How to Trade Forex: A Beginners Guide

The foreign exchange market, better known as Forex Market or simply FX, is a global marketplace for exchanging national currencies.

Forex market is one of the largest and most liquid asset markets globally due to trade, commerce, and finance worldwide.

In Forex, currencies are traded against each other. For example, EUR/USD is a currency pair that pegs Euro against the U.S. dollar.

Traders can trade in spot (cash) markets or derivatives markets like forwards, futures, options, and swaps.

Keep reading this article to find out about forex basics, how to start trading Forex, and what to know to become profitable in it.

This article is designed and curated for those who want to know how to trade Forex for beginners.

What is the forex market?

The foreign exchange market is a global over-the-counter (OTC) market for trading currencies. It’s the largest market in terms of trading volume in the world. The credit market is second to Forex by a long mile. 

The forex market determines foreign exchange rates for every currency. You can buy, sell, or exchange currencies at current or determined prices in this market. This market is open 24 hours for five days a week, and you can trade in it no matter where you live, except on the weekends.

As mentioned earlier, currencies are traded against each other in Forex. Therefore, there are no absolute values for any currencies in this market.

Mainly, the participants of this market are large international banks. However, ordinary people can access this market via brokers. Traders try to make a living by taking advantage of major and minor price fluctuations in the forex market.

Is forex trading profitable for beginners? 

Despite numerous advertisements, claims of courses and packages, finance gurus, and life hack mentors, Forex is not something you can pick up on during the weekend.

To be profitable in Forex, not only do you need to know and understand all the basics and know the important factors and players, but it also needs a great deal of practice to make it as a Forex trader.

Again, we don’t enjoy bursting anyone’s bubble, but despite what many people advertise, not anyone can be a Forex trader. A forex trader needs to have specific attributes, like being able to perform under stress and take action in a limited time, and also be able to make good split-second decisions. Of course, anyone can try and acquire these attributes, but a Forex trader life has proven difficult for many.

If you have enough knowledge, practice, dedication, and discipline, then, by all means, trade away, and the odds are you will make great profits. 

The bottom line is that beginners who are willing to learn forex trading step by step, put in the time and practice will eventually make profits.

What are Forex currency pairs?

A currency pair is essentially two different currencies, with the value of one currency being pegged against the other. The first shown currency in a currency pair is called the base currency, and the second is known as the quote currency.

In simpler words, currency pairs compare the value of one currency to another— the first currency (called the base) versus the second (called the quote) currency. 

Those three-letter alphabetical codes assigned to each currency also come from the ISO currency Code and are standard.

There are as many currency pairs as there are countries with currencies on earth. Yet, all currency pairs are categorized according to the volume being traded daily. The many currency pairs that exist are classified into three main categories: major, minor, and exotic.

As you may have gathered from the name, the majors are the most popularly traded pairs on a daily basis. All major pairs include the U.S. Dollar since it is the world’s leading reserve currency and is the most traded one of all.

Minor pairs are pairs that don’t include the U.S. Dollar. They are otherwise known as cross-currency pairs. The most widely traded ones have the British Pound, the Euro and the Japanese Yen.

Exotic forex pairs have minimal interest from a trading perspective, so they are rarely considered.

How to trade currency pairs? 

To start trading Forex Currency pairs, after registering with a broker and learning all the necessary information first], you should pick your desired pair and buy it. 

It is easier for beginners to think about currency pairs as a single unit. To review, all forex trades involve simultaneous purchase of one currency and sale of another one, but the currency pair itself can be thought of as a single unit as well. 

So basically, when you buy a currency pair from a Forex broker, you buy the base currency (the first one) and sell the quote currency (the second one). Contrarily, when you sell the currency pair, you sell the base currency and receive the quote currency.

Now here’s a tip for beginners: 

As mentioned above, the currencies that trade the most volume against the U.S. dollar are referred to as the major currencies. 

A commonly traded currency pair is the Euro against the U.S. Dollar, which is shown as EUR/USD. EUR/USD is the most liquid currency pair globally because it is the most heavily traded.

We highly recommend beginners to stick to majors, or better yet, EUR/USD pair until they have enough experience.

What is the ask and bid price in Forex?

The bid (buy) price represents the maximum price a buyer is willing to pay for a share of stock or other security, in our case, a currency pair.

The ask (sell) price represents the minimum price that a seller is willing to take for that same thing. 

A transaction happens when a buyer in the market is willing to pay the best offer available or sell at the highest bid.

The term “bid and ask” (A.K.A. “bid and offer”) refers to a two-way price quotation that indicates the best possible price that a currency pair can be sold and bought at a given point in time. 

To sum up, the bid is the price at which the market will buy a currency pair before any commissions or fees, and the offer (or ask) is the price at which the market will sell the currency pair.

What are pips?

Knowing what pips are and what they represent is essential for beginner Forex traders. Pip is short for “Percentage In Point” or “Price Interest Point.” 

A pip is a fundamental concept in Forex and is defined as the smallest price move that an exchange rate can make based on forex market convention. A pip is usually equivalent to 1/100 of 1% or one basis point.

In other words, movement in the exchange rate is measured by pips. Since most currency pairs show a maximum of four decimal places, the smallest change for these pairs is one pip. The value of a pip can be easily calculated by dividing 1/10,000 or 0.0001 by the exchange rate.

What are spreads?

The spread in the Forex market is a small cost built into the bid (buy) and ask (sell) price of every currency pair trade. 

When you look at the price of a currency pair, you will see a difference between the buy and sell prices – this is the spread or the bid/ask spread.

The spread (the difference between the bid and ask prices) is a crucial indicator of the liquidity of the asset. In general terms, the smaller the spread is, the better the liquidity will be.

To calculate the spread in Forex, you simply have to work out the difference between the buy and the selling price in pips. You can do this by quickly subtracting the bid price from the asking price.

What is a liquid market?

A liquid market has many available buyers and sellers and low transaction costs. But what makes a market liquid may vary depending on the asset being exchanged on it. 

Generally, It is easy to execute a trade quickly and at a desirable price in a liquid market because there are numerous buyers and sellers. The exchangeable product (in our case, a currency pair) is standardized and in high demand in a liquid market.

Despite daily changes in supply and demand in a liquid market, the spread (which we defined earlier) between what the buyer wants to pay and what sellers will offer remains fairly small.

Liquid markets are mainly found in financial assets such as Forex, futures, bonds, and stocks. 

The opposite of a liquid market is called a “thin market” or “illiquid market.” These markets usually have considerably large spreads between the highest available buyer and the lowest available seller. Markets for high-priced goods, such as luxury products, industrial equipment, houses, and villas, are considered illiquid markets.

The largest and most liquid market globally is the Forex market, where you can trade foreign currencies. It is estimated that the daily trading volume of the currency market is over 5 trillion U.S. dollars. The U.S. dollar dominates the Forex market, but the Euro, Japanese Yen, British Pound, Swiss Franc, and Canadian dollar markets are also highly liquid.

Yet even some currency pairs in Forex can be thinly traded depending on several factors, including the time of day, the immediate condition of the market, and news. 

What are the risks of Forex trading?

There are no risk-free Forex trading strategies, period. Forex trading comes with its own set of risks, and you need to practice and have contingency plans in place.

Some risks are foreseeable and manageable, while others are tricky to manage or even predict. Neither of these risks is avoidable by googling “how to trade forex for beginners.” If you choose to trade Forex, you need to be aware of its risks.

Unsystematic risk

Unsystematic risk is a risk that only affects a specific asset, market, sector, geographical region, etc. 

Let’s make it simpler: Unsystematic risk in the Forex market is linked to everything that can affect the price of the currency pairs you’re trading right now.

So, for example, if you’re trading the USD/CNY and suddenly it’s announced that China has won the trade war against the United States of America, then suddenly the price for the USD/CNY pair will drop quickly.

While unsystematic risk can be reduced by diversifying your portfolio, systematic risk can not be reduced or avoided.

Simply put, if you trade other pairs or invest in other markets such as crypto, gold, real estate, etc., you could have avoided unsystematic risk.

Systematic risks

These risks cannot be avoided even if you diversify your portfolio. Numerous systematic risks can affect prices, such as inflation, growth, and employment figures. These factors can impact Central Bank decisions about monetary policy, especially interest rates.

Other financial and economic announcements can also introduce systematic risks, like political events, elections, strikes, geopolitical conflicts, wars, terrorist attacks, and natural disasters.

Changes in regulations, legislation, and tax policy can also cause systematic risks.

No matter how experienced or intelligent you are and how diverse your portfolio is, if there’s a rumor that there will be a significant earthquake, a war, a bomb threat, or something like that, the whole market will show chaotic behavior. Some people or institutions choose to withdraw their money from the Forex market and safely keep it somewhere else.

Liquidity risk

When a market is liquid, it means that it’s easy and fast to open and close your positions at your expected price, simply because there are many buyers and sellers present in the market.

Even though the Forex market is one of the most liquid financial markets globally, there are periods of low liquidity within it. Takes the hours outside of the American and European trading sessions or during bank holidays and weekends, as examples, when liquidity falls sharply.

Risk of high spreads

Spreads are not usually fixed rates. When brokers face low liquidities, they increase the size of their spreads. 

Increasing trading costs is a situation that only happens when your broker offers variable spreads that can change depending on the market and trading conditions. (It’s a motivation to read those terms and conditions, no?)

However, you can look for a broker offering fixed spreads, especially if you’re uncertain about how a specific currency pair behaves.

Counterparty (broker) risk

In the Forex market, the counterparty is the entity you open and close trading positions with, in short: your broker.

The main counterparty risk here is that your broker doesn’t pay you, either due to bankruptcy and fraud or because of poor regulatory enforcement.

By using a trustworthy broker which is subject to regulation from a reputable authority, you can be more confident when trading. Not only should you work with a licensed and regulated broker, but you should also consider the financial strength of its counterparties, which need to be diversified. You need to make sure that the liquidity providers your broker works with will be able to survive during extreme market conditions.

Leverage risk

One of the most significant advantages and risks of Forex trading is leverage. Leverage amplifies all the other risks. That means if you take on too much market risk without a stop-loss, any large losses from sudden movements get leveraged up too.

Moreover, if a liquidity squeeze forces your trading costs to go up, that gets leveraged as well, because the spread is a function of your total position.

What is an online forex broker? 

An online Forex broker is a financial services company that provides traders access to a platform for trading foreign currencies.

A Forex broker may also be called a retail Forex broker or a currency trading broker.

The clients of an online Forex broker include retail currency traders who use these platforms for speculation on the direction of currencies and large financial service firms that trade on behalf of investment banks and other customers.

Any individual forex broker firm will handle only a tiny portion of the overall foreign exchange market volume.

Is forex trading suitable for you?

The answer lies within you, provided you are honest about your characteristics with yourself.

Do you perform well under pressure? Are you comfortable making split-second decisions and living with their consequences? Are you a risk-taker? 

To be honest, nearly all personality types can be good traders if they have enough knowledge and practice.

If you know what is forex trading and how does it work, are well-versed and practiced in forex trading strategies, and have taken forex trading courses, then yes, Forex might be suitable and profitable for you.

The most successful Forex traders develop their abilities via repetition and dedication. A self-analysis to see what motivates your transactions is also a good idea. You can learn how to take fear and greed out of the equation when you make trades.

What to learn before trading forex?

In addition to reading a dozen articles like this on Forex for beginners, taking Forex trading courses and practicing, here are some extra pointers:

Trade with regulated Forex brokers

A broker needs to pass various credibility tests technical evaluations and exceed the minimum requirements for the security of traders to get licensed by a good regulator. The authorities also pay closer attention to the registered brokers’ actions via the reporting system and discipline them if they engage in foul play or poor conduct. 

Regulators worldwide want different degrees of security from brokers and dealers. So make sure you choose one that complies with laws within your country to safeguard your money.

Start with a demo account.

The majority of brokers provide no-risk demo accounts for practicing. Setting up a virtual demo account enables you to place practice orders at real-market similar pricing and circumstances. 

We highly recommend that Forex beginners spend at least six months practicing on a demo account before getting into the market.

Even pro traders sometimes switch to demo accounts to test out their new forex trading strategies, so if it’s good enough for them, it should be good enough for you.

Practice patience and responsibility

Less than 20% of professional traders succeed long-term, while +80% lose money. 

This is because Forex trading is very complex and hazardous, especially if you have no prior experience. 

So, until you gain more experience, we recommend you to stay away from trades with a maximum loss of 3% of your money.

Don’t forget stop-loss.

A stop-loss can help you manage and plan your losses in order to reduce the risks of Forex trading. If you’re using leverage or borrowed money, this risk is amplified, and your need to stop loss increases dramatically.

We recommend that you set your stop-loss order somewhere that you don’t lose more than 3% of your initial investment.

A guaranteed stop-loss option from your broker will ensure that you can get out of your trading position at the predetermined price you have chosen, even if the market suddenly moves against you. You can ask your broker whether they provide a risk management option like guaranteed stop-loss execution or whether you have to pay for it or not.

What can Arongroups do for you?

Aron Groups is a Forex Broker that can make scalp trading easier for you. You can deposit and withdraw easily and with no commission and wages, using Visa, Mastercard, PayPal, etc. You can also enjoy a 2% cashback by depositing USDT.

You can open up different accounts such as standard, V.I.P., Nano, and Cash, and use the most up-to-date MT5 trading platform.

Aron Groups provides you with security and excellent customer service that any other broker cannot match.

To register with Aron Broker, Click Here, Or you can read about frequently asked questions here.

Trading forex for beginners in a glance

Forex market is one of the largest and most liquid asset markets globally due to trade, commerce, and finance worldwide. To be profitable in Forex, not only do you need to know and understand all the basics and know the important factors and players, but it also needs a great deal of practice to make it as a Forex trader. Forex trading comes with its own set of risks, and you need to practice and have contingency plans in place. Some stakes are foreseeable and manageable, while others are tricky to manage or even predict. We recommend you sign up with a reputable broker and start a demo account because this is the best course of action for forex beginners.