to lock in gains. Never risk more than one to two per cent of your total capital on a trade.
Most traders aspire to a fully funded account with a prop firm, because this allows them to trade without risking any personal capital. Although any losses you make will be covered by the prop firm, they will naturally want to work with traders who can demonstrate good risk management skills and operate within their guidelines.
Start with a demo account
Many prop firms offer a free 14-day trial which allows you to trade in simulated market conditions without risking any real money. This is a good opportunity to familiarise yourself with the trading platform and get used to making quick decisions under pressure. You can also roadtest different strategies and iron out any flaws.
The psychology of trading
Finally, before you begin live trading, it’s wise to understand the psychological pitfalls of trading. Beginners can be prone to letting emotions such as greed, fear, and impatience influence their decision making. Learn how to develop a purely rational approach to trading and be alert for signs of emotional bias in your decisions.
If in doubt, step away from the screen and refer back to your trading plan. Finally, be patient and remember that it takes time to build real skill and confidence. Focus on the process rather than profits, and over time the rewards will come to you.