Forex Trading Guide

Richard Montana | October 21, 2022

What is the Forex Market?

The Forex (FX) is a currency trading market. The forex market is the largest financial market in the world, with trillions of dollars in volume traded every day. Anyone who opens a forex trading account with a forex broker can trade the extremely liquid forex market.

The forex market does not have a centralized location, instead it is an electronic network consisting of participants who have foreign exchange currency needs such banks, financial institutions, brokers and speculative retail traders. The main factors that move the forex market are speculation, economic growth and strength and differentiating interest rates.

Those who participate within the forex market place orders to buy and sell currencies from each other through a forex broker. The forex market is open 24 hours a day, five days a week, excluding holidays. The size and deep liquidity of the forex market, combined with its availability make it an appealing choice for traders. This allows you to buy or sell currency pairs anytime during the week.

The largest forex markets are based in major global financial locations such as London, New York, Singapore, Tokyo, Frankfurt, Hong Kong, and Sydney. Trading liquidity usually peaks when these markets are open or overlap, especially when trading a currency pair that includes a major markets currency.

Forex is the foreign exchange market where currencies are traded. The forex market is one of the largest in the world with trillions of dollars traded amongst participants each and every day. This makes it a highly liquid and dynamic market. The fact there is high market liquidity means that forex prices can change rapidly in relation to news events. This creates multiple trading opportunities for forex traders.

The forex market is decentralized which means that it does not have one physical location. Instead, the forex market is an electronic network of participants who trade currencies such banks, financial institutions, brokers and speculative retail traders. Some of the key factors that cause movements within the forex market are speculation, economic growth and varying interest rates.

The largest forex markets are based in major global financial locations such as London, New York, Singapore, Tokyo, Frankfurt, Hong Kong, and Sydney. Trading liquidity usually peaks when these markets are open or overlap, especially on currency pairs that include a major markets currency.

Forex Market Differences

The forex market is different from other major markets. There are less rules especially when not using a regulated forex broker. Fees and commissions can vary depending on the forex broker you use. Most will charge a commission for each trade you make whereas some may also add a mark up to the spread. The spread being the difference between the bid and ask prices. Forex brokers can provide leverage of up to 1:500 or even higher in certain jurisdictions. This means that you can have $1,000 in your account and take a position of $100,000 when using 1:100 leverage. Whilst this may seem attractive, it can increase both profits and losses. High leverage makes forex trading very risky and most traders lose money attempting to trade in this way. Trading with a regulated forex broker that has no dealing desk can help to provide the best possible forex trading conditions. Traders should always manage their position size and control risk so that one trade does not results in a large loss.

What is Forex Trading?

Forex trading is when you want to speculate on the price movements in the global currency market. Currency prices fluctuate constantly against each other, which presents multiple trading opportunities on a daily basis.

When you trade forex, you are speculating on the difference between the prices of a currency pair and looking to make a profit from these price fluctuations. If you sell one currency, you are buying another and if you buy a currency you are selling the other.

Those who participate within the forex market place orders to buy and sell currencies from each other through a forex broker. The forex market is open 24 hours a day, five days a week, excluding holidays. The size and deep liquidity of the forex market, combined with its availability make it an appealing choice for traders. This allows you to buy or sell currency pairs anytime during the week.

What are Forex Currency Pairs?

Forex currencies are listed in pairs, such as the most popular fx pairs the EUR/USD and GBP/USD. When you are trading the forex market, you buy and sell a currency pair of one country that is relative to another. When you sell one currency, you are buying another and if you buy a currency you are selling another. The most traded currency is the U.S. dollar whereas the euro is the most traded counter currency. Other significant pairs include the Japanese yen, British pound and Swiss franc.

Each currency pair has its own price on which traders can speculate to make profits from increasing or decreasing value of the associated currencies. If you anticipate a currency pair will decrease in value then you would look to short (sell) the pair. If you expected a price increase, then you would look to long (buy) the pair. A profit or loss is made between the difference in prices from when you entered and exited your trade position.

There are hundreds of forex currency pairs that you can trade. They are typically divided into three categories; major, minor and exotic. The grouping depends on popularity and liquidity.

Major currency pairs

These are the most liquid currencies and most actively traded. Major currency pairs consist of around 85% of the total trading volume in the FX markets. The amount of liquidity usually means that the spreads for these pairs are usually tighter when compared to the less traded minor currency pairs. Examples of major currency pairs include EUR/USD, GBP/USD, USD/JPY, AUD/USD, USD/CHF and USD/CAD.

Minor currency pairs

Minor currency pairs are not as popular and therefore not traded as much as the major currencies. The spreads for minor currency pairs can often be much wider when compared to major currency pairs, primarily due to the medium sized liquidity in the market. Examples of minor currency pairs include AUD/NZD, EUR/NOK, EUR/SEK, EUR/AUD, GBP/CAD, CHF/JPY and NZD/JPY.

Exotic currency pairs

Exotic currency pairs are very rarely traded. Due to the low volumes of trade, exotic currency pairs are considered to be illiquid and therefore tend to be expensive to trade with much wider spreads than major currency pairs. Examples of exotic currency pairs include USD/MXN, EUR/TRY, USD/TRY, USD/ZAR, EUR/SGD and EUR/HUF.

How does Forex Trading Work?

Forex trading instruments are quoted in pairs, with one currency paired against another. For example, the EUR/USD (euro vs US dollar), GBP/USD (sterling vs US dollar), EUR/JPY (euro vs yen) and USD/CHF (US dollar vs franc).

The exchange rate between the currency pairs are where a forex trader looks to make profit. The first currency is known as the base currency whereas the second currency is known as the quote currency.

In the instance of the EUR/USD, the euro is the base currency whilst the US dollar is the quote currency. Thus, if the price of the EUR/USD currency pair is 1.06235, this means that 1 euro is the equivalent of 1.06235 dollars.

If the price increases, this means that the euro is increasing in strength in comparison to the US dollar. If the number decreases, it means that the US dollar is increasing in strength in comparison to the euro.

Forex traders would look to go long (buy) a currency pair if they expected a price increase and go short (sell) a currency pair if they believed the price would decrease. The difference between the price from when you entered a forex trade and the price when you exited, will determine the amount of profit or loss made from the trade.

In the EUR/USD example above, if the trader thought that the euro would increase in strength against the US dollar, they would look to place a buy trade. Once in a buy position on the EUR/USD, every point (pip) that the euro increases in value against the US dollar, they would make a profit. However, should the price of the euro weaken against the US dollar, every pip movement would result in a loss.

How to Analyse the Forex Market?

The majority of forex traders will conduct thorough market analysis in order to try and identify potential entry and exit opportunities on various currency pairs across different chart time frames. This can include technical analysis with indicators, fundamental analysis, price action analysis and market sentiment analysis.

Forex technical analysis

Forex technical analysis involves using a combination of technical indicators on forex charts to try and identify the direction in which a currency pair will move. Many technical indicators use complex mathematical algorithms that crunch historical data in order to present a visual interpretation of a currency pairs behaviour. Traders will then use this information to assist with trading decisions.

When you trade forex online, you will be using a forex trading platform which should have a range of technical indicators built-in. Some of the most popular indicators include the moving average, relative strength index (RSI), Bollinger bands, stochastic oscillator and moving average convergence divergence (MACD). These are often combined together to form a trading strategy template.

Forex fundamental analysis

Fundamental analysis in the forex market is the analysis of economic factors that can affect currency pairs. It is usually conducted by studying news releases that can impact the strength and weakness of a currency. Positive news can cause an increase in the value of a currency whereas negative news can cause a decrease in a currency value.

Traders who follow the news can anticipate how currency pairs are expected to react to news releases. Most forex brokers will have an economic calendar which is a popular trading tool that allows you to keep track of the latest news releases along with the previous, forecasted and actual impact they have on various currencies. News can be filtered according to date, time and currency.

Forex price action analysis

Price action analysis when trading forex is the study of price to assist with trading decisions. Forex traders use price action analysis to help determine how a currency pair will react. Common methods of price action analysis include support and resistance levels, pivot points and candlestick patterns.

Forex sentiment analysis

Forex sentiment analysis involves looking at what other market participants are doing and using this information to assist in trading decisions. The sentiment can be referred to as the overall bias of traders. If the majority of traders are buying a currency pair then the sentiment is said to be a buying sentiment. If the majority of traders were selling a currency pair then the sentiment would be considered a selling sentiment. Some traders believe that trading with the sentiment can gain momentum whereas others use the sentiment as part of a contrarian trading strategy, to trade against the crowd.

What is a Forex Broker?

Foreign exchange had previously only been traded on the interbank market by larger clients such as banks and multinational corporations who used it to trade for commercial purposes and to hedge against currency risks. Since then, retail forex trading has been introduced through forex brokers.

A forex broker (short for brokerage) is an intermediary who buys and sells currency pairs on behalf of its clients for a commission fee and/or spread mark up. They allow individual retail traders access to trade the previously inaccessible forex market through online trading platforms.

Since they first began in the 1990’s, forex brokers have offered a service that is essential for traders to be able to trade currencies and have been vastly improving their services over the years. Opening a forex trading account is now a quick and easy online process. All you need is an internet connection, forex broker trading account and trading platform. Previously, this was only available to banks and other financial institutions.

There are hundreds of forex brokers located throughout the world with differing trading conditions, products and services. Most will offer a wide range of major and exotic currency pairs to trade whilst also offering other trading instruments such as stocks, CFDs, indices, commodities, energies, precious metals and cryptocurrencies. This makes it convenient for a trader to be able to trade multiple markets on one trading broker. Trading is risky, thus if you are a beginner trader it is best to start on a demo trading account.

In addition to providing an account and platform to trade from, forex brokers offer other relevant services such as educational material, forex news, market analysis, trading tools and more. These services may be free to the brokers clients or come at an additional cost.

With so many forex brokers to choose from, it is very important to check if the broker is regulated and offers negative balance protection. Regulation will help to ensure that your funds are safe and held in a segregated account away from the brokers account so that they cannot be used for any other purpose. A regulated broker has to stick to strict regulatory guidelines which can give clients peace of mind.

Market Makers

There are forex brokers who operate as a market maker and use a dealing desk. These brokers can take the opposite position of a trader and add mark-ups to the spread which can increase trading costs. Some may even delay order fills that can lead to negative slippage. A dealing desk model can be problematic if there is a conflict of interest, although broker regulation has helped to significantly reduce this happening.

STP/ECN Brokers

Other brokers have no dealing desk and provide STP/ECN accounts with direct access to trade the markets through liquidity providers (LPs) for a small fixed commission fee. This model usually gives lower spreads, faster execution and more favourable trading conditions as there is no broker interference with your trading. This is why it is so important to compare brokers and choose only the best forex brokers with strict regulation in place.

What is a Forex Trading Platform?

An online forex trading platform allows traders to access different global markets for speculating on the price movements of various trading instruments. This can include Forex, Commodities, Cryptocurrency, Stocks, Shares, Indices, Metals, Energies, Options, Bonds, ETFs and CFDs.

In the past, forex investors and traders would have had to go through an offline foreign exchange broker which meant that the markets were less accessible than they are today. As technology has improved over the years, there are now many online forex brokerages to choose from. Anyone aspiring to be a successful trader can open a forex trading account with a forex brokerage and gain access to the brokers trading platforms to trade forex from anywhere in the world with an internet connection. Most forex brokers provide these platforms free of charge and for use on desktop and mobile devices.

Through a forex trading platform, you can view real time bid/ask prices of various currency pairs and load charts that show the historical and current prices of these currencies over multiple timeframes ranging from tick to yearly charts. You can add technical indicators to these charts to help identify potential trending and ranging market conditions. These indicators can provide forex trading signals and are often used as part of a forex trading strategy that involves technical, fundamental, sentiment and price action analysis. When you find a suitable trading opportunity, you can execute, manage and close your buy or sell position directly through the forex trading platform.

Choosing a Forex Broker

We will now look at what forex trading platforms are used for and some of the most important factors to consider when looking for a reliable forex platform. The key factors to consider when choosing an online forex broker include:

Regulation

When you choose a forex trading platform it is very important to ensure that the forex brokerage providing the platform is regulated by a respected government authority. Investors have more protection when using a regulated forex broker as they have to conduct business according to strict rules and regulations put in place to protect forex investors. If a broker claims to be regulated, you can verify this by checking the broker’s license number with the relevant authorities to ensure the regulation is legitimate and up to date.

Platforms

If you are already familiar with a specific forex trading platform then it could be a good idea to choose a forex broker that offers that platform. However, if you have yet to use a trading platform then it may be a good idea to start with a broker that offers a user-friendly forex trading platform which has plenty of tutorials available to help you learn how to trade online. The MetaTrader 4 (MT4) platform is often considered as one of the most intuitive and easy to use forex trading platforms which makes it a popular choice amongst new forex traders across the globe. You will find that there are lots of MetaTrader brokers which is one of the most user-friendly platforms that gives convenient market access for manual and automated trading strategies.

Most forex brokers will provide traders with free forex trading platforms although there are some who charge monthly and volume-based fees, usually for specialised trading platforms that have specific features a professional forex investor may need. That being said, the free platforms will most likely be sufficient enough for the average retail trader.

In addition to potential fees for gaining access to the brokers trading platforms, you should consider other online forex trading costs. Most forex brokerages will charge a commission for placing trades in addition to the spread and overnight swap fee. These costs can vary significantly from broker to broker so it is important to consider the overall costs you will incur and the affect that will have on your money management.

Tools

All forex trading platforms come with a range of free built in trading tools to assist with your forex trading, helping to improve overall efficiency and performance. These can include technical indicators for analysing charts such as a moving average, MACD, Bollinger Bands, RSI, CCI and many more.

Some forex platforms offer fundamental analysis tools such as built in economic calendars to efficiently keep track of the latest forex news releases. They may also have trading calculators to help with planning your trades. The more advanced platforms will have depth of market (DOM) with level 2 pricing and sentiment tools that show how many traders are buying/selling a particular currency pair.

If you require a specific set of trading tools or would like access to as many as possible, you should check what forex trading platforms the broker offers along with the trading tools included. Some trading tools are stand alone and thus will not be incorporated into the platforms but can still be very useful.

Currency Pairs

Forex is one of the most popular markets for online traders and is a large focus of the service that trading brokers offer. Each forex broker will offer a range of different markets and trading instruments to trade via their online trading platforms. If you wish to trade a particular asset class such as forex, stocks, cryptos, etc, you should check whether the broker offers that market through its platforms. It may also be wise to consider if you plan to diversify your investment portfolio in the future. If so, the more trading products and markets offered by the broker, the easier it could be to expand your portfolio when the time is right.

You will want to check that the forex broker offers a good range of forex currency pairs for trading, this will include major currency pairs such as the EURUSD and GBPUSD, minor currency pairs such as the EURGBP and EURAUD, exotic currency pairs such as the EURTRY and USDDKK. The more currency pairs available, the greater your options will be. You will find there are many brokers who offer a combination of financial instruments.

Broker Fees

A forex broker makes money by charging a fee for using their services. This fee is usually a commission for each trade made through the brokerage and/or a spread mark-up if using a market maker. These brokers charge zero commission but will increase the liquidity providers spreads to cover costs and make profit from every trade processed through them. They can offer fixed spread accounts which is not always a sustainable model as actual spreads may be greater than the fixed spread set by a broker. When using a fixed spread trading account you should check the small print as they are not always fixed 24/5 especially around economic releases or hours of low liquidity. When a broker charges a commission they tend to offer variable spreads which will depend on the liquidity pools that they use, without any mark-up. This will often mean lower spreads and overall trading costs, even after the discount brokers commission fee is factored in.

Commissions

When you trade forex online with a forex broker, you may be charged a commission fee for each trade. Generally speaking, the lower the commission fee, the more you can save on trading costs in the long-term. If you are someone who plans on placing trades on a frequent basis, then you may wish to shop around for a discount broker.

Some brokers do not charge a commission but will usually compensate by including a spread mark-up to cover costs. The type of broker you choose can depend on your trading style. Those who use scalping strategies may look for brokers with the lowest commission and spreads possible. However, swing traders who hold positions over the long-term, are less likely to be as concerned by the commissions and spreads.

Most forex brokers will charge a commission for each trade that you place. Check the commission amount is listed “per round turn”. Some brokers will list a commission of $3.5 per trading lot which is actually $7 once you have opened and closed the trade. It would be a wise idea to factor the commission in to your money management plan as it is a key trading cost, along with the spread.

Spreads

The spread is the difference between the buy and sell (bid/ask) price which can vary depending on the volume of liquidity and quality of liquidity providers that a forex broker has. Some brokers offer fixed and variable spread accounts, some will offer commission free accounts but instead mark up the spread to make up for this. In general, the more liquidity that the broker has, the tighter the spreads can be. It is important to account for the spread when planning your forex trading strategy, especially if you are planning on using scalping strategy.

Every time you buy or sell a currency pair, you need to pay the spread. This is the difference between the buy and sell price. Whilst the spread will be similar across most brokers, some forex brokers have more liquidity providers (LPs) than others which means their spreads can be lower. This is especially important if you are taking short term trades as the spread can quickly add up.

Swaps

If you hold a position with your online forex broker overnight then you will probably need to pay a swap fee. This is an interest fee for the procedure of moving open positions from one day to another, also known as the rollover. Weekend rollover is usually charged on Wednesday which will give a credit or debit of triple the normal amount. This is another cost to factor in to your money management planning. Some brokers offer swap free Islamic trading accounts that conform with Sharia law which allows Muslims to engage in online trading through their forex platforms.

Other Fees

Along with trading platform, spread, commission and swap fees, most forex brokers will charge additional fees that should be checked and clearly understood. Other fees that are worth considering include withdrawal and inactivity fees.

Leverage

Forex is a margined product, also known as leveraged trading. Leverage involves borrowing a certain amount of the money needed to invest in something. In the case of forex trading, money is usually borrowed from a forex broker. Forex trading does offer high leverage in the sense that for an initial margin requirement, a trader can leverage their account in order to control a much larger position size.

Nearly all online brokers offer leveraged forex trading via their platforms. Leverage basically means that you can open a position larger than you could without it. If for example you had leverage of 1:50 and a trading account balance of $1,000, you could effectively open a position size of $50,000 (1,000 x 50 = 50,000). Some forex brokers can provide leverage of up to 1:100 or even higher in certain jurisdictions. With a leverage of 1:100, you could have $2,000 in your account and take a position of $200,000.

Although leverage can increase profit potential, it also increases trading risk and thus, can lead to large losses. It is imperative that you have a thorough understanding of leverage and the significant risks involved before you start trading online. Check the broker offers a leverage that you require via your preferred forex trading platform.

Orders

Forex brokers will usually offer the instant execution of opening/closing trades and stop/limit orders if you wish to enter a specified distance away from the current price. Trailing stops and break evens are other options they can allow. Some brokers will have a minimum distance requirement if you try to modify an order at a level to close to the current price. Most brokers will allow scalpers, hedging and automated trading. It is worth considering what order types you plan to use and if these are supported by the broker.

Lots

The forex market is traded in lots which can be micro, mini or standard. Check to make sure the broker supports the lot size that you wish to trade. Many new traders start with micro lots to get a feeling for trading in a real environment with less risk. You can trade single or multiple lots, e.g. six micro lots (0.06) or thirteen standard lots (13).

  • Micro Lot: 1,000 currency value (0.01 lots)
  • Mini Lot: 10,000 currency value (0.1 lots)
  • Standard Lot: 100,000 currency value (1 lot)

Resources

Some brokers also provide traders with educational resources such as videos and trading guides to help them improve their forex trading knowledge and skills. They may include detailed tutorials on how to use trading platforms which could be helpful for those who are new to online trading and need help to familiarise themselves with the different platforms available to them. If you require specific tools or would find them beneficial, check that they are offered to clients of the broker and if they free or come at an additional cost. If you are new to trading and need as much guidance as possible, you might want to explore our best brokers for beginners.

Funding

Each online forex broker will offer different options for making deposits and withdrawals to and from the trading platform. Most brokers accept bank wire transfers and credit/debit cards but some traders prefer online payment processors such as Skrill, PayPal, Neteller, etc. Ensure that the trading platform supports your preferred method for funding your forex account.

Support

Whatever the skill level of a trader, it is very likely at some point you will need to contact customer service. This may be more frequent for beginners or a one off for the more experienced traders. However, the customer service should respond in a prompt and efficient manner. Consider what customer services they offer as one may be more convenient to you than others. Some traders prefer to communicate over live chat whereas others want to speak to someone directly on the phone. Online chat is often the quickest way to speak with someone. Also consider the location of the forex broker as the time difference may cause difficulties although most brokers should offer multilingual support 24 hours a day, five days a week. The more hours the forex brokerage support team is available, the better.

Requirements

You will need to make sure that the forex trading platform will run on your computer, VPS or mobile device by checking the specification requirements. Each forex broker trading platform will have a minimum deposit requirement which is worth considering.

How to Trade Forex Online?

Now that you have had a brief overview of what forex trading platforms are and what to look for, you may be considering opening a forex trading account with an online broker to gain access to their trading platforms. This can be a quick and easy process that requires completing an online registration form. Simply choose a broker, follow the account opening process and you will be able to start trading online through one of their trading platforms. If you have taken the time to read through the above, you should hopefully have an understanding of the forex market and how to trade forex online. Here is a summary of the key steps summarised:

1. Decide if forex trading is for you

Trading forex online requires investing time and money. It also carries an element of risk, especially when trading with leverage. You will need to research and analyse currency pairs, follow market news and manage your forex trades. It is important to understand the risks and dedication that comes with trading forex online.

2. Educate yourself

Before trading forex, it is important to learn as much as possible about the forex market. This way you can be prepared as any mistake could prove to be costly. There is a vast array of free educational materials provided by many forex brokers that can help you to improve your trading skills and knowledge.

Most brokerages will also provide a free demo trading account so that you can practice trading forex online with virtual funds in order to familiarise yourself with the trading platforms and practice your forex strategies until you feel confident enough to open a real trading account.

3. Choose a forex broker

In order to trade forex online, you will need a broker account and forex trading platform to execute your trade positions through to the forex market. When choosing a broker, there are a few important things to consider such as regulation, commission fees, platforms, tools, education, funding options and customer support.

4. Research forex currency pairs

If you have made it this far then you may be ready to start trading forex online! The next step is to research the different forex currency pairs to discover which currencies you have an interest in. Perhaps there is a particular country that is already of interest to you and you would like to use your knowledge of the country’s currency. You can choose from major minor and exotic currency pairs. Some experts suggest mastering one currency pair rather than trying to follow multiple currencies with different characteristics.

5. Have a forex trading plan

Amongst the most important factors that can help determine forex trading results can be the trading plan and discipline. It is important to have a solid trading plan personalised to your own needs that includes the money management and trading strategy that you will use. Most experts and professional traders would try to not let negative emotions such as fear, anger and greed affect their forex trading.

6. Buy and sell currency pairs

Once you know what forex currency pairs you want to trade online, you can analyse them to help decide if and when you will place your trades. After placing a forex trade, you will need to keep track of how it performs and manage it according to your forex trading plan. Some traders will keep hold of currencies for the long-term, whereas others may buy and sell currency pairs on a daily basis.

Conclusion

Forex trading is a popular choice for active investors who would like to trade a market that is open 24 hours a day. The liquidity of the forex market also means that there is ample opportunity to look for trades. It can be suitable for scalping, day trading and swing trading.

You can start trading forex with as little as $1 depending on the minimum deposit required by the broker. However, it is important to understand the significant risks involved with trading forex online, especially when using leveraged positions. Most experts would suggest trading on a demo account with virtual funds to begin with.

This can be a useful way to familiarise yourself with how to trade forex and use the trading platforms whilst allowing you to practice your trading strategies until you feel confident and produce consistent results. Most forex brokers provide unlimited demo accounts free of charge.

Forex trading requires patience, discipline and lots of practice. According to our research across hundreds of forex brokers, most online forex traders actually lose money. Most aspiring traders start trading on a demo trading account before going live.

Take your time to research brokers and do your own due diligence, the above information is only for educational purposes and not advice. Please feel free to view our best forex brokers if you need some further inspiration before you get started.

About the Author

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Richard Montana
Richard has many years of experience in broker research, testing, analysis and reviews. He knows what to look for through years of trading himself with different brokers and listening to the feedback of others.

Review Methodology

For all of our broker reviews, we research, validate, analyse and compare what we deem to be the most important factors to consider when choosing a broker. This includes pros, cons and an overall rating based on our findings. We aim to help you find the best broker according to your own needs. You can read more about our review process.


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