How to Trade Forex for Beginners: 3 Strategies to Learn How to Trade Forex
Forex trading for beginners can be difficult. In general, this is due to unrealistic but common expectations among newcomers to this market. Whether we are talking about forex trading for beginners or stock trading for beginners, many of the basic principles overlap. In this article, we're going to focus on Forex trading. However, some of the same strategies, terms and general concepts also apply to stock trading.
By the end of it, you'll know all the most essential terms used in Forex trading so you won't be confused at any point while you learn to trade. You'll learn all the basics, including which platform to use, how to execute a trade and 10 Forex trading tips for beginners who want to earn, discover new strategies, and more.
Table of Contents
Before we begin this Forex trading for beginners guide and learn how to trade Forex, we will quickly answer the question, 'What is Forex trading?':
|The foreign exchange (FX or forex) market is a global marketplace where traders exchange national currencies|
Forex Trading for Beginners: An Introduction
The next question that comes to everyone's mind is: how to learn Forex from scratch? Can I teach myself to trade Forex? Don't worry, this Forex trading for beginners guide is our definitive manual for all aspects of Forex and general trading. By the end, you'll understand the basics of trading Forex and how to begin.
Trading terminology: Forex trading notes for beginners
Here's where your Forex trading notes for beginners can begin. I'm going to start this trading for beginners guide in the UK by presenting some of the most common terms you'll come across in trading that you'll need to know.
1. Spot Forex
This form of Forex trading involves buying and selling the real currency. For example, you can buy a certain amount of pound sterling and exchange it for euros, and then once the value of the pound increases, you can exchange your euros for pounds again, receiving more money compared to what you originally spent on the purchase.
The term CFD stands for "Contract for Difference". It is a contract used to represent the movement in the prices of financial instruments. In Forex terms, this means that instead of buying and selling large amounts of currency, you can take advantage of price movements without having to own the asset itself. Along with Forex, CFDs are also available in stocks, indices, bonds, commodities, and cryptocurrencies. In all cases, they allow you to trade in the price movements of these instruments without having to buy them.
If you are interested in knowing how CFDs work in greater detail, we recommend the following article that explains CFD trading for beginners: What is CFD Trading?
A pip is the base unit in the price of the currency pair or 0.0001 of the quoted price, in non-JPY currency pairs. So, when the bid price for the EUR / USD pair goes from 1.16667 to 1.16677, that represents a difference of 1 pip.
The spread is the difference between the purchase price and the sale price of a currency pair. For the most popular currency pairs, the spread is often low, sometimes even less than a pip! For pairs that don't trade as often, the spread tends to be much higher. Before a Forex trade becomes profitable, the value of the currency pair must exceed the spread.
Margin is the money that is retained in the trading account when opening a trade. However, because the average "Retail Forex Trader" lacks the necessary margin to trade at a volume high enough to make a good profit, many Forex brokers offer their clients access to leverage.
This concept is a must for beginner Forex traders. The leverage is the capital provided by a Forex broker to increase the volume of trades its customers can make.
- The face value of a contract or lot equals 100,000 units of the base currency. In the case of EUR/USD, it would be 100,000 euros.
- If you use a 1:10 leverage rate and have 1,000 euros in your trading account, you can trade a currency pair with a $10,000 position size.
- If the trade is successful, leverage will maximise your profits by a factor of 10. However, keep in mind that leverage also multiplies your losses to the same degree.
Therefore, leverage should be used with caution, regardless of whether we are talking bout trading for beginners or experts. If your account balance falls below zero euros, you can request the negative balance policy offered by your broker. ESMA regulated brokers offer this protection. Using this protection will mean that your balance cannot move below zero euros, so you will not be indebted to the broker.
7. Bear Market
This is a term used to describe the stock market when it is moving in a downwards trend. In other words, when the prices of stocks are falling. If a stock price falls deep and fast, it's considered very bearish.
8. Bull Market
The opposite of a bear market is a bull market. When the stock market is experiencing a period of rising stock prices, we call it a Bear Market. An individual stock, as well as a sector, can also be called bullish or bearish.
A metric indicating the relationship between a stock's price relative to the whole market's movement. If a stock has a beta measuring 1.5, this means the when the market moves 1 point, this stock moves 1.5 points, and vice versa.
A broker is a person or company that helps facilitate your buying and selling of an instrument through their platform (in the case of an online broker). They usually charge a commission.
The bid is the price traders are willing to pay per share. It is set against the ask price, which is the price sellers are willing to sell their shares for. What do we call the difference between the bid and the ask price? The spread.
This is a place where trades are made. Two well-known stock exchanges are the NASDAQ and the New York Stock Exchange (NYSE).
This is the at which an exchange closes and trading stops. Regular trading hours for the NASDAQ and the NYSE are from 9 a.m. to 4:30 p.m. Eastern time. After-hours trading continues until 8 p.m.
14. Day Trading
This when traders buy and sell within a day. Day trading is a common trading strategy. However, if someone day trades, they may also make long term investments as well (a long-term portfolio).
The following two terms only apply to share trading:
A proportion of the earnings of a company that is paid out to its shareholders, the people who own their stock. These dividends are paid out either quarterly (four times per year) or annually (once per year). Not every company pays its shareholders dividends. For example, companies that offer penny stocks likely don't pay dividends.
16. Blue Chip Stocks
These are stocks in big, industry-leading firms. Many traders are attracted to Blue chip stocks because of their reputation for paying stable dividend payments and demonstrating long-term sound fiscal management. Some believe that the expression 'blue-chip' derived from the blue chips used in casinos, which are the highest denomination of chips.
If you're just starting out with Forex trading and are interested in stepping up your trading game, there's no better way than to so than with Admirals free online Forex 101 trading course. It's one of the best ways to start learning, as each lesson is carefully crafted and delivered by our industry experts. For more information on how to start, please click the banner below:
Forex Trading for Beginners: Making Trades
The next section of this Forex trading for beginners outline covers things to consider before making a trade. Before you make a trade, you'll need to decide which kind of trade to make (short or long), how much it will cost you and how big the spread is (difference between ask and bid price). Knowing these factors will help you decide which trade to enter. Below we describe each of these aspects in detail.
Price and Quote
When you trade Forex, you will see Ask and Bid prices.
- Remember, the ask price is the price at which you can buy the currency
- And the bid price is the price at which you can sell it
One of the things you should keep in mind when you want to learn Forex from scratch is that you can trade both long and short, but you have to be aware of the risks involved in dealing with a complex product.
Buying a currency with the expectation that its value will increase and make a profit on the difference between the purchase and sale price.
You sell a currency with the expectation that its value will decrease and you can buy back at a lower value, benefiting from the difference.
The price at which the currency pair trades is based on the current exchange rate of the currencies in the pair, or the amount of the second currency that you would get in exchange for a unit of the first currency (for example, if you could exchange 1 EUR for 1.68 USD, the purchase and sale price your broker gives will be on either side of this number).
If the way brokers make a profit is by collecting the difference between the buy and sell prices of the currency pairs (the spread), the next logical question is: How much can a particular currency be expected to move? This depends on what the liquidity of the currency is like or how much is bought and sold at the same time.
The most liquid currency pairs are those with the highest supply and demand in the Forex market. It is the banks, companies, importers, exporters and traders that generate this supply and demand.
The major currency pairs tend to be the most liquid, with the EUR / USD currency pair moving 90-120 pips on an average day and therefore providing the most opportunities for short-term trading. In contrast, the AUD / NZD pair moves between 50 and 60 pips per day, and the USD / HKD currency pair only moves at an average of 32 pips per day (looking at the value of the currency pairs, most will appear with five decimal points).
The main Forex pairs tend to be the most liquid. However, there are also many opportunities between minor and exotic currencies, especially if you have some specialized knowledge about a certain currency.
Forex for Beginners: How to Read Charts
No Forex trading for beginners article would be complete without discussing charts. When viewing the exchange rate in live Forex charts, there are three different options available to traders using the MetaTrader platform: line charts, bar charts or candlestick charts. When in the MetaTrader platform you can toggle between these different chart types by selecting View -> Toolbars -> Standard option. In the toolbar at the top of your screen, you will now be able to see the box below:
A line chart connects the closing prices of the time frame you are viewing. So, when viewing a daily chart the line connects the closing price of each trading day. This is the most basic type of chart used by traders. It is mainly used to identify bigger picture trends but does not offer much else unlike some of the other chart types.
OHLC bar charts
An OHLC bar chart shows a bar for each time period the trader is viewing. So, when looking at a daily chart, each vertical bar represents one day's worth of trading. The bar chart is unique as it offers much more than the line chart such as the open, high, low and close (OHLC) values of the bar.
The dash on the left represents the opening price and the dash on the right represents the closing price. The high of the bar is the highest price the market traded during the time period selected. The low of the bar is the lowest price the market traded during the time period selected.
- The green bars are known as buyer bars as the closing price is above the opening price.
- The red bars are known as seller bars as the closing price is below the opening price.
In either case, the OHLC bar charts help traders identify who is in control of the market - buyers or sellers. These bars form the basis of the next chart type called candlestick charts which is the most popular type of Forex charting.
Candlestick charts were first used by Japanese rice traders in the 18th century. They are similar to OHLC bars in the fact they also give the open, high, low and close values of a specific time period. However, candlestick charts have a box between the open and close price values. This is also known as the 'body' of the candlestick.
Many traders find candlestick charts the most visually appealing when viewing live Forex charts. They are also very popular as they provide a variety of price action patterns used by traders all over the world.
If you are interested in practicing your trading in a risk free manner, but with real conditions and a live market environment, why not register for a free demo account here at Admirals? You can trade with virtual funds and practice your strategies without putting any of your funds at risk.
Forex for Beginners: Trading Systems
Now that you know how to start trading in Forex, the next step in this Forex trading for beginners guide is to choose one of the best Forex trading systems for beginners. Fortunately, banks, corporations, investors, and speculators have been trading in the markets for decades, meaning that there is already a wide range of types of Forex trading strategies to choose from. You may not remember them all after your first read, so this is a good section to add to your Forex trading notes. These systems include:
- Currency Scalping: Scalping is a type of trading that consists of buying and selling currency pairs in very short periods of time, generally between a few seconds and a few hours. This is a very practical strategy that involves making a large number of small profits in the hope those profits accumulate.
- Intraday Trades: Forex intraday trading is a more conservative approach that can suit beginners. It is focused on four-hour or one-hour price trends. Trades can be open between one and four hours. In general, they focus on the main sessions for each Forex market.
- Swing Trading: Swing trading is a medium-term trading approach that focuses on larger price movements than scalping or intraday trading. This means that traders can keep a trade open for days or a few weeks. This type of trading is a good option for those who trade as a complement to their daily work.
To compare all of these strategies we suggest reading our article "A Comparison Scalping vs Day trading vs Swing trading"
Best Forex Trading Platforms for Beginners
Let's look at some of the best Forex trading platforms for beginners. In addition to choosing a broker, you should also study the currency trading software and platforms they offer. The trading platform is the central element of your trading and your main work tool, making this section an integral part of your Forex trading notes. When evaluating a trading platform, especially if we are talking about trading for beginners, make sure that it includes the following elements:
Do you trust your trading platform to offer you the results you expect? Being able to trust the accuracy of the quoted prices, the speed of data transfer and the fast execution of orders is essential to be able to trade Forex successfully. Even more so, if you plan to use very short-term strategies, such as scalping.
The information must be available in real-time and the platform must be available at all times when the Forex market is open. This ensures that you can take advantage of any opportunity that presents itself.
Will your funds and personal information be protected? A reputable Forex broker and a good Forex trading platform will take steps to ensure the security of your information, along with the ability to back up all key account information.
It will also segregate your funds from its own funds. If a broker cannot demonstrate the steps they will take to protect your account balance, it is better to find another broker.
Independent account management
Any Forex trading platform should allow you to manage your trades and your account independently, without having to ask your broker to take action on your behalf. This ensures that you can act as soon as the market moves, capitalize on opportunities as they arise and control any open position.
Does the platform provide embedded analysis, or does it offer the tools for independent fundamental or technical analysis? Many Forex traders trade using technical indicators and can trade much more effectively if they can access this information within the trading platform, rather than having to leave the platform to find it. This should include charts that are updated in real-time and access to up-to-date market data and news.
Automated Trading Functionality
One of the benefits of Forex trading is the ability to open a position and set an automatic stop loss and profit level at which the trade will be closed. This is a key concept for those learning Forex trading for beginners. The most sophisticated platforms should have the functionality to carry out trading strategies on your behalf, once you have defined the parameters for these strategies.
At Admirals, the platforms are MetaTrader 4 and MetaTrader 5, which are the easiest to use multi-asset trading platforms in the world. They are two of the best platforms that offer the best online trading for beginners. Both platforms can be accessed through a variety of devices including PC, Mac, iOS and Android devices, as well as, web browsers through the MetaTrader WebTrader platform for MT4 and MT5.
These are fast, responsive platforms that provide real-time market data. Furthermore, these platforms offer automated trading options and advanced charting capabilities and are highly secure, which helps novice Forex traders.
MetaTrader 5 is the latest version and has a range of additional features, including:
- Access to thousands of financial markets
- A Mini Terminal that offers complete control of your account with a single click
- 38 built-in trading indicators
- The ability to download tick history for a range of instruments
- Actual volume trading data
- Free-market data, news and market education
Interested in trading with the world's premier multi asset trading platform? Click the link below to get started with MetaTrader and to begin your trading journey:
Is Forex Trading Safe for Beginners? Risks Every Beginner Should be Aware of
There are different types of risks that you should be aware of as a Forex trader. Keep the following risks in your Forex trading notes for beginners:
- Leverage Risk: Leverage in trading can have both a positive or negative impact on your trading. The higher your leverage, the larger your benefits or losses.
- Interest Rate Risk: The moment that a country's interest rate rises, the currency could strengthen. The boost in strength can be attributed to an influx of investments in that country's money markets since with a stronger currency, higher returns could be likely. But if the interest rate falls, the currency may weaken, which may result in more investors withdrawing their investments.
- Transaction Risk: This risk is an exchange rate risk that can be associated with the time differences between the different countries. It can take place sometime between the beginning and end of a contract. There is a chance that during the 24-hours, exchange rates will change even before settling a trade. The transaction risk increases the greater the time difference between entering and settling a contract.
3 Forex Trading Strategies for Beginners
Below is an explanation of three Forex trading strategies for beginners:
This long-term strategy uses breaks as trading signals. Markets sometimes swing between support and resistance bands. This is known as consolidation. A breakout is when the market moves beyond the limits of its consolidation, to new highs or lows. When a new trend occurs, a breakout must occur first. Therefore, breaks are considered as possible signs that a new trend has started. But the problem is that not all breakouts result in new trends. Using a stop loss can prevent you from losing money.
2. Moving Average Cross
Another Forex strategy uses the simple moving average (SMA). Moving averages are a lagging indicator that use more historical price data than most strategies and moves more slowly than the current market price.
In the graph above, the 25-day moving average is the orange line. As you can see, this line follows the actual price very closely. The 200-day moving average is the green line.
When the short-term moving average moves above the long-term moving average, it means that the most recent prices are higher than the oldest prices. This suggests an upward trend and could be a buy signal. Conversely, when the short-term moving average moves below the long-term moving average, it suggests a downward trend and could be a sell signal.
Rather than being used solely to generate Forex trading signals, moving averages are often used as confirmations of the overall trend. This means that we can combine these two strategies by using the trend confirmation from a moving average to make breakout signals more effective. With this combined strategy, we discard breakout signals that do not match the general trend indicated by the moving averages.
For example, if we receive a buy signal for a breakout and see that the short-term moving average is above the long-term moving average, we could place a buy order. If not, then it may be best to wait.
3. Donchian Channels
The Donchian Channels were invented by Richard Donchian. The parameters of the Donchian Channels can be modified as you see fit, but for this example, we will look at the 20-day breakdown. The indicator is formed by taking the highest high and the lowest low of a user-defined period (in this case 20-periods).
A break in the Donchian channel provides one of two things:
- Buy if the market price exceeds the highest high of the last 20 periods.
- Sell if the market price exceeds the lowest low of the last 20 periods.
That's not all! There is another tip for trade when the market situation is more favorable to the system. This tip is designed to filter out breakouts that go against the long-term trend.
Look at the moving average of the last 25 and the last 300 days. The direction of the shorter-term moving average determines the direction that is allowed. Therefore, you may want to consider opening a position:
- Short: If the 25-day moving average is less than the last 300-day moving average.
- Long: If the 25-day moving average is greater than the 300-day moving average.
The exit from these positions is similar to the entry but using a break from the last 10 days. This means that if you open a long position and the market moves below the 10-day minimum, you will want to sell to exit your position and vice versa.
If you like what you have read thus far and are interested in learning more, why not tune in to one of our free webinars hosted by our trading experts? Discover the latest trading trends, get actionable strategies and enjoy complimentary tools by clicking the banner below:
Forex for Beginners: Top 10 Tips
Below are trading tips to help you excel in trading and avoid making simple mistakes.
1. Know Your Markets
One of the most effective ways to avoid losses in trading is education of the Forex market. Taking the time to educate yourself on the currency pairs and what moves their prices before you risk your funds may save you from making simple mistakes that could cost you more than you can afford to lose. This is a time investment that may save you from stress and losing a lot of funds.
2. Stick to Your Plan
Setting up a trading plan is an important component of avoiding losses. Many traders include their profit goals, risk tolerance level, evaluation criteria and methodology. Once you have created a plan, be sure each trade you make does not fall outside the parameters of your plan. Remember that you are likely the most rational before you enter a trade and least rational after you place it.
Put your plan into practice with a demo account. You’ll see what it’s like trading currency pairs with your trading plan without risking your capital.
4. Forecast the Market Conditions
Some traders choose to predict the markets based on what's happening in the news or other political and financial data. These are called fundamental traders. Others choose to predict the market movements based on technical analysis tools such as moving averages, Fibonacci retracements and other indicators. These are called technical traders. Many traders use both. Regardless of your trading style, it's important to not forget about the tools available to you via your platform to help you predict the markets more accurately.
5. Know Your Limits
This is a simple yet key rule. This includes knowing when to exit a losing trade instead of continuing to wait, setting stop loss levels accordingly, using a leverage ratio according to your needs and remembering to never risk more than you can afford to lose.
6. Know When to Stop
You don’t have time to sit and watch the markets every minute of every day. You can better manage your risk and protect potential profits through stop and limit orders, getting you out of the market at the price you set. Trailing stops are especially helpful; they trail your position at a specific distance as the market moves, helping to protect profits should the market reverse. Placing contingent orders may not necessarily limit your risk for losses.
7. Leave Your Emotions Outside the Door
You have an open position and the market’s not going your way. Maybe you could make it up with a trade or two that don’t fit with your trading plan...just a couple couldn’t hurt, right?
“Revenge trading” rarely ends well. Don’t let emotion get in the way of your plan for successful trading. When you have a losing trade, don’t go all-in to try to make it back in one shot; it’s smarter to stick with your plan and make the lost back a little at a time than to suddenly find yourself with two crippling losses.
8. Stay Slow and Steady
One key to trading is consistency. All traders have lost money, but if you maintain a positive edge, you have a better chance of coming out on top. Educating yourself and creating a trading plan is good, but the real test is sticking to that plan through patience and discipline.
9. Don’t Fear Growth
While consistency is important, don’t be afraid to re-evaluate your trading plan if things aren’t working as you thought. As your experience grows, your needs may change; your plan should always reflect your goals. If your goals or financial situation changes, so should your plan.
10. Choose the Right Broker for You
It’s critical to choose the right trading partner as you engage the forex market. Pricing, execution, and the quality of customer service can all make a difference in your trading experience.
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- Investing in Gaming Stocks - A complete guide
Frequently Asked Questions
What is Forex trading?
Forex trading, also known as foreign exchange trading or currency trading, is the act of buying and selling currencies on the foreign exchange market. The goal is to profit from changes in the value of one currency against another. The Forex market is the largest financial market in the world, open 24 hours a day, five days a week.
How do I start trading Forex?
To start trading Forex, you'll need to:
- Educate Yourself: Learn the basics of Forex trading, including how the market operates, trading strategies, and the key concepts of margin, leverage, and pips.
- Choose a Broker: Select a reputable Forex broker that is regulated by major regulatory bodies.
- Open a Trading Account: After choosing a broker, you'll need to open a trading account. You may be required to provide personal identification documents for verification.
- Start with a Demo Account: Before trading with real money, practice with a demo account to get familiar with the trading platform and test your strategies without any risk.
What risks are involved in Forex trading?
Forex trading carries a high level of risk and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to trade Forex, carefully consider your investment objectives, experience level, and risk tolerance. You could lose some or all of your initial investment; do not invest money that you cannot afford to lose. Educate yourself on the risks associated with foreign exchange trading, and seek advice from an independent financial or tax advisor if you have any questions.
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