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How to Trade Forex

September 6, 2022
How to trade forex: A beginner’s guide

Getting started in the forex market can be daunting, and traders may feel unsure of how to grow their understanding and develop their skills. Following a few simple steps can help traders to begin, although all would-be forex traders should recognise that this is a gradual process — sustainable and responsible trading requires care and caution, even among more experienced individuals.

Set up a trading account

Traders will need an account on a trading platform as they learn FX. This platform will provide the charts and tools required to analyse the market and will also offer the functionality required to open and close trades. The trader will also be able to manage their capital balance via this platform, adding and withdrawing funds when required.

Use a demo account to understand market movements

The trading platform will include a demo account, and traders are advised to use this demo version as they learn how to trade forex. The demo account is risk-free as there is no capital involved, which means no potential profit and no potential loss.

Analyse pips

When the value of a currency pair moves up or down, this movement is measured in pips. Pips in FX are incremental movements, usually at the fourth decimal place — and sometimes at the second decimal place for quote currencies with smaller denominations. While past performance does not guarantee future success, pip movements can help traders as they forecast which direction the market will travel in.

Choose a strategy

As individuals learn to trade forex, they will need to adopt a strategy and stick to it. Forex decisions are always strategic and will need to be aligned to a predetermined target, so traders will have to decide whether they are going to adopt a very short-term scalping strategy, a short-term day trading strategy or a longer-term approach. Short-term trading has smaller returns but also involves less risk.

Select a currency pair

With the strategy defined, traders can choose which currency pair they want to trade with. They will refer back to their strategy and their pip analysis as they decide this — a scalping strategy requires a currency pair exhibiting swift price movements, while longer-term strategies are more suited to currency pairs displaying consistent, aggregate growth over time.

Protect against losses

Traders can use stop-loss features that will automatically close the position if losses reach a certain level. This helps to keep the trader on track and within the bounds of their predetermined strategy. Take-profit tools are also useful here, as these will close the trade once a specified profit level is achieved — again, this helps to keep trades sustainable.

Decide on leverage ratios

Leverage in FX essentially involves borrowing money to supplement the amount of capital put forward. This is expressed as a ratio — in the example of 20:1 leverage, the trader borrows $20 for every $1 they commit from their own capital reserves. Exposure is increased, which means a greater profit potential, but also a greater risk of loss. Because of the increased risk, beginners should keep leverage low when they learn how to trade currencies on the forex market — inexperienced traders should 

never go beyond 10:1 leverage. They may use an even smaller ratio.

Open the position

Once everything is ready, the trader can open their position based on the current spot trading price, represented in real-time on the platform’s dashboard. They can open a buying position if they expect the value of the currency pair to appreciate — also known as going long — and can open a selling position (going short) if they expect it to fall in value. Ongoing analysis of price movements in pips, as well as the take-profit and stop-loss features, will help to make sure the trade remains sustainable.

Close the position

When the trader decides the time is right, they can close their position. Once the position is closed, the trade is no longer subject to rises and falls in the market, and the trader will take any profits and absorb any losses that have occurred while the position was open.

Different types of forex derivatives

Above, we’ve looked at what traders need to do as they open and close positions on the forex market. This is designed to be a relatively simple rundown of how you can make trades on the market, but there are other techniques and trade types that you may decide to incorporate into your strategy as you develop your skills.

  • Forex forwards

With forex forwards, individuals can customise a trading agreement with another party. They will set the currency to be traded, the trading price (which will be locked in for the duration of the contract) and the time period for the trade. These are OTC — over-the-counter — contracts, which are customised and traded via a broker.

  • Forex futures

FX futures are similar to forwards in that there is a set price, a set time and an obligation to complete the transaction. The difference is the customisability — futures cannot be customised and are instead traded on the exchange according to a standardised set of rules and parameters.

  • Forex options

Forex options work in a similar way to futures and forwards — they are executed with 

locked-in pricing and across a set time period. However, there is no obligation to complete the transaction at the end of the time period.

  • Forex swaps

With forex swaps, two parties agree to exchange equivalent amounts in different currencies. Each pays interest on the currency trade, and then the swap is reversed at the end of the agreement phase.

The benefits of forex trading

Trading forex provides a number of advantages for individuals, although it is important to always exercise caution during trading, as there are risks involved. Take a look at some of the main benefits of forex.

  • Traders can access the market with low levels of capital investment

It does not take huge amounts of capital investment to access the forex market. Traders can open and close positions with only small investments, and they can choose to leverage trades to increase their exposure if required. Leverage in forex significantly increases risk, however, so traders should bear this in mind.

  • Risk can be managed effectively

Stop-loss and take-profit tools help individuals to manage risk when trading forex. In addition to this, a conservative approach to leverage and proactive monitoring and assessment of market performance can further reduce the risk traders face. Remember that risk can never be eliminated completely, and there will always be an element of danger in the market.

  • There is a relatively easy learning curve

Traders can learn how to trade forex quickly and easily, developing a more sophisticated strategy as their knowledge grows. A demo account is also useful for anyone who wants to learn to trade forex in a risk-free environment.

  • Traders achieve exposure to a liquid market

Forex values can grow and fall very quickly, and the market is a volatile one. This is a good thing for traders, as it means there is a potential to make profits quickly, even on very short-term trades. Of course, this is a double-edged sword as traders may also experience losses.

  • It’s possible to trade even when a market is in decline

When trading forex, it is possible to go long (to open a buying position) or to go short (to open a selling position). This gives traders an element of flexibility, as they have the potential to make a profit whether the market is moving up or down. However, it’s important to remember that predictions are not always accurate, and there is always a risk of loss.

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