How To Start Forex Trading? A Beginner’s Guide (2024)

Foreign exchange (forex or FX) trading involves buying one currency and selling another while attempting to profit from the trade. According to the latest reliable data from 2022, global daily trading was $7.5 trillion, making forex trading the largest financial market in the world, dwarfing even the global stock market. Trading currencies online has become far more accessible in the last decade, attracting droves of newer traders wanting a piece of the action.

In forex markets, currencies trade against each other as exchange rate pairs. For example, the EUR/USD would be a currency pair for trading the euro against the U.S. dollar. This is straightforward, but the market lingo comes fast at beginners and can quickly become overwhelming. Assets traded in FX include currencies, contracts for difference (CFDs), indexes, commodities,spreads,and cryptocurrencies. There are also forex spot and derivatives markets for forwards, futures, options, and currency swaps, all to speculate or hedge on forex prices. If all this weren't enough, jargon like "pips," "lots," and "leverage" mean that, without a good introduction, newer traders can quickly feel they are in over their heads.

That's why we've put together this detailed guide to getting you started trading foreign currencies the right way. We'll break down the essential concepts and guide you through the most critical steps, from choosing a broker and placing your first trade to developing a solid strategy and, most importantly, managing your risk.

What Is the Forex Market?

The foreign exchange market is where currencies are traded. Its most striking aspect is how it has no central marketplace. Instead, currency trading is done electronicallyover the counter (OTC). All transactions occur via computer networks among traders worldwide.

The main markets are open 24 hours a day, five days a week. Currencies are traded worldwide, but a lot of the action happens in the major financial centers such as Frankfurt, Hong Kong, London, New York, Paris, Singapore, Sydney, Tokyo, and Zurich. This means the forex market begins in Tokyo and Hong Kong when the U.S. trading day ends. The forex market is highly dynamic at all times, with price quotes changing constantly.

How Does the Forex Market Work?

The FX market is the only truly continuous, 24-hours-a-day (during weekdays) trading market in the world. In the past, the forex market was dominated by institutional firms and large banks, which acted on behalf of clients. But it has become more retail-oriented in recent years—traders and investors of all sizes participate in it. There's a caveat to this: newer traders in the market have helped lure in fraudsters looking to take advantage of less knowledgeable investors.

Where Is It?

An interesting aspect of world forex markets is that no physical buildings act as trading venues. Instead, they are a series of connected trading terminals and computer networks. Market participants are institutions, investment banks, commercial banks, and retail investors worldwide.

Who Trades on It?

Currency trading was complicated for individual investors until it made its way onto the internet. Most currency traders were largemultinational corporations,hedge funds, or high-net-worth individuals because forex trading required a lot of capital.

Commercialandinvestment banksstill conduct most of the trading in forex markets on behalf of their clients. However, there are alsoprospectsfor professional and individual investors to trade one currency against another.

What Is Forex Trading?

At its core, forex trading is about capturing the changing values of pairs of currencies. For example, if you think the euro will increase in value against the U.S. Dollar, a speculator might buy euros with dollars. If the euro's value rises on a relative basis (the EUR/USD rate), you can sell your euros back for more dollars than you initially spent, thus making a profit.

In addition to speculative trading, forex trading is also used for hedging purposes. Individuals and businesses use forex trading to protect themselves from unfavorable currency movements. For example, a company doing business in another country might use forex trading to insure against potential losses caused by fluctuations in the exchange rate.

By securing a favorable rate in advance through forex trades, a firm can reduce financial uncertainty and ensure more stable costs in its domestic currency. This is an essential part of international business today.

Forex trading has high liquidity, meaning it's easy to buy and sell many currencies without significantly changing their value. In addition, traders can use leverage to amplify the power of their trades, controlling a significant position with a relatively small amount of money. However, leverage can also amplify losses, making forex trading a field that requires knowledge, strategy, and an awareness of the risks involved.

Forex trading is also quintessentially global, encompassing financial centers worldwide. This means that currency values are influenced by a variety of international events. Economic indicators such as interest rates, inflation, geopolitical stability, and economic growth can significantly impact currency prices. For instance, if a country's central bank raises its interest rates, its currency might rise in value due to the higher returns on investments made in that currency.

Similarly, political uncertainty or a poor economic growth outlook can depreciate a currency. These interlocking exchange relations—some currencies growing stronger, others not—means forex trading reflects worldwide economic and political developments.

How To Start Trading Forex

Here's a to-do list to get you started:

1. Learn about forex: You now have the basicconcepts, but you'll need to understand more of the terminology and how theforex marketoperates. Thisincludes learningcurrency pairs, market patterns, and the factorsinfluencingcurrency prices.
2. Develop a trading strategy: Learn the different trading strategies, such as various technical analysis strategies, fundamental analysis, and news trading. Choose a strategy that aligns with your trading style and risk tolerance. For more, see our Forex Trading Strategy and Education.
3. Develop a plan: Create a trading plan that includes your goals, risk tolerance, strategies, and the criteria you'll use to assess trades. The most crucial part is not just making a plan but sticking to it in the heat of trading when emotions run high. Disciplined traders are successful traders.
4. Set up a brokerage account: Select a broker regulated by a reputable financial authority, such as the Commodities Futures Trading Commission (CFTC) in the U.S. Ensure the broker offers a user-friendly trading platform, good customer support, and low fees. For ideas, see our Best Forex Brokers.
5. Practice with a demo account: Many forex platforms provide the ability to paper trade before you put skin in the game. This is a time to ensure you've locked down all the mechanics of trading and test your strategies. It's better to find your mistakes by practicing than when your money is on the line.
6. Start slowly: Once you feel confident with your practice trading, start trading with real money. Start off small to manage risk and gradually increase your trading size as you gain experience.
7. Stay on top of your holdings: Regularly check your positions and ensure you have enough funds in your account. Use stop-loss and take-profit orders to manage risk and protect your profits.
8. Monitor and adapt: Keep up with market news, economic indicators, and geopolitical events likely to affect currency prices. Be prepared to adjust your strategies as market conditions change, which is not the same as adapting your strategy with every price move.

Types of Markets

Forex is traded primarily via spot, forwards, and futures markets. The spot market is the largest of all three markets because it is the “underlying” asset (the money) on which forwards and futures markets are based. When people talk about the forex market, they are usually referring to the spot market.

The forwards and futures markets are more likely to be used by companies or financial firms that need to hedge their foreign exchange risks.

Spot Market

In the spot market, currencies are bought and sold based on their trading price. Prices are determined by supply and demand and reactions to specific factors:

• Interest rates
• Economic performance
• Geopolitical events
• Price speculation

A finished deal on the spot market is known as a spot deal. It's a bilateral transaction in which one party delivers one currency amount to the counterparty and receives a specified amount of another currency at the agreed-upon exchange rate value. After a position is closed, it's settled in cash. Trades take two days to settle.

Forwards and Futures Markets

A forward contract is a private agreement to buy a currency at a future date and a predetermined price in the OTC markets. A futures contract involves the same principle but are standardized. Futures trade on exchanges, not OTC.

In the futures market, futures contracts are bought and sold based on a standard size and settlement date on public commodities markets, such as the Chicago Mercantile Exchange (CME). Futures contracts have specific details, including the number of units being traded, delivery and settlement dates, and minimum price increments that can't be customized. The exchange acts as a counterparty to the trader, providing clearance and settlement services.

Both types of contracts are binding and are typically settled in cash at expiry, although contracts can also be bought and sold before they expire. These markets can offer protection against risk when trading.

In addition to forwards and futures, options contracts are traded on specific currency pairs. Forex options give holders the right, but not the obligation, to buy or sell a currency pair at a specified price on a specified date.

Using the Forex Markets

There are two features of currencies as anasset class:

• You can earn theinterest rate differentialbetween two currencies: When you hold a currency pair position overnight, you'll either receive or pay interest based on the interest rate differential. You'll earn interest if the currency you bought has a higher interest rate than the currency you sold. This strategy is sometimes called a carry trade.
• You can profit from changes in the exchange rate: In forex trading, you can profit by buying a currency pair when you anticipate the exchange rate will rise and selling it when you expect the exchange rate to fall. The difference between your entry and exit prices determines your profit or loss.

Forex for Hedging

Companies doing business in foreign countries are at risk due to fluctuations in currency values when they buy or sell goods and services outside their domestic market. Foreign exchange marketsprovide a way tohedge currency risk by fixing a rate at which the transaction will be completed. A trader can buy or sell currencies in the forwardor swap markets in advance, which locks in an exchange rate.

Locking in an exchange rate helps firms reduce losses or increase gains, depending on which currency in a pair is strengthened or weakened.

Forex for Speculation

Interest rates, trade, political stability, economic strength,andgeopolitical risk all affect the supply and demand for currencies. This creates prospects for profiting from changes that may increase or reduce one currency’s value relative to another.

A forecast that one currency will weaken is essentially the same as assuming that the other currency in the pair will strengthen. So, a trader anticipating a currency change could short or long one of the currencies in a pair and take advantage of the shift.

Basic Forex Trading Strategies

The most basic trades are long and short trades, with the price changes reported as pips, points, and ticks. In a long trade, the trader bets that the currency price will increase and that they can profit from it. A short trade consists of a bet that the currency pair’s price will decrease. Traders can also use trading strategies based on technical analysis, such as breakouts and moving averages, to fine-tune their approach to trading.

Depending on the duration and numbers for trading, we can set out four types of trading strategies:

• A scalp trade involves positions held for seconds or minutes at most, and profits are restricted to the number of pips.
• Day trades are short-term trades in which positions are held and liquidated on the same day. The duration of a day trade can be hours or minutes.
• In a swing trade, the trader holds the position for longer than a day, like days or weeks.
• In a position trade, the trader holds the currency for a long period, sometimes months or even years.

Forex Terminology

The best way to get started in forex is to learn its language. Here are a few terms to get you started: