Forex trading is buying or selling currencies to make money from the changes in the market. There are different types of Forex traders ranging from individual investors to the major banks. If you are unaware of that Forex trading has significant risk involved, please read our section on risk management for a background.
How does Forex Trading work?
Traders can buy (go long on) a currency pair expecting the value to rise, or they can sell (going short on) the currency, assuming the value will fall. Here are two different trades where we are trying to predict if the market will gain or lose.
In the first example, the trader goes long, expecting the value of the currency to increase.
In the second example, the trader goes short, expecting the value of the currency to decrease.
In reality, happened was the currency increased in value, and the AUDUSD gained 9 points during the time I was monitoring it. So had the trader gone long and bought AUDUSD, they would have made a profit.
How do you make money on Forex trading?
Let’s say I am going to buy one standard lot of AUDUSD. We open a long trade at 0.7858 and expect the value to increase. After a period, the value of AUDUSD increases as expected to 0.7879 so we close the trade.
Since I predicted the market correctly and sold for a higher price than I bought, I made a profit of 220 USD.
If we thought the value of the AUDUSD was going to weaken, we could go short on the trade. If we were to go short on the same trade, entering at 0.7858, and the value of AUDUSD drops to 0.7818 then I would earn 400 USD should I chose to close the trade.
Note: If you are going short, and the profit in your calculation is a negative number, that is a positive result on your account. Read here for more on how to calculate your profit and loss.
Currencies are always quoted in pairs because as you are selling one currency, you are buying another at precisely the same time. The first currency in the pair is the base currency while the second currency in the pair is the quote currency.
Currency pairs have been split up into three different groups primarily based on the amount of liquidity, or the number of people continually trading the pairs. A full list of the most commonly traded pairs is here.
The Major Pairs
|Euro / United States Dollar|
|British Pound / United States Dollars|
|The United States Dollar / Swiss Franc|
|The United States Dollar / Japanese Yen|
|Australian Dollar / United States Dollar|
|The United States Dollar / Canadian Dollar|
|New Zealand Dollar / United States Dollar|
The Minor Pairs
The minor currency pairs are not a set list like the majors. They are all currency pairs that do not include the USD in the currency pair. Some example pairs might be:
|Euro / Japanese Yen|
|British Pound / Australian Dollar|
|Australian Dollar / New Zealand Dollar|
The Exotic Pairs
The final group is called the exotics and it when the currency pair has both currencies from a well-developed economy and a developing economy. Examples could be:
|Euro / Brazilian Real|
|British Pound / South African Rand|
|Australian Dollar / Malaysian Ringgit|
Quotes and Spreads in Forex Trading
Forex brokers make money is by offering different prices for buying and selling a currency. The difference between rates is known as the spread, and it is different for every currency pair. Spreads are measured in pips which is the smallest change in value a currency can make.
While some brokers or account types have fixed spreads, some brokers will also have variable spreads which change based on the liquidity available. More on Forex quotes here.
Forex is a Margined Product
Forex is a margined product, meaning to trade Forex, traders will borrow money to make the investment. This is done using something called leverage.
Leverage is a financial tool that allows you to increase the possible profits from a trade. With leverage, you can trade bigger trade sizes than what your account could typically trade. Leverage is either offered by your broker or a 3rd party liquid provider like a bank. Depending on the broker, and the experience of the trader, the broker makes more leverage available to you.
While leverage can amplify your profits, it will also increase your losses, and the more leverage you use will mean the more money you need to have in your account to cover for the losses. For this reason, a trader needs to understand their exposure to risk and how to manage it.
Forex Trading For Beginners
What is Forex trading for beginners?
Forex trading for beginners usually starts with a demo account. A demo account is a play-money account where traders can practice trading using real market data. Also reading basic tips, understanding some of the terms used in trading that we discuss in our education section and reading some more examples of trades.
How can I trade Forex successfully?
Trading successfully takes dedication to learning the basics of trading, investing time in doing analysis and staying up-to-date with currency International news events, and discipline. Trading successfully is difficult, and it requires extreme focus at times.
Setting a strategy and sticking to what works will make you successful too. There are three main strategies for analysis in trading:
- Trading the fundamentals – trade based on analysis of news events that affect markets. An excellent example of this would be trading the Non-Farm Payroll Report from the USA or trading the COT Report.
- Trading the technical charts – trading by following charts and trading the patterns. If you are going to be a technical trader, you should understand trends and momentum in the market, as well as pivot points where the market makes a sudden turn.
- Trading the market sentiment – Trading by watching what the traders and banks are doing, and following them or going against them.
How much money can I make from Forex trading?
Some traders make a lot of money trading Forex. How much you can make trading Forex depends on the amount you are trading with, the amount of time you spend trading and your appetite for risk.
How to get started
Compare Forex Brokers
|Broker||Min. Deposit||Regulated by||Next Step|
|$ 200||ASIC Regulated.||Sign Up|
|$ 250||ASIC Regulated.||Sign Up|
|$ 5||ASIC Regulated.||Sign Up|
|$ 100||ASIC Regulated.||Sign Up|
How much money do I need to start trading Forex?
Some Forex brokers will let you start trading with as little as $5 in your account. If you plan on using leverage, deposit at least $250 because you need to be able to cover for any temporary losses on your account, which would not be possible with a smaller balance. Should not have the funds to protect the loss, the broker will close your trade early in a margin call.
How do I start Forex trading?
To start trading, you need to sign up with the Forex broker of your choice. When picking a broker you will need to look at the minimum deposit expected, the leverage available to traders, the minimum spread, and the regulation. Together, these will help you determine the right broker for you.
When you visit a broker from our website, you will go to the account sign up page. After completing your details, the broker may call to introduce themselves and see if they can answer any questions for you. They will also use this opportunity to explain a process called KYC or “Know Your Customer” that is a requirement for broker working with clients to protect them and you from money laundering activities.
To complete your KYC requirements, you need to provide copies of a national identity document and also a utility bill or proof of residence. As soon as these documents are completed, you will be able to make your first deposit and start trading.
The Risk in Forex Trading
Is Forex trading worth the risk?
Trading Forex comes with significant risk, and if you are concerned about losing any the money that you are depositing, the Forex trading is not for you. Forex trading is not some get rich quick scheme, and it does require dedication and know-how from those who trade.
As a trader, you will need to develop a trading plan, understand risk management, and have a goal with what you want to achieve. Don’t start depositing money until you are sure you want to give this a good shot.
What are the risks associated with Forex trading?
In Forex trading, just as with any other speculative investment, means that you can lose everything you have invested. Every trader has lost trades that they were sure they would win, so expect the unexpected and have a plan for when your trades fail.