What Is Forex Trading?  Beginner’s Guide

Forex trading is when banks, businesses, and individual traders like you and I come to exchange one currency for another and make profit out of it. Forex is often referred to as Foreign Currency Exchange, or shortly FX, and it is the biggest and most exciting market in the world with average daily turnover of almost $4 trillion.

Forex market opens its virtual doors 24 hours a day, 5 days a week based on the major world trading centers in London, New York, Hong Kong, Paris, Sydney, Frankfurt, Tokyo, Zurich and Singapore.

History of Forex

It all started in 1876 when the Gold Exchange Standard was activated. In simple lingo, that’s when all the paper currency needed to have a solid gold backup. The idea behind it was to stabilize the currencies by attaching them to the gold prices. The theory might sound good, but the reality often proves it wrong.

Instead of stabilizing the currency, the gold standard was decreased around the time of World War 2. There was simply not enough gold to deal with all the printed currency used to cover the military expenses.

Then the new idea of having fixed exchange rates came to the rescue, which resulted in US Dollar turning into the primary reserve currency – the only currency attached to gold. And this is called the “Bretton Woods System”. By the end of 1971, U.S. refused to exchange gold for US dollars held in foreign reserves. This marks the fall of the Bretton Woods System and the beginning of global legalization of floating foreign exchange rates.

1976 marks the beginning of forex as we know it, however it took another 20 years until foreign currency exchange market because available to public over the internet.

What is Forex Trading?

Forex trading is when traders speculate on the price of one currency against the other. Based on your understanding of factors that move the market and your daily predictions, it is possible to make profit from the price fluctuations.

Let’s go over a very simple example. You are on the way to the holiday to Maxico. In the airport you exchange your American USD for Pesos. By exchanging one currency for another, you have experienced exchange rates in full speed.

Let’s say that the exchange rate is 18.88. This means that for 1 US Dollar you can purchase 18.88 Pesos. Now, imagine that you have exchanged 100 USD. How much Pesos would that be?

100 USD x 18.88 = 1,888 Pesos

Congratulations, you are now very rich (not really, but go on with me on this).

Now let’s pretend that there was a political uproar of some sort which forced the exchange rate to flung to 10.42. Having 1,888 Pesos, you can rush to the exchange shop and change it back to USD, resulting in:

1,888 / 10.42 = 181.19 US Dollars

In just couple of hours, you have successfully earned $81 dollars doing absolutely nothing.

Of course, things can go the other way around and an earthquake can lead to different currency rate, for example 21. On the way back home, when you want to exchange your Pesos for USD, the value of 1,888 yields just 89.90 US Dollars. You have lost $10, once again, not lifting a finger.

In later chapters, we will discuss ways to analyze the market and predict the price movements. This is a true art of forex trading and you will be able to know how it works.

Trading Accounts

How long does it usually take to open a trading account with a forex Broker?

In most cases, in case you fill out all details correctly, it takes less than 5 minutes.

How to start trading?

If you have already opened a trading account, received your login details by email, submitted your identification documents for account validation, and made a deposit; the next step is to download the trading platform of your choice or log into the web-based platform of your Broker.

What is the minimum deposit/withdrawal for a trading account?

This depends on the broker and can vary from just $1 to $2,000 minimum deposit requirement.

How long can demo account be used?

There are brokers who offer demo account only for a limited amount of time. On the other hand, there are forex brokers such as for example XM  and Liteforex, where demo accounts do not have an expiry date, and so you can use them as long as you want. Demo accounts that have been inactive for longer than 90 days from the last login will be closed. However, you can open a new demo account at any time. Please note that maximum 5 active demo accounts are allowed.

Is it possible to lose more money than I deposited?

Most brokers have negative balance protection, so you cannot lose more than the amount you deposited. Should the slippage of a certain currency pair cause a negative balance, it will be reset automatically with your next deposit.

Is my money safe?

Clients’ funds should be transferred to the Company’s segregated client bank account. These funds are off balance sheet and cannot be used to pay creditors in the unlikely event of Company insolvency. 

How to calculate the margin?

Margin calculation formula for forex instruments is the following:

(Lots * contract size / leverage) where the result is at always in the primary currency of the symbol.

For STANDARD accounts all forex instruments have a contract size of 100 000 units. For MICRO accounts all forex instruments have a contract size of 1 000 units.

For instance, if the base currency for your trading account is USD, your leverage is 1:30 and you are trading 1 lot EURUSD, the margin will be calculated like this:

(1 * 100 000/30) = 3,333 Euros

Euro is the primary currency of the symbol EURUSD, and because your account is USD, the system automatically converts the 3,333 EUROS to USD at the actual rate.

What is the difference between demo and real accounts?

While all features and functions of a real account are also available for a demo account, you should keep in mind that simulation cannot replicate real trading market conditions. One relevant difference is that the volume executed through the simulation does not affect the market; while in real trading volumes have effect on the market, especially when the deal size is large. The speed of execution is the same for real trading accounts as for the demo accounts.

Moreover, users can have a very different psychological profile depending on whether they trade with demo or real accounts. This aspect may impact the evaluation performed with the demo account. We advise you to be cautious and avoid complacency about any conclusion that you may draw from using a demo account. 

Why Forex market is so attractive?

I am a professional forex trading and I have a life style many would envy. It is not easy to get where I am, but it is possible and many professional traders are here to prove it.

When you decide to make forex into your career, you must:

  • Learn to take loss without emotional drama.
  • Believe in your strategy even if sometimes it seems to fail you.
  • Dedicate your time and energy in learning about market analysis, expert advisors, charting options, money management, economic factors and financial news release.
  • Stay organized and keep track of your decisions and emotions.
  • Do not treat loss as a mistake. Instead consider it necessary experience and a step forward towards profits.
  • Realize that you are not going to become rich in one day.
  • Keep learning even if you know the basics.
  • Control your emotions and never trade out of anger or desperation.

Why should you Trade Forex Market?

Forex is the biggest market out there and it doesn’t make any sense not to take part of this profit machine.

You have access to forex market almost every day, for 24 hours. There is no limit on hours, there is no opening and closing bell. You choose the trading hours. You are your own boss.

There is no need to have thousands of dollars to open a trading account. Many forex brokers offer mini accounts for just $1. There are some brokers with cent accounts, which are useful for practicing. The advisable amount beginner should start with is about $250.

You have a lot of interesting options when it comes to currency pairs. You can focus on just one pair, or select several. Unlike stocks where you must analyze thousands of options, in forex you can stick to one currency pair and focus on it..

Online forex trading doesn’t require much. You need a decent computer, tablet or smart phone with fast internet. It doesn’t get any simpler than this.

Profits come from volatility of the market conditions. There are tons of profitable opportunities during the week. Everyone has equal opportunity to profit from the movements of the market. No exceptions.

With all that positive feedback about forex, beginners must realize that trading involves potential risks. You have to understand that ignoring the risks involved will get you into more trouble than you can imagine. Accept the fact that you can lose the money you invest and you are on the right track in getting started with your forex career.

How to Get Started with Forex Trading

Trading forex is similar to equity trading. Here are some steps to get yourself started on the forex trading journey.

1.    Learn about Forex: While it is not complicated, forex trading is a project of its own and requires specialized knowledge. For example, the leverage ratio of forex trades is higher as compared to those for equities and the drivers for currency price movement are different from those in equity markets. There are several online courses available for beginners that teach the ins-and-outs of forex trading.

2.    Set up a brokerage account: You will need a forex trading account at a brokerage to get started with forex trading. Forex brokers do not charge commissions. Instead, they make money through spreads (also known as pips) between the buying and selling prices.

For beginner traders, it is a good idea to setup a micro forex trading account with low capital requirements. Such accounts have variable trading limits and allow brokers to limit their trades to amounts as low as 1,000 units of a currency. For context, a standard account lot is equal to 100,000 currency units. A micro forex account will help you become more comfortable with forex trading and determine your trading style.

3.    Develop a trading strategy: While it is not always possible to predict and time market movement, having a trading strategy will help you set broad guidelines and a roadmap for trading. A good trading strategy is based on the reality of your situation and finances. It takes into account the amount of cash that you are willing to put up for trading and, correspondingly, the amount of risk that you can tolerate without getting burned out of your position. Remember, forex trading is mostly a high leverage environment. But it also offers more rewards to those who are willing to take the risk.  

4.    Always be on top of your numbers: Once you begin trading, always check your positions at the end of the day. Most trading software already provides with a daily accounting of trades. Make sure that you do not have any pending positions that need to be filled out and that you have sufficient cash in your account to make future trades.

5.    Cultivate Emotional Equilibrium: beginner forex trading is fraught with emotional rollercoasters and unanswered questions. Should you have held onto your position a bit longer for more profits? How did you miss that report about low GDP numbers that led to a decline in overall value for your portfolio? Obsessing over such unanswered questions can lead you down a path of confusion. That is why it is important to not get carried away by your trading positions and cultivate emotional equilibrium across profits and losses. Be disciplined about closing out your positions, when necessary.    

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