The first time I heard the term “Forex Trading,” it honestly sounded like some complicated financial trick that only bankers understood. But once I actually learned what it was, everything suddenly became clear and surprisingly simple. This is what I intend to share here. This is a guide to the very basics of Forex Trading so that anyone can easily understand.
Forex Trading has become one of the most popular ways to earn money online, yet many people still get confused about how it works. Beginners, most especially, can get intimidated by all the vocabulary (Jargon) the traders use. Fear not, we have a free E-Book that you can download, which contains those words and their meanings in simple English.
So let’s just focus on 3 fundamentals and talk about what Forex Trading is, how it works, and how beginners can start it.
Forex Trading Description (Simplified)
Forex Trading, or FX Trading, is simply exchanging one currency for another and making a profit. That’s it. No rocket science.
You’re basically trying to take advantage of currency price movements. When one currency becomes stronger or weaker against another, traders jump in to make money from that change. You can trade Forex from anywhere, from your home, your laptop, or even your phone. And the best part? The market is open 24 hours a day, five days a week, so there’s always an opportunity to trade somewhere in the world.
For a detailed description, please read our article, “What is Forex Trading“.
How Does Forex Trading Work?
Think of Forex as a global marketplace where currencies constantly move up and down. These price changes happen because of:
- Economic conditions
- Political news
- Supply and demand
- Global events
- Market sentiment
As a trader, your job is to observe these movements and decide whether a currency will rise or fall. If you think a currency will strengthen, you buy it. If you think it will weaken, you sell it.
Your profit or loss depends on how accurately you predict these moves. That’s the heart of Forex Trading.
How can Beginners Start it?
If you are a beginner, the way to start this business is in 3 steps:
- Learn the Basics:You need to learn the basic terms, the strategies, and the techniques.
- Use a Demo Account: A number of platforms offer demo accounts for beginners. There, you can see the actual market charts (Currency going up and down), and play buying and selling (Mock trade). You do not need to invest actual money.
- Get into Trading Using a Small Capital:Once you have gained confidence using demo accounts and mock trades, you can get into an actual trading session with a small capital, ideally $100 (5,000 PHP).
Currency Biz will help you with all of those. Again, we insist you download the free E-Book, which is a more comprehensive guide.
However, in this article, we’ll discuss a few more things as a warm-up.
Currency Pairs
As you understood from before, you need to sell one currency and buy another. Therefore, you will need to determine which two currencies you’d like to trade with. Currency pairs are often written in the “EUR/USD” format. When traders say, “EUR/USD= 1.1000”. It means 1 euro buys 1.1000 USD at the current market rate.
Here, the first one (EUR) is called the Base Currency, and the second one (USD) is called the Quote Currency. There are 3 types of currency pairs:
- Major Pairs:Currency pairs involving USD and another currency from a country with a stable economy. (I.e., USD/GBP)
- Minor Pairs:Pairs that don’t involve USD, but still come from a stable country. (I.e., GBP/EUR)
- Exotic Pairs:Pairs involving one Major and another currency from a country with an emerging economy. (I.e. EUR/ZAR)
You will find more details in our article, “Understanding Currency Pairs”.
Pips and Lots
You will hear the words “Pip” and “Lot” a lot when you are into trading. So here they are:
- A “Pip” is the smallest possible movement (increase or decrease) in the chart. For most major currencies, a Pip is calculated at the fourth decimal point. For example, if your pair is EUR/USD= 1.1000 and it moves to 1.1001, you can say the USD has moved 1 Pip up. If 1,1002, then it moved 2 Pips.
- A “Lot” is your total trade (Investment): Of course, if you invest 1 EUR and buy USD (1.1000) and it moves one Pip up (1.001), you don’t make much. But if you invest 1,000 EUR, and the USD moves 1 Pip up, you make 1 EUR profit. So, your total Base Currency is your Lot.
And again, we highly recommend downloading our E-Book.
Broker and Platform
- To do any trade (Forex, Stocks, or Crypto), you will need a broker. A broker (Brokerage firm) has direct access to the market and allows you to buy and sell on their platform. They make a small commission on each trade.
- A Platform is a software that facilitates trade. It displays the currency charts and movements in real time. You can also automate a lot of things. For example, you have bought some USD. You can tell the software to sell it when the USD goes up 2 Pips. The platform will do it automatically, and you do not need to stay up all night waiting for your currency to move. Platforms can be both downloadable software on your computer or phone, or web-based.
Leverage and Margin
- Leverage is when a broker offers some advantage to the client (You). Some brokerages offer 1:100 leverage. That means, you can invest $100 of your own money, but your Lot size will be $10,000. Brokers do this so that more traders will come to their platforms. If you make a profit, you make a lot, and the broker makes a bigger commission. However, be careful using Leverage. If you lose money, you will have to pay the broker the entire amount.
- Margin is the minimum amount of money that the brokerage requires in order to upgrade to a leveraged trade. Yes, they don’t just offer leverage to just anyone or to an absolute beginner. For different brokerage firms, the margin policies can be different.
Bid Price, Ask Price, and Spread
- Bid Price: The price you buy at.
- Ask Price: The price you sell at.
- Spread: The difference between the Bid Price and Ask Price. Spread is how you calculate your profit or loss.
Market Hours and Trading Sessions
The Forex Market runs almost 24 hours a day, 5 days a week. There are 3 major sessions:
- New York Session (Americas)
- London Session (Europs)
- Asia Session (Japan, Taiwan, Shanghai, and others)
You can expect the highest volume of trades and faster Pip movements when the NY and London sessions overlap. It’s called the “Golden Hours” in Forex Trading. It’s usually between 8:00 AM and 12:00 PM EST (Eastern Standard Time).
Risk Management Techniques Beginners Should Know
Stop Loss
A Stop Loss is a setup of your platform that closes a trade when the price reaches a certain low. You can set this up on the platform you use to limit losses.
Take Profit
A Take Profit is a setup on your platform that sells when the price reaches a certain height.
Risk-Reward Ratio
A smart trader risks little and earns more. Having the ability to calculate the Risk-Reward Ratio is vital to trading Forex.
How to Choose a Trading Platform
You need to see 3 qualities to choose a Trading Platform:
- Must be easy to use.
- Must have a good 24/7 Customer support system.
- Must offer risk management tools.
Mistakes Beginners Should Avoid
As a beginner, you should remember to avoid the following mistakes:
- Trading without learning the basics
- Using too much Leverage
- Expecting fast profit
- Overtrading
- Ignoring risk management, especially “Stop Loss”
Advantages of Forex Trading
This is a very interesting and exciting business, no doubt. Here are the advantages of Forex Trading Business:
- An excellent way to make money online.
- A great “Work from Home” opportunity
- Flexible, so you can start part-time and won’t have to quit your job.
- An online job is still a job; you have a boss. Forex Trading is an independent business. You are the boss.
- Access to “High Liquidity Market” (fast buy and sell market). Profit can be made in an instant (15 minutes).
However, it is also important to remember that it is not a “Get-Rich-Quick” scheme. You must learn it and apply your learning slowly. Never get sentimental or take it as a gamble.
What Should I Do Next?
If you are serious about this, the first thing to do is download our E-Book and learn the basics. Secondly, to get our full support and access, consider becoming a member at CurrencyBiz.Net. It’s free. We’ll guide you through the next steps.
Forex Beginner’s FAQ
Here is a summary and frequently asked questions of all that we have discussed so far:
What is Forex Trading?
It is the art of buying a currency when low and selling when high in order to make a profit.
How does it work?
First, You chose a currency pair such as EUR/USD. Then, you buy USD when it’s low. Wait for USD to go up, and sell it back to EUR.
How do I start this business?
You learn the basics first, practice on a demo account, and finally start trading in the actual market with a small capital.
How much do I need to start this business?
No more than $100 or PHP 5,000.
Is it safe for beginners?
Yes, as long as you have learned the basics and set up proper Risk Management on the platform.
Why is Forex the best online money-making method?
Because you are independent and your own boss, you can do it part-time, and you can do it on your phone and on your computer.
