How To Trade Forex
Welcome to Trading Brokers step by step guide to trading forex online. Here you will find an easy to understand explanation of forex trading. This includes how to trade forex online, what you need to trade forex and how to open a trading account with a forex broker so that you can start trading forex online today.
Maybe you have heard about forex trading online or from a friend and are curious to know more about it. Perhaps you are looking to invest in currencies and are not sure where to start. Whatever your experience level or investment background, this guide can help you learn how to trade forex online.
What is forex?
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.
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.
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.
Where to trade forex?
Forex trades are processed via a forex broker. The majority of investors will nowadays use an online forex broker to buy and sell currency pairs through a forex trading platform which will enable them to connect to the forex market. You can see a selection of our best forex brokers below with whom you can open a trading account to trade forex online.
ASIC, BVI, CBI, FFAJ, FSA, FSCA
Min $100 Deposit
FCA, CFTC, NFA, BaFin, FINMA, ASIC, FMA, MAS, FSA, FSCA, DFSA, JFSA, METI, MAFF
Min $250 Deposit
ASIC, FCA, DFSA, SCB, CySEC, BaFin
Min $200 Deposit
ASIC, CySEC, IFSC
Min $5 Deposit
Forex currency pairs
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.
What are forex spreads?
Every time you buy or sell a currency pair, you will need to pay the spread. This is the difference between the bid (buy) and ask (sell) price of a currency pair. The spread can vary between forex brokers and currency pairs. The brokers and currencies with the most liquidity will tend to have the tighter spreads. The lower the spreads, the more you can save on trading costs in the long term. This is especially important if you are making frequent short-term trades as the spread costs can quickly add up.
What are forex 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.
What is forex 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.
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.
Whilst this does mean that you can trade a position size larger than you would be able to without leverage, it does also mean that losses can be magnified. It is therefore imperative that before trading online, you understand what forex leverage is, how it works and the risks involved.
How to trade forex online?
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:
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.
If you do not have the time to research brokers, you can see a list of our best forex brokers that we have already prepared to help traders. If you would like to know more, you can also view our detailed guide on how to choose a trading broker.
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.
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.
Is forex trading right for me?
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. Traders who would usually trade stocks, trade indices, trade commodities, trade cryptocurrency, may look to diversify their portfolio.
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 using 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.
Not sure which forex broker to trade online with?
If you are still unsure which forex broker is the best for you to trade online with then you can use our free online broker comparison tool to quickly compare forex brokers based on regulations, minimum deposit, leverage, spreads, commissions, funding options and more. You can also read our broker reviews and choose from our best forex brokers, best trading platforms, best social trading platforms and best trading apps. If you would like to look for the best trading brokers in a particular country, we have pages dedicated to our best brokers USA, best brokers UK, best brokers Australia, best brokers South Africa and best brokers Canada.
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