What is forex trading and how to trade forex for beginners
What do traders expect when they first start in the foreign exchange trading market?
A lot of them will think of “easy money” or “instant riches”, but that’s not the way it goes.
Of course, there is money to be made – that’s why so many people trade forex and the reason it is the biggest financial market in the world. But success is in no way guaranteed, nor does it happen overnight.
To be a successful long-term forex trader takes skill, patience, education and application.
That’s why, before you go anywhere near making that first trade, you need to read this guide on forex trading for beginners!
Table of contents
- What is forex trading?
- What is the forex market?
- How does the forex market work?
- Forex trading course for beginners
- Forex terminology
- How much do you need to start trading forex?
- Advantages of forex trading
- What are the key forex trading tools?
- How to start trading with a forex broker
- Risk management when trading forex
- Forex trading strategies
- Further education on learning forex trading
Basics of forex trading
Understanding the basics of forex trading will give you a solid foundation from which to build your skills, learn trading strategies and even work towards a successful trading journey.
What is forex trading?
The forex market is recognised as the largest and most liquid financial market in the world. The average daily forex transaction is now estimated at around $6.6 trillion, according to the most recent Bank for International Settlements Triennial Central Bank Survey of the foreign exchange market.
If you’re new to the markets and want to know what forex trading is and exactly how it works, one feature you will quickly notice when trading currencies is that you trade them in pairs, also known as a currency pair.
Unlike share trading where you buy or sell the same stock, trading forex means selling one currency and buying another currency in return.
The best example to illustrate this is when you’re going on an overseas trip. You will need to buy the local currency of the country you’re visiting, so what you do is buy that currency using the currency of your home country.
For example, you live in USA and are travelling to Europe, so you will buy the Euro (EUR) using the US Dollar (USD). This transaction is represented in the symbol EUR/USD.
Further reading: What is forex trading?
What is the forex market?
Forex trading is the buying and selling of currencies, and the place where it all happens is in the foreign exchange market. The forex market is made up of forex brokers, investors, banks, central banks, investment management firms, commercial companies and hedge funds, and many more forex market participants.
The foreign exchange market is a global network of brokers and computers from all over the globe, made up of two tiers of liquidity:
Tier 1
The first tier of liquidity providers in the foreign exchange market is made up of the largest banks in the world with forex departments. These large banking corporations are responsible for making price quotes for all currency pairs, as well as making markets for forex brokers and retail clients who use the ECN platforms.
These tier 1 providers will offer prices to market maker brokers who then offer a marked up price to their retail clients, using the initial liquidity providers as the benchmark. These companies will make their money from the spread difference between the buy and sell prices on currency pairs, as well as the commissions on either side of the trades as the second source of income.
Some examples of tier 1 liquidity providers include: Deutsche Bank, Citibank, HSBC, Barclays, BNP Paribas, Citadel, Royal Bank of Scotland, Morgan Stanley and Goldman Sachs.
Tier 2
The second tier of liquidity operates at the level of the interbank forex market. This tier functions as market makers to provide retail clients with currency pair pricing and most forex brokers operate in this space with services as fully-fledged market makers.
Market makers are considered the intermediaries between retail investors and the tier 1 liquidity providers. Their role in the market greatly enhances liquidity, and increased liquidity leads to cheaper costs for traders, lower spreads and a larger volume of trades.
How does the forex market work?
Trading activity in the foreign exchange market works by speculating on the rise or fall of a currency pair to try and make a profit, which in this process can sometimes end in a loss. There are also market participants who are participating in the market only for hedging purposes, i.e. they don't intend to achieve a profit.
Historically, traders had to carry out a trade with a traditional broker but today online trading platforms make it easier to invest in forex from anywhere in the world. All you need is a computer and internet, and you can access the market 24 hours a day, 5 days a week to place a trade.
There are three different types of forex markets to trade in:
Forex spot market
The forex spot market is the largest market in the world – and you may have even been a part of it without knowing. Any time someone goes to a bank to exchange currencies, they have participated in the forex spot market.
Forex futures market
Futures contracts work by buying or selling a currency pair at a set time, date and size. This market operates on futures exchanges around the world, where the contracts are traded. These are legally binding contracts allowing the seller to risk that the currency will become cheaper in the spot market, before the contract end date.
Forex forwards market
The forwards market operates between a customer and a bank, or bank to bank. Unlike futures, where they have standardised features in size and age, forwards contracts are flexible and customised to fit a trader’s requirements.
Who regulates the forex market?
Regulating a global market that is trading 24 hours, 5 days a week seems like a huge feat. Due to the size of this task there is no global centralised body governing the currency trading market.
A group of supervisory bodies from some of the major countries around the world regulate forex by setting standards which all brokers under their jurisdiction must comply with.
| Country | Regulatory body |
|---|---|
| Australia | ASIC - Australian Securities and Investments Commission |
| Canada | IIROC - Investment Industry Regulatory Organisation of Canada |
| Cyprus | CySec - Cyprus Securities and Exchange Commission |
| Germany | BaFIN - The Bundesanstalt für Finanzdienstleistungsaufsicht |
| Japan | FSA - Financial Services Agency |
| New Zealand | FMA - Financial Markets Authority |
| Singapore | MAS - The Monetary Authority of Singapore |
| South Africa | FSCA - Financial Sector Conduct Authority of South Africa |
| United Kingdom | FCA - Financial Conduct Authority |
| United States | CFTC - Commodities and Futures Trading Commission |
What causes the price of currency to move?
In today’s world of an interconnected and globalised economy, prices of trading instruments including forex pairs are constantly moving and fluctuating.
Trading volume and transactions in the FX markets are always affected by supply and demand and, like any other financial markets, the higher the demand for a currency the higher its price will move. But there are also many other factors that can affect the prices of currency pairs.
Here are some of the key factors to look out for when trading forex:
Central bank decisions – Central banks across the globe are responsible for setting interest rate levels for each country. When trading in the market, traders are generally attracted to currencies with high-interest rates compared to other currencies. If you want to trade the forex markets, it is a good idea to keep an eye on the major central banks including:
- US Federal Reserve
- Bank of England (BoE)
- Bank of Canada (BoC)
- European Central Bank (ECB)
- Reserve Bank of Australian (RBA)
- Bank of Japan (BoJ)
- Swiss National Bank (SNB)
- Reserve Bank of New Zealand (RBNZ)
Economic data – Employment numbers, gross domestic product (GDP) levels, inflation, business and consumer sentiments tend to affect the movement in currency pairs. Monitor the economic calendar and market trends on your online trading platform to ensure that you’re up-to-date with major economic data releases.
Trading sessions – It’s commonly known that trading volumes and activities can be thin or slow during the market open in the Japan/Asia time zone. Trading volumes and activities usually increase when the UK/Europe session begins, then liquidity will be at its peak towards the close of the UK and open of the US session. The London and New York sessions are usually the most active due to the time overlap of these major financial hubs.
During certain forex market hours some currencies are more liquid e.g. JPY during the Tokyo session or GBP during the London session.
Geopolitical factors – Wars, political crises, global unrest and other related events can also impact the foreign exchange markets. Some currencies tend to do well when there’s a high level of uncertainty in the markets, while other currencies go in the opposite direction.
Forex market hours
The global FX market is also known as a market that never sleeps. This is because forex markets operate on a 24-hour, 5-day cycle that covers three major forex centres – Japan/Asia, UK/Europe and the US (North America).
So, wherever you are in the world, you can trade forex almost any time of the day. For a full overview, see our guide on the forex market hours and refer to the table below.
What are the most traded currency pairs on the forex market?
While hundreds of forex pairs are represented in the global FX market, there are five main FX groups that are essential to know as they tend to be the most liquid and heavily traded forex pairs.
Forex majors
Forex major currency pairs represent the most traded currencies and are responsible for an estimated 85% of global FX market transactions. FX majors are identified with the world’s largest and most stable economies like the US, Great Britain, Japan, Europe, Canada, Australia and New Zealand.
The 7 forex majors include:
- EUR/USD – this ticker represents the Euro against the US dollar
- USD/JPY – this ticker represents the US dollar against the Japanese Yen
- GBP/USD – this ticker represents the British Pound Sterling against the US dollar
- USD/CHF – this ticker represents the US dollar against the Swiss Franc
- USD/CAD – this ticker represents the US dollar against the Canadian dollar
- AUD/USD – this ticker represents the Australian dollar against the US dollar
- NZD/USD – this ticker represents the New Zealand dollar against the US dollar
Forex minors (or forex crosses)
Forex minors refers to FX pairs where the US dollar is not involved. You may have noted that in the forex majors group, the US dollar is always included in the pair. The forex crosses bypass the US dollar. Some of the main forex minors include:
- EUR/CAD – this ticker represents the Euro against the Canadian dollar
- EUR/GBP – this ticker represents the Euro against the British Pound Sterling
- EUR/JPY – this ticker represents the Euro against the Japanese Yen
- EUR/AUD – this ticker represents the Euro against the Australian dollar
- GBP/AUD – this ticker represents the British Pound Sterling against the Australian dollar
- GBP/JPY – this ticker represents the British Pound Sterling against the Japanese Yen
- GBP/CAD – this ticker represents the British Pound Sterling against the Canadian dollar
- AUD/CAD – this ticker represents the Australia dollar against the Canadian dollar
- AUD/CHF – this ticker represents the Australia dollar against the Swiss Franc
- AUD/JPY – this ticker represents the Australia dollar against the Japanese Yen
Exotic currency pairs
Exotic currencies refer to thinly traded currencies with low liquidity and low transaction volumes. These currencies are usually associated with emerging markets or developing economies and their currencies are not in great demand nor traded globally. Some of the more prominent exotic currencies include:
- Thai Baht
- Turkish Lira
- Danish Krone
- South African Rand
- Swedish Krona
Further reading: Exotic currency pairs to trade in the forex market
Commodity bloc currencies
Commodity bloc currencies refer to a group of currencies from countries that are rich in natural resources, including Australia, New Zealand and Canada. This forex group is usually affected by the price fluctuation in commodity markets. Whether you’re a forex, commodities or CFD trader, it’s wise to monitor the correlation and price movements of the commodity bloc of currencies and the associated commodities that affect them.
Safe haven currencies
While this is not an official or formal FX group, a few currencies are considered “safe haven” when trading in the foreign exchange markets. Safe haven currencies in this group include the Japanese Yen (JPY), the Pound Sterling (GBP), the US dollar (USD), the Euro (EUR) and the Swiss Franc (CHF).
Why safe haven? Traders view these currencies as stable and will most likely retain their value compared to other currencies during volatile market conditions. Similar to gold, which is considered a safe haven asset, currencies in this group will attract more trading activity – particularly when there’s a high level of market volatility. Some of the most volatile currency pairs are also quite frequently traded due to the opportunities they provide traders.
Forex trading course for beginners
The Introduction to Forex Trading course on Axi Academy is perfect for brand new traders who are just starting out in the market. The courses provides more details about how the forex market works and how beginner forex traders can enter.
Forex terminology
Now that you've gone through part one of forex trading for beginners and know how the forex market operates, it’s important to get to know the common forex terminology you will start seeing.
Forex broker
A broker (or brokerage) is an individual or firm that arranges transactions between a trader and an exchange. There are different types of brokers, but at it’s core the broker is a third-person facilitator between a buyer and a seller.
The main reason brokers exist is to provide you with easy access to the forex market. Thus, the biggest advantage to choosing a local forex broker is that they will understand the market and be in a great position to adapt and respond quickly to any changes.
However, do not just choose any broker. It’s important to do your research and choose a reputable broker with a license, good reviews, and a strong community to prove legitimacy as there are risks of being scammed.
What is a base and quote currency?
Forex traders use currency unit prices, known in the forex market as currency pairs. Made up of two different currencies, the base currency (also known as the transaction currency) is the first currency that appears in the pair while the second part of the pair is the quote currency or counter currency.
The base currency indicates how much of the quote currency is required for you to get one unit of the base currency.
For example, in the EUR/USD currency pair the Euro is the base currency while the United States Dollar is the quote currency. If the price of the EUR/USD pair is 1.1302, it shows that you would need $1.1302 USD to buy a single Euro.
What is a pip in forex?
A pip represents the change in value between two currencies. For example, if the EUR/USD moves from 1.2250 to 1.2251 it has moved by 0.0001 or one pip.
A tick is similar to a pip, but it may not measure every increment equally. For example, a tick on one instrument may be measured in increments of 0.0001, whereas another instrument may be measured in increments of 0.25. A useful way to remember this is that a tick is simply the smallest increment a particular instrument can move in.
Further reading: Pips and pipettes explained
What is spread in forex?
If you’re trading the currency market, spreads refer to the price difference between the currencies you are buying and selling – the 'ask' and the 'bid' price. The size of the spread is a very important consideration in your trading decisions because it can represent the difference between making a profit, a smaller profit, or even a loss.
Technically, the spread is the cost that you pay the FX broker to make the transaction: the tighter the spread, the less you pay. Another thing worth remembering is that the wider the spread, the more the price has to move in order to result in a profit or loss on a trade. That’s why traders prefer brokers with consistently low or tight spreads.
What is leverage in forex?
In trading, leverage means you only put a percentage of your trading capital up front to open a trade. In practice, this means you don’t need a lot of capital to get started with forex trading – an amount as low as $10 in your trading account, combined with sufficient leverage, can be enough to get you going.
At Axi, you can get access to various levels of leverage, up to 500:1 (depending on the jurisdiction you are trading in) which means that for every $1 in your trading account, you can open a position of up to $500.
While that opens the potential to make a lot of money in a short space of time, you must remember that more leverage also means a higher risk of losing money if the trade goes against you.
As a beginner you won’t want to be trading at such high levels of leverage straight away because the level of risk is too high compared to your market knowledge and trading ability. Instead, you might prefer to minimise your exposure by trading micro or mini positions:
- Micro - $1,000 (0.01 lot)
- Mini - $10,000 (0.1 lot)
- Full lot - $100,000 (1 lot)
To get a feel for how this works in action, use a demo trading account and try some test trades.
What is margin in forex?
Margin is used in forex to allow a trader to take positions of a higher value than the amount of funds in their trading account. The two main margin terms you need to become aware of are: initial margin and variation margin.
Initial margin is the minimum amount you need to have in your account in order to open a position, while variation margin is based on the current value of all open positions. Find out more about how margin trading works.
Long vs short positions explained
When traders go ‘long’ on a currency pair they are buying the base currency first and selling the quote currency. In the same USD/JPY currency pair example above, we would be buying the US dollar and selling the Japanese Yen.
If you want a short position in forex the opposite happens, selling the US dollar and buying the Japanese Yen. To put it simply, long means to buy, and short means to sell.
Bull and bear markets
A bull market is a common term used in investing when conditions are considered positive and prices are going up. Bullish markets mean that investors have higher confidence and higher acceptance of risk when they are looking to invest money into the market.
A bear market is another common term to describe when conditions are considered negative and prices are going down. The downward trend in bearish markets is due to investors selling their assets and trying to enter back into the market when they think it’s hit its peak.
Learn more about the difference between bull and bear markets.
Most common chart types used in forex
There are many different types of charts used when analysing the forex market. Deciding which chart to use will usually depend on the trading style or type of analysis. For a deeper dive into these charts, see our article on how to read forex charts.
Line charts
Line charts are the easiest to read. It simply shows the close price at the given time period – typically represented by a continuous curved line that connects dots that represent the changes in price over certain intervals of time.
Line charts give a clear, simplified view of the current market situation and work best for people who want a quick glimpse of where the market is heading.
Bar charts
Bar charts (or OHLC charts) are an upgraded version of the line chart, offering information on the Open, High Low and Close prices – hence the abbreviation.
Candlestick charts
Although candlestick charts look complicated at first, they are actually very simple to read.
Candlesticks represent four main price points within a particular time period. This period can usually be set to 1 minute, 5 minutes, 30 minutes 1 hour, daily, weekly, monthly etc.
The main body of the candle will be coloured in green (or be empty) if the closing price is higher than the opening price of that time period (i.e. the price has increased). If the body is coloured red (or filled in black) the price has decreased within the period. The ability to read candlestick charts and understand candlestick patterns is the first step before using more advanced analysis tools.
What you need to know before trading forex
Alright, you know the basics of how the forex market works and all the terminology thrown around by traders. But now you need to know exactly how to trade forex when you open your very first forex trading account.
How much do you need to start trading forex?
Trading forex with any significant success takes more than money. You need patience, skill, emotional control and an ability to look at your mistakes and improve on them (yes, there will be mistakes!).
But when it comes to considering the bottom line, there are some fundamental things to consider, including leverage, spreads and other trading costs.
A bottom line figure to start trading could be as low as $50 or even $10 but we would recommend at least starting with $500 in your trading account.
Check out our guide on how much money you need to start trading forex.
Are there any other costs to trading?
For standard forex and commodity trading, commission fees are either waived or already built into the spread price you pay on an individual trade. This helps make trading a transparent process.
There are, however, certain products such as futures that incur additional “swap” or “rollover” fees due to their longer timeframes. If you choose to trade these types of products, be sure to find out exactly what extra costs, if any, you would be required to pay on open positions.
For more information on costs involved, refer to the product schedule.
Advantages of forex trading
Being the largest globally traded market with an immense daily trading volume helps give the forex market some unique benefits over other markets, including:
- High liquidity
- Buy and sell the market using leverage
- 24 hours, 5 days a week
- The costs of transactions are low
- Profit by going long or short
- Being able to hedge with forex
Read our article on the benefits of forex trading to discover more unique characteristics the forex market has.
What are the key forex trading tools?
The most important tools when you’re first getting started relate to research. You need to learn all the ins and outs of the market so you can develop your own unique strategies.
Here are some recommended tools you will need to look out for in the beginning:
- Forex trading platforms - Every Axi account gives you free access to powerful platforms and trading tools designed to help find your trading edge. A trading platform like Metatrader 4 allows you to open positions, while a tool like PsyQuation provides AI-powered analytics to help make smarter data-driven decisions.
- Keeping a trading journal to record your thoughts, emotions and observations. You can read more about how to create a trading journal here.
- Forex volatility calculators are used to generate the historic volatility (the range of price changes) for specific currency pairs over a given time frame. Understanding volatility is important as it influences trading decisions, strategies, and determines the level of risk undertaken by a trader.
- Time zone converters are used to assist you with viewing the open and close times of the major markets in your local time zone.
- Daily financial market analysis is a great tool to stay up-to-date with breaking news stories, the latest information, and forex trends. View our daily market analysis written by our experienced market experts.
- Economic calendar keeps track of all the most important world events, news releases and market indicators. Use the Axi forex economic calendar to stay up to date.
How to start trading with a forex broker
- Learn about forex trading: Step one starts here, learning about how the forex market works, completing the forex course and understanding the various terminology surrounding currency pair assets and what drives price movements.
- Opening a live trading or demo trading account: You will need to find an online forex broker and open a forex trading account to be able to start trading. If you want to first practice in a demo environment that is risk-free, a demo account is the best option. For new traders who are ready to jump into the real market, a live trading account will be what you want to get started.
- Conduct research and decide what currency pairs you will buy or sell: Based on your research have you decided to buy or sell a currency pair. What fundamental and technical analysis signals are helping to inform your decisions.
- Follow your trading and risk management strategy: Ensure that you have followed your strategy and are managing your risk.
- Place your trade, close the trade and think about how you can improve next trade: Following the defined entry and exit points, place the trade and make sure your risk conditions (take profit and stop loss) are entered. When the trade has been closed, review the process, include details of the trade in your trading journal and gather insights to inform your future decisions.
Advanced understanding of forex trading
Let’s get into the nitty-gritty of forex trading and show you how some deeper knowledge can turn a hobby into a second income.
Risk management when trading forex
Trading any market, including the forex markets, involves risk. That’s partly why most of the professional and successful traders in the world believe risk management is one of the most important factors in their trading success.
One good rule of thumb, especially for new traders, is to never risk more than 1% of your trading capital while in learning mode.
Let’s walk through the top 5 components of a forex risk management strategy that can help you with your forex trading.
- Know your own risk profile: Are you a big risk-taker? Or do you want to take smaller and calculated risks? Knowing your own risk profile or appetite for risk is vital in managing forex trades. Depending on your level of risk-taking, you can adjust your trading strategy accordingly.
- Position sizing: How much you allocate per trade can also have a big impact on your risk exposure. The bigger your position size, the bigger the potential win as well as losses. The reverse is also true. The smaller the position size, the more manageable the trade is, though it may mean smaller potential for wins and losses. The thing to remember is you need to understand position sizing techniques to ensure that you can preserve your trading capital for the long-term.
- Stop loss: One of the benefits of modern trading platforms is that they give you the ability to set stop loss levels. This is a predetermined price at which your trade will automatically close in order to prevent further losses. Setting stop loss for each of your trades is one of the most effective ways of managing trading risks, so use stop loss to your advantage.
- Leverage: Similar to stop loss, you can select and pre-set the level of leverage you want to use for forex trading. As a new forex trader, you may want to keep the leverage level to a minimum when you’re just starting out. Keep in mind that leverage can be a double-edged sword as it can magnify your wins as well as your losses.
- Your own trading psychology: Like knowing your own risk profile, it is also important to know your own trading psychology. This means being honest with yourself when faced with big wins and losses in the markets. If you know your own psychology and how you deal with different market conditions, you will be in a great situation to prepare for various situations.
Forex trading strategies
Now that you’ve got your head wrapped around the concept of forex trading, and you understand how the market works, it is time to talk forex trading strategies.
Everyone takes a unique approach but there are strategies that often share some common features. Here are some popular FX strategies you might like to consider:
- Trend trading: This is a simple and commonly used strategy that involves identifying potential trends and jumping on board to exploit momentum. It is often a medium/long-term strategy.
- Range trading: This involves identifying key support and resistance areas where price is likely to bounce off this level rather than break through it. It works well during periods of consolidation when there is no clear trend.
- Swing trading: This is a strategy where traders attempt to predict the tops and bottoms that currencies will hit, and choose long and short positions accordingly.
- Position trading: This means holding a position for a long period of time – from several weeks to as long as years! Position traders can use both technical and fundamental analysis.
- Day trading: This is at the opposite end of the spectrum to position trading, because trades may only last a couple of minutes or hours, and will be complete before markets close.
- Scalp trading: This refers to a strategy in which traders profit off tiny price changes. They may hold positions for only seconds.
Technical analysis
Technical analysis is the use of a collection of methods that look for patterns in the chart that may predict future behaviour. Technical analysis assumes that all the information related to a currency pair available is already priced in. Therefore, the theory is that if a particular pattern is repeated in the past, recognising that pattern can help the trader predict the immediate future.
Fundamental analysis
Fundamental analysis is when the FX trader considers underlying economic or policy reasons for a currency’s price fluctuations. The main idea behind the analysis is if the currency’s underlying economy is predicted to do better compared to other countries, the price of that currency will go up and vice versa.
Further reading: What is fundamental analysis?
Further education on learning forex trading
Trading forex involves daily learning and education. As markets move and present limitless trading opportunities, you as a trader need to be equipped with the right trading tools, information and strategies that can help you take advantage of any trading opportunity.
The beauty of today’s technology driven world is the availability of a wide range of free online education and information at your fingertips.
At Axi, we offer access to an extensive range of trading resources to enhance your trading skills. Access all our available educational resources including video tutorials, webinars, online trading courses, eBooks and trading guides.
How to read an economic calendar
When you start trading the forex market, the economic calendar will become a great resource to implement into your trading strategy. Learning how to read the economic calendar properly is essential to your success.
To maximise your chances of success in forex trading, you should follow the most important releases and international events on the forex calendar. The calendar will show you all scheduled economic news and events happening across the world by default. You can customise the timeframe you want to review by selecting a custom date range and also select specific market conditions, volatility levels and countries you wish to monitor.
Forex eBooks for beginners
Whether you’re learning the fundamentals of forex, trialling new strategies or looking for expert trading tips, our eBook series will help improve your trading knowledge.
Download a forex eBook and develop your trading edge.
MT4 video tutorials
We have published helpful resources and tips, including our MetaTrader 4 video tutorials. With over 20 videos to learn from, start with the basics and then move onto the advanced tutorials, focusing on things like understanding support and resistance levels and how to analyse economic data.
Best way to learn forex trading is to practice
There’s no limit to what you can learn about trading and it can be hard to know where to start, but there’s no substitute for actually doing it!
You've now read the most comprehensive guide on forex trading for beginners. When you’re ready to trade, choose a trusted, regulated and multi-award winning broker and jump into the foreign exchange arena.
Sign up for a live trading account with Axi today!
The information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. Readers should seek their own advice. Reproduction or redistribution of this information is not permitted.
