How to Trade Forex • Full Guide

Some years ago, Forex trading sounded like rocket science. It was the preserve of a few people who were daring enough to try it. However, today, things have changed thanks to technology. Many ordinary people, micro-businesses, and big companies like banks have learned how to trade Forex and are doing it successfully.

You, too, can learn FX trading and become a successful Forex trader. When trading Forex, you combine knowledge, skills, and a proven Forex trading strategy. It's also good to use a solid Forex trading system. So, you cannot become successful in this business overnight. Still, you will eventually succeed if you are willing to put in some hard work.

You should know some things before you start trading Forex. There are also things you should do as you continue trading. The Forex industry is ever-evolving, and you should therefore keep yourself up-to-date so that your business can thrive. In this article, I'll explain how to trade Forex. Let's dive right in.

How to trade Forex – What's Covered?

• Understand Basic Forex Trading Terms
• What is Forex Trading?
• Forex Market
• Popular currencies used in the Forex Markets
• Forex Market Jargon
• Exchange rate
• Currency pair
• Base currency
• Quote currency
• Spread
• Pips
• Trading capital
• Forex order
• FX charts
• Taking a trading position
• Margin rate
• Leverage
• Forex broker
• Analyzing the Forex markets
• Fundamental market analysis
• Technical market analysis
• Start trading Forex
• Get a fast computer
•  High internet speed
•  Look for a Forex broker
• Open a demo account
• Open a live account
• Choose a currency pair to trade with
• Analyze the market
• Read the quote
• Pick your position
• Forex trading example
• Forex trading tutorial
• Other Forex trading strategies
• Day trading
• Trend trading
• Swing trading
• Scalping
• Develop a Forex trading plan
• Psychology of trading
• Frequently asked questions
• Conclusion

Understand Basic Forex Trading Terms

The first step of trading Forex is to understand the basic terms used in this business. Once you know these terms, then you will be on your way to successful Forex trading. Here are some basic terms that you should understand:

What is Forex Trading?

Forex (FX) stands for Foreign Exchange. It is trading/exchanging one currency for another. For instance, if you have dollars and require Euros, you can swap them at the bank or FX bureau. The bank will exchange the dollar for the Euro based on the current FX exchange rate. The bank ensures that it makes some profit from selling currencies.

Forex Market

The Foreign exchange market is an online platform where traders from all over the globe meet to trade foreign currencies. Currencies trade involves buying and selling of different currencies. The FX market sets the rates/prices of all trading currencies depending on the market forces. An FX trader's aim is just like any other trader's: to make a profit by buying one currency at a low price and selling it at a high price.

Popular currencies used in the Forex Markets

You will find almost all the world currencies in the foreign exchange market and other financial markets. However, the most popular currencies are the U.S. Dollar, Japanese Yen, Euro, and British Pound Sterling. The New Zealand Dollar, Canadian Dollar, Australian Dollar, and Swiss France are also popular currencies. If you want to trade successfully, go for the most Forex traded currencies.

Forex Market Jargon

The next thing you should understand before trading Forex is the jargon used commonly in the Forex business. Once you understand the jargon, you can apply it when trading. Here is the common terminology used in the FX market:

① Exchange rate

The exchange rate is the amount of money you can buy or sell one currency for another. For instance, if the exchange rate between the Japanese yen (JPY) and US dollar (USD) is 1 dollar per 120 yen, it means that if you have 120 yen, you can exchange it for 1 U.S dollar in the FX market.

② Currency pair

FX currencies are usually traded in pairs. For instance, you can trade these Forex pairs of currencies; USD/CHF, GBP/USD, USD/JPY, or EUR/USD. As you can see, each currency is abbreviated using three letters, and there is a slash in between them. GBP/USD refers to the Great Britain Pound US Dollar currency pair.

③ Base currency

In the example of GBP/USD, GBP is the first currency in the pair, and it’s called the base currency. So, if today GBP/USD is trading at 1.38, it means that you need 1.38 USD to buy one Great Britain Sterling Pound.

④ Quote currency

When you look at a currency pair like GBP/USD, the USD is the quote currency or counter currency. So, the quote or counter currency is the second currency in a Forex pair.  For example, if the quote for USD/EUR is 0.7747, it means that the EUR USD exchange rate is 0.7747. It means you can buy 0.7747 Euros for US$1.

⑤ Spread

If you examine the quoted price for any currency pair, you’ll notice that there is some difference between the buying and selling price. The difference between the prices is known as the spread. Any changes in the spread cause small price movements known as pips.

⑥ Pips

Pips stand for ‘price interest point’ or ‘percentage in point.’ Pips is very important as you trade Forex. Pips represents the tiny change in a particular currency pair. You can measure it in terms of the underlying currency or in terms of the quote. Pips helps you to calculate your profits and losses.

For example, if the quote of USD/EUR is 0.7747. You can buy 0.7747 euros for $1. If there is a change in the market and this quote increases by one-pip to 0.7748, the USD will rise by pips 0.0001. As a result, you can buy a few more euros.

⑦ Trading capital

Before you start foreign exchange trading, you should decide how much money you would like to invest. Once you have decided, you deposit your trading capital with your chosen broker. You can start trading on your chosen platform with as little as $10. However, investing very little trading capital may not give you good returns.

On the other hand, you should not invest more than you can afford to lose. Remember that the FX market is unpredictable. Although most Forex traders can make loads of profit, they also expect to make some losses now and then.

⑧ Forex Order

You can give instructions to your FX broker to carry out a transaction on your behalf in the currency markets. For example, you could order your broker to buy 200,000 GBP versus the US Dollar at the current currency markets rates. You can give the order through your broker’s Forex trading platform.

⑨ FX Charts

In Forex trade, a chart (price chart) is the visual representation of the price of a currency pair over a given period. It shows you the pair’s trading activity during one trading period. The trading activity could be one week, a day, six hours, ten minutes, etc.

A chart helps you see Forex trading volume, Forex derivatives, random price changes of a currency pair, tendencies, patterns, and movement. It thus enables you to assess probability and manage risk.

⑩ Taking a Trading position

Taking a trading position as you trade currencies is choosing the way you hope/predict to make a profit. You can either take a buying position or a selling position. The position you take could be unprofitable or profitable depending on how the market prices move. You make a loss if the prices move against you and a profit if they move in your favor.

⑪ Margin rate

The margin rate is the amount of cash you are required to deposit so that you open a trade. The margin rate is normally expressed as a percentage of the total value of the position. In some countries like the UK, the margin rate starts at about 3.3% for the leading pairs of Forex currencies.

⑫ Leverage

Leverage allows you to control larger trading positions with a small number of your actual trading funds. For example, 50:1 leverage means that $1 in your trading account could control a trading position that’s worth $50. So, leverage magnifies potential losses and potential profits depending on the degree of leverage you use.

⑬ Forex Broker

A broker is a firm that links traders with the FX market or stock market. When you start trading FX, you have to open an account with a Forex broker. The broker will then give you a platform where you can carry out your Forex trades.

There are numerous reputable online Forex brokers platforms where you can perform your Forex trades. It would help if you did your research so that you could choose the best. Most Forex brokers make money by charging you a fee for using their platform. The commission charged may vary from one broker to the other.

Read about the 5 Best Forex Brokers here.

Analyzing the Forex markets 

In Forex trade, you should not trade using emotions. You should instead analyze the market before making a move. When you analyze the market, you will make informed trading decisions. Below are the two market analyses methods you could use:

① Fundamental market analysis

Fundamental analysis helps you to determine the actual or fair market value of a stock. In this method, you look for a stock trading lower or higher than its actual value. If you find that the stock's fair market value is higher than its market price, you can buy it because, according to you, the stock is undervalued. In forex, you use fundamental analysis to look at the news that will impact the currency movement. Popular news includes non-farm payroll, central bank meetings which can affect their decision on the country's interest rate and such.

② Technical market analysis

In technical analysis, you overlook the fundamentals. You study the stock's historical price trends to forecast how the stock will perform soon. You can check the stock's historical patterns and trends on charts. You might identify trading opportunities by the time you finish your technical analysis. The same goes for forex trading, you study the technicals of the market, with chart patterns, price action and indicators to help determine the direction of the market.

How to Start Trading Forex

Now that you know what Forex trading entails, it's time to start retail trading. It may take time to understand most of the things about Forex trade. Every day in the Forex market is a learning process. So, let's start trading.

1. Get a fast computer

You require a computer or tablet to trade FX. The computer should be reasonably fast, and it should have good storage space. The screen should be big enough to accommodate your charts. It's not necessary to have a gaming computer, any model that allows fast streaming on the internet is good enough to run the trading platforms regardless if the platform is online or via a software.

2. High internet speed

It would help if you also had reliable and high internet speed. You see, currency prices change quickly during trading. So, you have to quickly decide when and where to buy or sell in the FX market. Slow internet can impact your foreign exchange transaction negatively.

3. Look for a Forex Broker

As mentioned earlier, in FX trading, you buy and sell currencies. You trade Forex through an online platform provided by a FX broker. It would help if you vetted several brokers before picking one. A good broker should be of good reputation with traders. You can find out their reputation by looking at reviews online.

The broker should also have been in the business for an extended period. The necessary authorities should also regulate them in their country. Finally, the broker should segregate clients' money from its own money. After all, you want someone you can trust with your money, right?

4. Open a Demo Account

You can open a demo account once you have chosen the broker and they have accepted you as their client. Most reputable brokers provide their clients with demo accounts. A demo account is an account that you use to practice trading. You don't fund the account with real money; instead, the broker provides virtual currency that you can use to practice trading.

The demo account works like the live account; the only difference is that the money you trade with is not real. You can practice using the demo account for as long as you wish. This is the time to put all the Forex knowledge we mentioned earlier into use.

You will meet the Forex jargon and learn other things as you trade using the demo account on the trading platform you have chosen. The good thing is that you have nothing to lose when dealing with a demo account.

5. Open a Live Account

After practicing using the demo account, you can open a live Forex trading account on the same trading platform. A live account is an account where you deposit real money to start live trading. You can fund your Forex accounts through debit card, bank wire transfer, PayPal, Skrill, etc. It all depends on the methods that your broker accepts.

Once you have deposited money into your trading account, you can start trading. It's good to start trading with small amounts as you test the waters. You can increase your deposit as your confidence grows.

6. Choose a currency pair to trade with

Trading Forex is just like any other kind of trading where you exchange one thing for the other. In the currency market, you exchange one currency for the other. It means that you always trade currency pairs.

For new Forex traders, it's advisable to start trading with the major currencies or most common Forex pairs. One of the major currency pairs is the EUR/USD. However, one can go for any of the other currency pairs available in the market.

Analyze the market

Before making a move in Forex trading, do some market analysis. As mentioned earlier, you can analyze a currency pair using either technical or fundamental market analysis.

Both market analysis methods are suitable so long as the method you choose helps you speculate the currency price movement and make an informed decision. After you are satisfied with your market analysis, take the following steps:

Read the quote

You'll notice two prices are shown for currency pairs. For example, a quote for EUR/USD may look like this 0.07173/0.07191. The first rate (1.07173) is the price at which you can sell the currency pair. The second rate (1.07191) is the price at which you can buy the currency pair. The difference between the first and the second rate is called the spread. This is the amount that a dealer will charge you for making the trade.

Pick your position

In Forex trading, you buy one currency and sell another simultaneously. You speculate on downward or upward movements in the market to help you buy or sell currency. There are two ways you can pick your position in the market:

⫸ Pick a sell position: If you plan to sell EUR/USD, it means that you have already speculated that the Euro will weaken against the US Dollar. In other words, the base currency will drop against the quote currency.

⫸ Pick a buy position: In this case, if you plan to buy EUR/USD, it means that according to your speculation, the Euro will strengthen against the US Dollar. In other words, the base currency will increase against the quote currency.

Forex Trading Example

The values of currencies can fall or rise against each other or in response to the world's political, financial, international, and national events. That is why it is essential to update yourself on what is happening in the world.

In FX trading, you buy and sell two currencies simultaneously. You can therefore speculate on downward or upward market movements. Below is an example of Forex trading:

For example, you decide to trade the pair of EUR/USD, and EUR is trading at 1.13010 and the USD at 1.13020 (1.13010 / 1.13020). So, from market analysis, you learn that the Euro might fall against the USD in a few days. After careful consideration, you feel that the price of EUR/USD will drop, so you resolve to sell euros €20,000.

Since EUR/USD is trading at 1.13010 / 1.13020, the margin rate of this pair is 3.34%. You should therefore deposit 3.34% of the entire position value as the position margin. So, the position margin is $754.94 (3.34% x [€20,000 x 1.13015]). Your trading platform automatically converts the amount of the position margin into your trading account currency. The conversion will be done at the prevailing market conversion rates.

Outcome 1: losing trade

Let's say you made a wrong prediction, and the price of your currency pair EUR/USD rises to 13800 / 1.13810 in the next two hours. If you feel like the price might continue to rise, you could decide to limit your losses by closing the trade by buying at the current buy price of 1.13810.

In this scenario, the price has moved 80 points against you (1.13810 – 1.13010).  So, you lose $160 ([€20,000 x 1.13810] – [€20,000 x1.13010]) = –$160.​​

Outcome 2: winning trade

You made the right prediction and the price of EUR/USD falls to 1.12510 / 1.12520 in the next two hours. Then, you decide to close the trade by buying at the current buy price of 1.12520.

In this case, the price has moved 49 points in your favor (1.13010 – 1.12520). You will make a profit of $98 ([€20,000 x 1.13010] –[€20,000 x 1.12520]) = $98.​

Forex Trading Tutorial

Here, we have Ezekiel Chew, founder of Asia Forex Mentor and a top FX trader who earns over 6 figures per trade and trains bank traders. Ezekiel divulges how to trade FX and what you need to become successful in FX trading.  According to Ezekiel, if you want to succeed in trading Forex, there are three key things that you must do:

1. Start by learning how to read the price charts

You'll understand why the markets move sideways, down, or up when you know how to read price charts. You'll then see the Forex trading strategy you should apply in that direction. Price action is among the best ways of learning how to read charts. Most professional traders use the price action technique.

 

2. Trade with a combination of strategies or Forex trading strategy that is proven

If a strategy is proven, it means that it has been back-tested comprehensively. The strategy has consistently proven to work. You will then have the confidence to stick with the strategy even during quiet periods.

 

3. Use a solid trading system

A solid trading system is defined by the business behind trading and the technical aspects. It's a properly structured trade that aligns itself with the entire trading plan, and there is proof that it works. Most new traders think that Forex trading is about strategies. To become a successful trader, you must combine strategies and a solid trading system.

Ezekiel's famous trading mantra is “Win big, lose small.” He abides by this mantra, and so do his students.

“Forex trading is all about understanding the mathematical probability behind every trade and having an edge in the trading game.”

If you lose small and win big, one win can cover three losses or more. You will be a winning trader if you make use of this methodology in the long run.

Check out Ezekiel's one core program to learn more about his trading method whose focus is on R.O.I and is backed by mathematical probability.

 

Other Forex Trading Strategies

As stated earlier, learning how to trade FX is a continuous process. There are other trading strategies that you could develop to make your trading more successful. You could use one or more of these strategies in your trading. The strategies are:

① Day Trading

You could decide to become a day trader. In this currency trading strategy, you enter and exit trading positions throughout the day. However, you close your positions by the end of the single trading session. This strategy helps you to avoid the additional risks of holding trading positions overnight.

② Trend Trading

If you are a trend trader, you have to estimate the currency's fundamental value and look out for its previous results and forecasts during a specified period (trends). After establishing the trend, you can decide to hold a trading position to profit from a particular trend until the trend ends. Trend trading is, therefore, a currency trading strategy that is for a longer-term.

③ Swing Trading

If you are a swing trader, it means that you usually take overnight trading positions. In swing trading, you aim at buying low and selling high. You get into and out of the FX market depending on signals you get from the Forex market.

④ Scalping

In scalping strategy, you become a very active trader. You aim to make profits from any short-term shifts in the market. You, therefore, exit and enter the market fast so that you can get a few pips of profit at a time.

 

Also read: Best Forex Trading Course

Develop a Forex Trading Plan 

There is a saying that ‘failing to plan is planning to fail'. This expression applies to Forex traders too. Any Forex trader worth his salt should develop a trading plan. A plan is a written roadmap showing how to trade.  The plan should incorporate any trading strategies you have tested and feel that is working for you.

The plan should also include exit and entry rules, position sizing rules, and risk management rules.  Stick to the trading strategy you have picked. Please don't change the plan unless you want to improve it or feel that it is not helping you make profits.

Developing a trading plan takes time. It could help if you joined a social online trading platform. You could learn a lot from other successful traders on such platforms.

The psychology of trading

Forex trading can be a very emotive business because you can either make profits or losses. However, it would be best if you tried not to trade with emotions. Being able to control your emotions while trading in the financial markets could be the difference between failure and success. There are two emotions you should try to control while trading. These emotions are fear and greed.

Fear: Sometimes, as you trade, the Forex prices can start falling right before your eyes. In such a case, fear can grip you as you start thinking of the losses you are likely to make. You might then close a winning trade prematurely. If you eventually make a loss, you might have a fear of entering the market again.

However, you should control your fears and live to fight another day. Don't allow one bad day at the Forex market to ruin your entire career.

Greed: At times, greed can get the better of you, especially if you continuously make profits for a given period. In this case, you decide to invest more money in a trade even when all signs indicate that the market will not move in your favor. If the market does not favor you, you end up losing money because of greed.

Frequently Asked Questions

In this part, you'll find answers to some of the questions asked by those who are interested in Forex trading :

Who is the owner of Forex Market?

No one per se owns the Forex market. It is an open market where buyers and sellers of foreign currency meet to trade. Anyone can trade in this market, including banks, governments, organizations, ordinary Forex traders, etc.

When does the Forex market open?

The online Forex market is open 24/7, 365 days a year.

What is the minimum money I can invest

The minimum amount of money Forex traders can invest depends on the trading platforms of their Forex brokers. Some platforms allow Forex traders to start with as low as $10. However, investing too little may not result in a profitable trade.

What is the maximum amount of money I can invest

Again, there is no maximum amount of money that Forex traders can invest. It all depends on how much they want to invest. However, remember that since the FX market is unpredictable, you should invest only what you can afford to lose.

Conclusion

Now that you know how to trade Forex, you can easily start your trading business. You can trade from any part of the world if you have the necessary market knowledge, skills, techniques, viable strategies, and a solid Forex trading system.

Most of the things explained here may sound strange right now, but you will get to understand them more as you continue to trade. Remember, learning how to trade foreign currency is a continuous process. To be successful as a trader, you should be patient, committed, open-minded, and, most importantly, learn from your successes and mistakes.

As you continue trading, you should develop a trading plan that works for you. You should also not allow emotions like fear and greed to overcome you when trading. Take profits and losses in your stride. With time, you could become one of those Forex traders that rake in unbelievable profits.