This tutorial will help beginner to get a basic knowledge about forex trading. There are many things to consider but every journey starts with a first small step. Learn and enjoy!

01. What is forex trading?
02. How is the forex market organized?
03. How to actually take a forex trade?
04. What is a pip?
05. Are bid and ask prices the same?
06. Why do I need a forex broker?
07. What does leverage represent?
08. What is the value of a pip?
09. What does margin mean?
10. What is a pending forex trading order?
11. What another type of orders are there?
12. Why do currencies move?
13. Are there specific terms to know?
14. What is fundamental analysis?
15. What is technical analysis?
16. Are there different forex trading styles?

1. What is forex trading?

Forex is the largest financial market in the world where trillions and trillions of dollars are changing hands on a daily basis. Forex trading represents selling or buying of different currencies with the purpose of making a profit from their swings. If a trader thinks that a currency is going to appreciate in time, then he/she can buy that currency. On the other hand, if a currency is believed to lose value in time, then the trader can sell the currency. The foreign exchange market is opened 24/5 and because of that, it requires a great deal of attention as virtually trading can take place around the clock.

2. How is the forex market organized?

The forex trading environment is very well organized starting with the products that can actually be traded (currency pairs) and continuing with the brokers (intermediaries between traders and the actual market) and Online Forex Trading Chartregulating bodies (financial authorities that regulate trading). Currencies are being paired together in currency pairs and they float freely against another. A currency pair will always reflect the difference between the two economies it represents. These currency pairs are grouped in many categories, but the most important classification comes from the very nature of the US dollar. The US dollar is the world’s reserve currency and this makes that all currency pairs that have the US dollar in their componence are being called major pairs. Keeping the same logic, the other currency pairs that do not have the US dollar are being called crosses. Therefore, the whole forex market comes down to trading either a major or a cross pair.

3. How to actually take a forex trade?

The first thing to do is to find a forex broker and to open and fund a trading account. The trading account can be accessed via a trading platform, that can be either a web-based platform or one that can be downloaded. The most popular trading platform is the Metatrader, and there is virtually no broker that is not offering it. However, some brokers developed their own trading platforms as well, but the idea behind a trading platform is the same: to access the forex market. Currency pairs are moving on a constant basis and the broker offers two prices, or quotations: the bid and ask price. As a rule of thumb, the price on the left side is always the bid price and the price on the right side is the ask price. When you buy a currency pair, this can be done only at the ask price, or the one on the right side, while selling a currency pair can only be done at the bid price.

4. What is a pip?

A pip is the difference between the opening and the closing price in a transaction or the distance that price travels. For example, assuming one is buying the EURUSD pair at 1.11491 and closes the trade later at 1.12101. The difference between the two prices is 50 pips and it is being said that the trader just made a 50 pips profit.

5. Are bid and ask prices the same?

No. There is a difference between the bid and ask prices and it is being called a spread. This is one of the things that differentiate forex brokers as, naturally, the lower the spread, the more attractive the broker is for forex traders. fx trading brokerSpreads are not fixed all the time, as they vary based on multiple factors. When important economic news is released, for example, spreads are being increased due to the volatility generated around the event. Also, the end of the trading day usually comes with bigger spreads as liquidity is low at that moment of the trading day and good liquidity providers tend to be scarce.

6. Why do I need a forex broker?

Without a forex broker, the forex market cannot be accessed. The broker makes sure your trade is executed at the best possible conditions stated in the terms and conditions you agreed when opened a trading account and earns a living through commissions and spreads. A commission is always being deducted from a trade right at the start of the trade when the position is opened. Therefore, the broker is the part that is being paid no matter if the trade will be a winning or a losing one.

7. What does leverage represent?

Because the foreign exchange market is so big, retail traders cannot access it due to lack of funds. Therefore, trading accounts can be opened on leverage. This means that the actual amount to be traded on the forex market is not the amount one funds the traded account, but the amount times the leverage. A typical leverage can go anywhere from 0 to 200, while levels above 1:400 are considered to be risky ones.

8. What is the value of a pip?

The value of a pip is closely correlated with the volume that is traded. On the forex, market volume is organized in lots, and as an example, one pip has a value of $10 if one lot is traded on the EURUSD pair. Continuing with this example, if you trade 20 lots and make a profit of 20 pips, you just made a profit of $400. However, this is not the amount that you’ll see on the account’s balance. You have to deduct the broker’s commission as well as the spread (the difference between the bid and the ask price) and the difference is the actual profit.

9. What does margin mean?

When opening a position, depending on the volume that is traded, a margin is blocked and cannot be used anymore technical analysis for forex tradingfor trading purposes until the trade is being closed and the margin is release. It is being said that the trader gets a margin call when there are no more sufficient funds in the trading account to support the opening trades. If no new funds are being added, the broker will automatically close the open trades with the respective loss.

10. What is a pending forex trading order?

A pending order is a type of order to be used when entering a trade at levels that are not yet reached. If the trader wants to buy a currency pair at a higher level than the actual price, then a pending buy stop order can be placed. On the other hand, to sell a currency pair at lower levels than the actual price, a pending sell stop order can be placed. Selling can be made from higher levels as well, and in this case, the order is called a sell limit order, and if buying is intended to be done at lower levels than the current ones, a pending buy limit order can be made. If the trade is opened at current prices, it is being said that the trade was “at market”.

11. What another type of orders are there?

A stop loss and take profit orders can be placed as well. In fact, it is recommended that a stop loss order should always be in place as forex markets can move unexpectedly and one cannot watch them 24/7. The stop loss level is the level the trader wants to close the position if it goes against the desired direction and normally this level invalidates the whole idea behind the trade. A take profit is a level where the target is being reached. Both stop loss and take profit orders can be set immediately after the trade is being taken, or even before opening a trade, and the trading platform will automatically close the trade if one of them is being reached. Some trading platforms also offer the possibility to place an OCO pending order (One-Cancels-Other). The idea behind this type of pending order is to catch the swings the market makes and to trade the breaks no matter the direction.

12. Why do currencies move?

Currencies and currency pairs are moving based on two factors: supply and demand on one hand, and monetary policy on another hand. Supply and demand represents the oldest rule in economic history that states that prices are moving up if there is more demand than supply. In plain English, if there are more people that are buying then sellers or the volume on the buying side is bigger than the one on the selling side, the price will always move to the forex trader display at wall streetupside. The opposite is true as well if sellers dominate buyers. Supply and demand levels can be spotted using technical analysis as there are many trading theories that allow strong support and resistance areas to be identified. Monetary policy is being set by the central bank that governs a respective currency and when it comes to a currency pair, there are always two central banks involved. Let’s take the USDJPY pair for example. This pair will move based on the differences between the monetary policy set by the central bank in the United States, the Federal Reserve, and Japanese central bank, Bank of Japan. As a rule of thumb, tightening monetary policy is always currency positive, while easing the policy is being viewed as negative for a currency.

13. Are there specific terms to know?

Yes, trading the forex market implies knowing your way through the terminology. Here are some basic examples, but the list can be much longer:

  • Going LONG = buying a currency pair;
  • Going SHORT = selling a currency pair;
  • Being BULLISH = expecting price of a currency pair to move to the upside;
  • Being BEARISH = expecting price of a currency pair to move to the downside;
  • Being HAWKISH = BULLISH – only it refers to an economy, statement, text, and not to the price of a currency pair. For example, if a central bank is making a hawkish statement, this is being viewed as bullish for that respective currency.
  • Being DOVISH = BEARISH – this is the opposite of being hawkish.
  • FED = Federal Reserve of the United States = U.S. central bank
  • ECB = European Central Bank
  • BOE = Bank of England
  • BOJ = Bank of Japan
  • RBA = Reserve Bank of Australia
  • RBNZ = Reserve Bank of New Zealand
  • SNB = Swiss National Bank
  • QE = Quantitative Easing
  • Hiking rates = tightening = a central bank is raising the main interest rate = bullish for the currency
  • Cutting rates = easing = a central bank is cutting the main interest rate = bearish for the currency

14. What is fundamental analysis?

Fundamental analysis refers to the interpretation of economic releases relatives to the potential move it can cause to a currency pair. Also, it means comparing the two economies in a currency pair and taking a trade based on the difference between the two. Economic releases are scheduled and known in advance via the economic calendar, a public calendar that can be consulted any time and is offered by brokers for free. This economic calendar splits the economic releases into three different categories: very important ones (volatility is the greatest here and currency pairs will move aggressively), news that is of medium importance and less important economic news.

15. What is technical analysis?

Technical analysis stands for analyzing a currency pair’s chart in order to identify patterns that formed on the left side of the chart and to project them on the right side, basically forecasting future price movement the currency pair online trading call to actionmight do. There are many trading theories based on technical analysis, such as Elliott Waves, Gartley, Point and Figure, Renko, Japanese Candlestick Techniques, VSA (Volume Spread Analysis), etc, and to a certain degree, they fit every trader personality. There are a lot of services which offer forex trading signals.

16. Are there different forex trading styles?

Yes, and they are differentiating based on the time horizon. Short term traders are being called scalpers, so scalping means opening and closing many trades during the trading day with the purpose of making a quick but small profit. Swing trading means positions are being left open for a medium period of time, from a few days to even weeks, while investing refers to keeping positions open for an even longer period of time. Check our forex trading strategies page for more information.