The Forex market can be quite engaging as it’s known for its liquidity and high trading volumes. Nonetheless, it can also be challenging for new traders given the fact that it can also be volatile and price swings occur frequently.
In this beginner-friendly article, you’ll get a step-by-step guide to the Forex markets and Forex CFD trading. Here’s what you need to know about Forex:
Introduction to Forex Trading: What Is Forex?
In simple terms, the Foreign Exchange market, otherwise known as Forex or FX, refers to the global market whereby national currencies are exchanged with each other.
Forex trading, is, therefore, the act of buying and selling currencies, commonly done by travelers when exchanging their national currency for the currency of the country they plan to visit.
With Plus500, all Forex trades are done through Contracts for Difference (CFDs) and not the actual underlying currencies.
Main Points
- Forex (FX) is the global market for exchanging national currencies.
- Forex market is open 24/5 and closed on weekends.
- Each currency pair has a base and quote currency, determining the ratio price.
- Some Forex trading strategies beginners could use include Trend Trading, Range Trading, and Breakout Trading.
Important Forex Trading Terminology
The Forex market is a rich one and, as such, there’s a multitude of trading terms that are helpful to know. Here is some of the main Forex terminology to keep in mind:
- Major, Minor, Cross, and Exotic: Majors refer to the most-traded Forex pairs like the EUR/USD; Minors (also known as Crosses) refer to pairs of major currencies that do not include the US dollar, such as CAD/JPY or EUR/GBP; and Exotics are less-traded pairs that include one major currency and a currency that belongs to a developing economy, such as USD/HUF.
- Exchange Rates: the price paid for exchanging one currency for another.
- Long and Short: A Long position refers to opening a buy trade while a Short Position refers to opening a sell trade.
- Pips: "Pip" which is an abbreviation for "percentage in point" or "price interest point," is the smallest increment by which an exchange rate can change, as per the customary practice in the forex market.
- Lot Size: Lot sizes denote the number of traded currency pairs units. This is typically segmented as either a standard lot (100,000 units of the base currency), a mini lot (10,000 of the base currency), or a micro lot (1,000 of the base currency).
Other key terms include leverage, margins, and bull and bear markets and you can find out more about them in our “Popular Forex Terms You Should Know” article.
Understanding Forex Pairs: The Mechanics of Currency Trading
Understanding how Forex pairs work is essential to understanding how the overall Forex market functions and how you can trade Forex CFDs.
Foreign currency exchange rates fluctuate continuously due to various factors, with one currency holding a stronger position than the other. This multiplication establishes the equivalent value of the foreign currency.
How to Read Forex Quotes
A Forex pair consists of a base currency and a quote currency (or counter currency). So, for example, when looking at the USD/JPY pair, the USD is the base currency while the JPY is the quote (or counter) currency, and the difference between the two is the ratio price.
In other words, the USD/JPY is the amount of Japanese yen needed to buy one US dollar, while the EUR/USD pair is the amount of US dollars needed to purchase one Euro.
How Long Is the Forex Market Open?
The Forex market is open 24 hours a day, 5 days a week (it closes on the weekends). Hence, it is a flexible market in terms of timing.
Furthermore, Forex markets operate in four local sessions, namely, New York, London, Tokyo, and Sydney, with the busiest sessions being New York and London.
Forex Trading Strategies for Beginners
Many trading strategies can be used to approach the Forex market, but some strategies may be more appropriate for beginners than others. Here are some suitable Forex trading strategies for beginners:
- Trend Trading: This strategy revolves around recognizing and profiting from price trends.
To start, evaluate the trend and its duration to assess its stability. Once you've pinpointed the trend, establish your entry and exit points. However, you should be prepared for occasional minor price fluctuations going against the trend, resulting in some losses.
Trend trading can also be applied across short, medium, or extended time frames, although it often aligns with a more prolonged approach known as position trading.
- Range Trending: In case the market’s direction is not so clear, traders can utilize this strategy which works on a certain price range and operates within its boundaries.
To do so, you need to assess high or low points within a chart. This would help you to identify support and resistance levels, which are crucial for monitoring overbought and oversold conditions when trading Forex.
- Breakout Trending: As the name implies, Breakout Trading involves seeking to profit from price shifts when an asset's value “breaks out” from important support or resistance levels. This usually happens when the currency price escapes its current range and creates a fresh trend. In forex, breakout trading is crucial for quickly spotting and positioning during periods of volatility, enabling traders to seize trading prospects.
To execute this strategy, start by pinpointing currencies with robust support and resistance levels, then monitor the market for a breakout. Once you pinpoint the breakout, you can examine the conditions and decide where your exit or entry points are based on profit or loss considerations.
To learn more about the different types of trading strategies, watch our Trader’s Guide video on “Popular Trading Strategies”.
Risk Management in Forex
Risk management is crucial when trading in general, but particularly when trading Forex, mainly due to the Forex market's fast-paced and volatile nature. Some of the ways traders can mitigate risk are through using risk management tools such as Stop-Loss, Trading Stop, Guaranteed Stop, and Take-Profit which are available for free on Plus500’s platform.
Another way to manage risk could be through studying the Forex market, reading about how it works, and staying informed about any market news and events that could potentially affect your trading and create market volatility.
Additionally, you should always set realistic expectations, stay aware of your own risk appetite, and not risk more than you can afford.
Practical Tips for Forex Trading
- Set Goals and Find Out Your Trading Style: Defining your goals, determining your trading style, and setting a trading strategy can help you navigate market uncertainty better especially when it comes to the Forex market.
- Analyze, Research, and Pinpoint Entry and Exit Points: Researching, keeping tabs on market movements, and analyzing price charts are crucial to your overall success as a Forex trader.
- Manage Risk with Risk Management Tools: As mentioned above, using risk management tools can be a safeguard against adverse Forex price swings.
- Maintain a Trading Record: As a new trader and even an experienced one, maintaining a record of your exit and entry points, achievements, and emotional decisions behind your trades can help you maintain consistency and increase your chances of success.
You can also learn more about general trading tips and mistakes to avoid when trading in our Beginner’s Guide article on “10 Trading Tips for Beginners”.
In Conclusion
In summary, while the Forex market offers opportunities and challenges for beginners due to its liquidity and volatility, with the right knowledge and approach you may obtain your desired trading outcomes.
In addition, utilizing risk management tools like Stop-Loss, conducting continuous research, setting clear and realistic goals, defining your trading style, maintaining a trading record, and monitoring your profits and losses are all crucial to your progress as a new Forex trader.
Forex FAQs
What is Forex trading?
Forex or FX trading is the buying and selling of currencies in the foreign exchange market.
What are Forex pairs?
Forex pairs consist of two currencies, such as the euro and the dollar (EUR/USD), that are both involved in a trading transaction.
Currency trading basics: How do I read Forex quotes?
A Forex quote tells you the exchange rate between the first currency (the base) and the second currency (the quote).
Here’s how you would read the EUR/USD pair:
This pair essentially means the amount of US dollars needed to purchase one euro.
What are some basic Forex trading strategies for beginners?
Some of the basic Forex trading strategies for beginners include Trend Trading, Breakout Trading, and Swing Trading among others. Finding a reliable Forex broker is also essential.
How can I manage the risks in Forex trading?
Some of the ways to manage risks when trading Forex involve using risk-management tools, developing a trading strategy, setting your goals, and documenting your trades as well as performing analysis which could range from Technical Analysis to Fundamental analysis.
What are common mistakes that beginners should avoid in Forex trading?
Some common mistakes beginners should avoid include risking more than they can afford to lose, not using risk management tools, and not conducting enough research.
