Forex trading is the trading of one currency for another to make a profit.
Success in the forex market means understanding the fundamentals, picking the right broker and platform, and building a strong trading plan.
Managing risks is key in forex trading. Using stop loss and take profit orders is vital to safeguard investments.
Forex, short for foreign exchange, involves trading one currency for another for various purposes such as business, tourism, and international trade.
Forex trading entails speculating on currency prices to earn potential profits. By trading currencies in pairs, traders predict the rise or fall in value of one currency against another.
Forex is traded on the forex market, open to buy and sell currencies 24 hours a day, five days a week. This market is used by banks, businesses, investment firms, hedge funds, and retail traders.
The value of a currency pair is influenced by trade flows as well as economic, political and geopolitical events. This creates daily volatility that may offer a forex trader new opportunities. Online trading platforms provided by global brokers like FXTM mean you can buy and sell currencies from your phone, laptop, tablet or PC.
The forex market is by far the largest and most liquid financial market in the world, with an estimated average global daily turnover of more than US$7.5 trillion - up from $6.5 trillion just a few years ago.
One critical feature of the forex market is that there is no central marketplace or exchange, as all trading is done electronically via computer networks. This is known as an over the counter (OTC) market.
The foreign exchange (also known as forex or FX) market refers to the global marketplace where banks, institutions and investors trade and speculate on national currencies.
Heres everything youwill need to do to start trading forex, step-by-step.
FXTM is an award-winning forex broker that offers competitive spreads, low commissions, and excellent customer support.
Look for platforms that are user-friendly and offer robust analytics, tools, and real-time data. Popular options include MetaTrader 4, MetaTrader 5, as well as our own FXTM App.
Based on your risk tolerance, financial goals, and market analysis, develop a clear trading strategy.
When you're ready to go live, begin with a small position. Manage your risk and learn from every trade.
By following these steps with focus and dedication, you are setting the stage for a potentially rewarding trading experience.
Remember, success in forex trading doesnt happen overnight. Its a marathon, not a sprint. Stay committed, keep learning, and adapt your strategies as you gain more insight into the market dynamics.
There are two main types of analysis that traders use to predict market movements and enter live positions in forex markets – fundamental analysis and technical analysis.
A forex trader will tend to use one or a combination of these to determine a trading style that best fits their personality.
This analysis is interested in the why why is a forex market reacting the way it does? Forex and currencies are affected by many reasons, including a countrys economic strength, political and social factors, and market sentiment.
Investors and banks look for strong economies to place their funds, in the expectation that their capital will appreciate. This is because the currency of that country will be in demand as the outlook for the economy encourages more investment. Any news and economic reports which back this up will in turn see traders want to buy that countrys currency.
Central banks determine monetary policy, which means they control things like money supply and interest rates. The tools and policy types used will ultimately affect the supply and demand of their currencies. A governments use of fiscal policy through spending or taxes to grow or slow the economy may also affect exchange rates.
Forex traders who use technical analysis study price action and trends on the price charts. These movements can help the trader to identify clues about levels of supply and demand. The aim of technical analysis is to interpret patterns seen in charts that will help you find the right time and price level to both enter and exit the market.
All transactions made on the forex market involve the simultaneous buying and selling of two currencies.
This ‘currency pair’ is made up of a base currency and a quote currency, whereby you sell one to purchase another. The price for a pair is how much of the quote currency it costs to buy one unit of the base currency. You can make a profit by correctly forecasting the price move of a currency pair.
FXTM offers hundreds of combinations of currency pairs to trade including the majors which are the most popular traded pairs in the forex market. These include the Euro against the US Dollar, the US Dollar against the Japanese Yen and the British Pound against the US Dollar.
You can find out more about how currency pairs work by heading to our breakdown of major currency pairs.
Forex trading, while offering substantial profit opportunities, does come with risks. The forex market tends to be more volatile than, for example, the stock market, with countless transactions taking place every minute.
Its vital to approach this market with eyes wide open, understanding that the volatility can result in significant losses just as it can lead to substantial gain. Always trade carefully and implement risk management tools and techniques, such as stop loss and take profit orders.
The base currency is the first currency that appears in a forex pair and is always quoted on the left. This currency is bought or sold in exchange for the quote currency and is always worth 1. Based on the example above, it will cost a trader 1.1918 USD to buy 1 EUR. Alternatively, a trader could sell 1 EUR for 1.1916 USD.
The bid price is the value at which a trader is prepared to sell a currency. This price is usually to the left of the quote and often in red. The bid price is given in real time and is constantly updating as it is a live market.
The second currency of a currency pair is called the quote currency and is always on the right. In EUR/USD for example, USD is the quote currency and shows how much of the quote currency you’ll exchange for 1 unit of the base currency.
The ask price is the value at which a trader accepts to buy a currency or is the lowest price a seller is willing to accept. This is usually to the right and in blue. The ask price is given in real time and is constantly changing as it is a live market.
As a forex trader, you’ll notice that the bid price is always higher than the ask price. The difference between these two prices is the spread. In other words, it is the cost of trading. The narrower the spread, the cheaper it costs. The wider the spread, the more expensive it is.
For example, if EUR/USD is trading with an ask price of 1.1918 and a bid price of 1.1916, then the spread will be the ask price minus the bid price. In this case, 0.0002. In order to make a profit in foreign exchange trading, you will want the market price to rise above the bid price if you are long, or fall below the ask price if you are short.
A point in percentage – or pip for short – is a measure of the change in value of a currency pair in the forex market.
It is the smallest possible move that a currency price can change which is the equivalent of a ‘point’ of movement.
A forex trader will hold a ‘position’ in a currency pair. This is the term used to describe a trade in progress and one that will have a profit or a loss, as the open position indicates the trader has some market exposure.
A long position means a trader has bought a currency expecting its value to rise. Once the trader sells that currency back to the market (ideally for a higher price than they paid for it), their long position is said to be ‘closed’ and the trade is complete. If you wanted to open a long position on the Euro, you would purchase 1 Euro for USD 1.1918. You will then hold your position in the hope that it will appreciate, selling it back to the market at a profit once the price has increased. A short position refers to a trader who sells a currency expecting its value to fall and plans to buy it back at a lower price. A short position is ‘closed’ once the trader buys back the asset (ideally for less than they sold it for). In this case, if you think the Euro will weaken against the Dollar, you will sell 1 Euro for USD 1.1916 and hold a short position. You expect the Euro to depreciate and plan to buy it back at a lower rate.
There are seven major currency pairs traded in the forex market, all of which include the US Dollar in the pair.
You can also trade crosses, which do not involve the USD, and exotic currency pairs which are historically less commonly traded (and relatively illiquid).
This means they often come with wider spreads, meaning they’re more expensive than crosses or majors.
Major currency pairs are generally thought to drive the forex market. They are the most commonly traded and account for over 80% of daily forex trade volume. There are four traditional majors – EURUSD, GBPUSD, USDJPY and USDCHF – and three known as the commodity pairs – AUDUSD, USDCAD and NZDUSD. These currency pairs typically have high liquidity, which means they tend to have lower spreads. They are associated with stable, well managed economies and are less prone to slippage, where the expected price of a trade differs from the price the trade was executed at.
Cross currency pairs, known as crosses, do not include the US Dollar. Historically, these pairs were converted first into USD and then into the desired currency – but are now offered for direct exchange. The most commonly traded are derived from minor currency pairs and can be less liquid than major currency pairs. Examples of the most commonly traded crosses include EURGBP, EURCHF, and EURJPY.
Exotics are currencies from emerging or developing economies, paired with one major currency. Compared to crosses and majors, exotics are traditionally riskier to trade because they are more volatile and less liquid. This is because these countries’ economies can be more susceptible to intervention and sudden shifts in political and financial developments.
| Majors | Minors | Exotics |
|---|---|---|
| EUR/USD | EUR/GBP | USD/MXN |
| USD/JPY | EUR/JPY | GBP/NOK |
| GBP/USD | GBP/JPY | GBP/DKK |
| USD/CHF | NZD/JPY | CHF/NOK |
| AUD/USD | CAD/CHF | EUR/TRY |
| USD/CAD | AUD/JPY | USD/TRY |
| NZD/USD | — | — |
The chart displays the high-to-low range with a vertical line and opening and closing prices. The difference to the bar charts is in the body which covers the opening and closing prices, while the candle wicks show the high and low.
If the candlestick is filled, then the currency pair closed lower than it opened. If the candlestick is hollow, then the closing price is higher than the opening price.
A bar chart shows the opening and closing prices, as well as the high and low for that period. The top of the bar shows the highest price paid, and the bottom indicates the lowest traded price.
The whole bar represents the currency pairs whole trading range and the horizontal marks on the sides indicate the opening (left) and the closing prices (right).
While a bar chart is commonly used to identify the contraction and expansion of price ranges, a line chart is the simplest of all charts and mostly used by beginners. It simply shows a line drawn from one closing price to the next.
When connected, it is simple to identify a price movement of a currency pair through a specific time period and determine currency patterns.
With FXTM, you can access the forex markets and execute your buy and sell orders through our trading platform. You should always choose a licensed, regulated broker that has at least five years of proven experience. These brokers will offer you peace of mind as they will always prioritise the protection of your funds.
Once you open an active account, you can start trading forex — and you will be required to make a deposit to cover the costs of your trades. This is called a margin account which uses financial derivatives like CFDs to buy and sell currencies.
With FXTM, you can access the forex markets and execute your buy and sell orders through our trading platform.
You should always choose a licensed, regulated broker that has at least five years of proven experience. These brokers will offer you peace of mind as they will always prioritise the protection of your funds. Once you open an active account, you can start trading forex — and you will be required to make a deposit to cover the costs of your trades. This is called a margin account which uses financial derivatives like CFDs to buy and sell currencies.
Forex trading platforms have transformed how people interact with financial markets. They enable investors to easily access hundreds of different markets across the globe.
As a leading global broker, we are committed to providing flexible services tailored to the needs of our clients. As such, we are proud to offer the most popular trading platforms in the world MetaTrader 4 (MT4) and MetaTrader 5 (MT5). They are both available on a PC, Mac, mobile or tablet. Our traders can also use the WebTrader version, which means no download is required, while the MT apps for iOS and Android allow you to trade the markets on the go, anytime and anywhere. You can use all of these platforms to open, close and manage trades from the device of your choice.
The platforms contain a huge variety of tools, indicators and charts designed to allow you to monitor and analyse the markets in real-time. You can even build strategies to execute your trades using algorithms. Together with innovative services such as FXTMs Pivot Point tool, Dow Jones insights, and our award-winning Customer Support team, our clients have the resources they need to trade with confidence on the platform of their choice. You can read more and download the trading platforms from our trading platforms page.
FXTM firmly believes that developing a sound understanding of the markets is your best chance at success as a forex trader. Thats why we offer a vast range of industry-leading educational resources in a variety of languages which are tailored to the needs of both new and more experienced traders.
These include ebooks, daily market analysis, a variety of videos, and more long read guides just like this one!
There are also many forex tools available to traders such as margin calculators, pip calculators, profit calculators, foreign exchange currency converters, economic data calendars and trading signals.
Forex widgets can help to enhance your trading experience. Some of the most popular widgets include Live Rates Feed, Live Commodities Quotes, Live Indices Quotes, and Market Update widgets