If you have ever looked into trading forex, you will no doubt have seen numerous success stories. There are those who understand the markets and have strategies in place to ensure that their forex trading brings rewards. Equally, there are those who seem to lack any form of success. Generally, these are the people who have not invested their time into the education needed to succeed. Trading forex for beginners can be confusing unless you take the time to learn.
To be one of the success stories, you need to ensure that you understand the basics such as currency pairs. You also need to be aware of the various strategies that exist and you need to be able to find a trading style that suits you. Whether you are starting out in forex as a complete beginner, or are someone who has perhaps placed a few trades, we’re here to help. We’re going to cover all of the basics that can see you getting started as a forex trader.
What is forex trading?
If you are a complete beginner to the world of forex, you may not be entirely clear on what forex trading actually is. Forex trading refers to the foreign exchange and is sometimes referred to as FX trading. It relates to the conversion of one currency into another. The market is huge and is driven by companies, banks, governments, and individual traders. To show just how big the forex market is, it is worth knowing that there is around $6.6 trillion worth of transactions every day.
As a forex trading beginner, you need to be aware of the fact that the market can be extremely volatile. Price movements are dependant upon the amount of currency that is converted each day. You need to be aware of how to spot patterns and realise what is an unexpected swing in prices. Getting out at the right time, as well as in, is vital to your success.
Forex terms for beginners
As a beginner in forex, you are going to need to have an understanding of certain terms. While there are many, we’re going to take a look at the most common. Having knowledge of these will mean that you can have a basic understanding of forex and how it all works. Without some understanding, reading about forex is almost like trying to contend with a foreign language. So, here are the basic terms that you’ll need to know:
In forex, a pair is a combination of two currencies. These currencies are traded against each other. If you start to look at the forex pairs that are available, you’ll soon see that there are literally hundreds of options to choose from. Some of the most popular include:
- Euro against the Dollar (EUR/USD)
- Dollar against the Japanese Yen (USD/JPY)
- Pound against the Dollar (GBP/USD)
Having seen the most popular forex pairs, you have probably noticed that each currency has its own three-letter code. These are used so that forex traders can quickly identify currencies that they want to trade. The most common codes that you’ll see include:
- CAD – Canadian dollar
- MXN – Mexican peso
- NZD – New Zealand dollar
- USD – US dollar
- HKD – Hong Kong dollar
- EUR – Euro
- AUD – Australian dollar
- CHF – Swiss franc
- GBP – Pound sterling
Base and quote currencies
This relates to how currency pairs are shown. On the left, you will find the base currency whereas on the right you will see the quote currency. With the base currency, this is always equal to 1. The quote currency is equal to the quote price of the pair.
In forex, a pip relates to movement in a currency pair. More precisely, it refers to a one-digit movement in the fourth decimal place. Confused? A basic example could see GBP/USD moving. it could be that it starts at $1.35371 and moves to $1.35381.
When looking at trading forex, currencies are traded in lots. These are batches of currency. Forex price movements tend to be on the small side so this means that lots tend to be extremely large. As an example, when looking at a standard lot, you will see that it is made up of 100,000 units of the base currency.
The workings of forex trading
As a beginner in forex, it is worth taking a look at how this actually works. On one level, forex trading is simple: just like buying anything else, you are buying something that is an asset by using a currency. In forex, that asset is another currency.
One currency will be worth more than another and the market price tells you how much of one you’ll need to buy another. If you look at the pairs that we referred to earlier, EUR/USD shows how many US dollars you would need to be able to buy a Euro.
Buying and selling currency
As a beginner to trading forex, you may not be fully aware of what it means to buy or sell a currency. When you buy a currency pair, you are saying that you are expecting the price to go up. This would mean that the base currency is getting stronger when compared to the quote currency.
Conversely, selling means that you expect the price to move downwards. This would mean that the base currency is becoming weaker when compared to the quote currency.
Forex trading styles
When it comes to trading forex, it is important to find a style that suits you and what your ultimate goals are. The most popular forex trading styles are:
- Scalping – You open and close positions quickly to take small profits
- Day trading – You open and close positions within a day
- Swing trading – This involves looking for highs and lows and then placing trades that anticipate a price reversal
- Trend trading – The overall trend dictates when positions will be opened
- Position trading – This is a longer-term strategy and sees positions being held for weeks, months, or occasionally, years.