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What is Forex Trading?

Forex trading, commonly referred to as foreign exchange, involves the conversion of one currency into another. Renowned as one of the most active trading markets globally, the Forex market witnesses a staggering volume of around $6.6 trillion in transactions every single day, involving individuals, companies, and banks.

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Forex traders undertake a vast majority of currency conversion to earn a profit. The amount of currency converted every day can make the price movements of some currencies extremely volatile – which is something to be aware of before you start forex trading.

Beginners’ guide to forex: learn currency trading in 6 steps

  1. Forex trading essentials for beginners
  2. How does Forex Trading work?
  3. Why do people trade forex?
  4. Learn how currency markets work
  5. How to become a forex trader

1. Forex trading essentials for beginners

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What is a forex pair?

A forex pair is a combination of two currencies that are traded against each other. There are hundreds of different combinations to choose from, but some of the most popular include the euro against the US dollar (EUR/USD), the US dollar against the Japanese yen (USD/JPY) and the British pound against the US dollar (GBP/USD).

What are the base and quote currencies?

The base currency is always on the left of a currency pair, and the quote is always on the right. The base currency is always equal to one, and the quote currency is equal to the current quote price of the pair – which shows how much of the quote currency it’ll cost to buy one of the bases. So, when you’re trading currency, you’re always selling one to buy another.

What is a pip in forex?

A pip in forex is usually a one-digit movement in the fourth decimal place of a currency pair. So, if GBP/USD moves from $1.35361 to $1.35371, then it has moved to a single pip. But, if you’re trading JPY crosses, a pip is a change at the second decimal place. Pipette is the fifth decimal of the price movement in Forex trading.

A pip is a measurement of movement in forex trading, used to define the change in value between two currencies. The meaning of “pip” is “point in percentage” It represents the minimum change in a currency quote. Traders use pips to calculate the difference between the bid and ask prices of a currency pair and determine their profit or loss.
Most major currencies define a pip as the fourth decimal place, so a one pip change is equivalent to 0.0001. But there are some exceptions, such as the Japanese Yen where a pip is the second digit after the decimal point. Although a pip is normally the second or fourth decimal place, we often display an additional decimal representing a fraction of a pip.
The spread in a currency pair quotes in pips, as it is a measure of the market price movement. A pip defined as the equivalent of a ‘point’ of movement – at IG we measure currency moves in pip for CFD trades, but we refer to them as points.
Let’s take a look at the EUR/USD currency pair. If the market moves from 1.1600 to 1.1601, that 0.0001 increase would be a single pip move.
If you had entered a long position on EUR/USD, and the market moved from 1.1600 to 1.1650, you would have gained 50 pips and profited from the increase. But if the market moved against you, falling from 1.1600 to 1.1550, this decline of 50 pips would mean that your position made a loss.
If we look at the USD/JPY currency pair, a move of 120.01 to 120.02 would be a single-pip move.
You decided to enter a long position on the pair, and the price increased from 120.00 to 120.08. This means that the market has moved by eight pips, and your position would be showing a profit. 

What is a lot in forex trading?

Currencies use lots to trade, which are batches of currency use to standardise forex trades. As forex price movements are usually small, lots tend to be very large. For example, a standard lot is 100,000 units of the base currency.

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2. Forex trading essentials for beginners

Forex trading operates akin to standard transactions, where you use currency to acquire assets. In the forex market, the market price indicates the amount of one currency needed to buy another. For example, the current market price of the GBP/USD currency pair reveals the cost in US dollars to purchase one pound. Additionally, each currency has its code, facilitating swift identification within pairs. Below, find codes for some popular currencies.

  • What does it mean to buy or sell a currency pair?
     

    Buy a currency pair if you expect the price to rise, indicating a stronger base currency, and sell if you expect the price to fall due to a weaker base currency. For example, if the GBP/USD pair is bought, the pound is expected to strengthen against the dollar, requiring more dollars to buy a single pound, and if sold, the pound is expected to weaken against the dollar, needing fewer dollars to buy a single pound.

  • What is the spread in forex trading
     

    The spread in forex trading is the difference between the buy and sell prices. For example, the buy price might be 1.3428 and the sale price might be 1.3424. For your position to be profitable. You’ll need the market price to either rise above the buy price or fall below the sell price – depending on whether you’ve gone long or short.

  • What is the margin and leverage in FX trading?
     

    Margin refers to the initial deposit you need to commit to in order to open and maintain a leveraged position. So, a trade in EUR/USD might only require a 0.50% margin in order for it to be opened. So instead of needing $100,000 to open a position, you’d only need to deposit $500.

3. Why do people trade forex?

Taking a position on currencies strengthening or weakening

Forex traders make predictions on currency pairs, aiming to profit from the fluctuation in strength between one currency and another. When a pair’s price rises, it indicates the base is strengthening against the quote; when it falls, the base is weakening.

With ascending prices, more of the quote currency is required to buy one unit of the base; conversely, descending prices mean fewer quotes are needed to buy one base. Traders tend to go long when the base is strengthening and short when it weakens.

Among the most popular forex trading styles—such as scalping, day trading, swing trading, and position trading—you might choose a style based on whether you have a short- or long-term outlook.

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Hedging with forex

Hedging is a way to mitigate your exposure to risk. It’s achieved by opening positions that will stand to profit if some of your other positions decline in value – with the gains will offset at least a portion of the losses. Currency correlations are effective ways to hedge forex exposure. An example would be EUR/USD and GBP/USD, which positively correlates because they tend to move in the same direction. You can go short on GBP/USD if you have a long EUR/USD position to hedge against potential market declines.

Seize opportunity 24 hours a day

The forex market is open 24 hours a day thanks to a global network of banks and market makers that are constantly exchanging currency. The main sessions are in the US, Europe and Asia, and it’s the time difference between these locations that enables the forex market to be open 24 hours a day.

Forex trading market hours are incredibly attractive, offering you the ability to seize opportunities around the clock. We are also the only provider to offer weekend trading on certain currency pairs, including weekends GBP/USD, EUR/USD and USD/JPY. That means you can trade these combinations when others can’t.

4. Learn how currency markets work

What moves the forex market?

  1. Central banks
  2. News reports
  3. Market sentiment

The forex market consists of currencies from different countries, which makes it challenging to predict exchange rates because various factors can influence price changes. That said, the following factors can all have an effect on the forex market.

Central banks

Central banks control the currency supply. They can announce measures that significantly impact its price. For instance, quantitative easing involves injecting more money into an economy, which can cause a currency’s price to decrease due to an increased supply.

News reports

Commercial banks and other investors tend to want to put their capital into economies that have a strong outlook. So, if a positive piece of news hits the markets about a certain region, it will encourage investment and increase demand for that region’s currency. Demand will fall if negative news hits. This is why currencies tend to reflect the reported economic health of the region they represent.

Market sentiment

Market sentiment, which often reacts to the news, can also play a major role in driving currency prices. If traders believe that a currency will head in a certain direction, they will trade accordingly and may convince others to follow suit, increasing or decreasing demand.

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5. How to become a forex trader

Learn ways to trade forex

 

There are several ways to trade forex, including trading spot forex, forex futures and currency options. When you trade with us, you’ll be predicting the price of spot forex, futures and options either rising or falling with a CFD account.

  • Spot Forex Trading lets you trade Forex pairs at their current market price with no fixed expiries
  • Forex or currency futures enable you to trade forex pairs at a specified price to be settled at a set date in the future or within a range of future dates
  • Forex or currency options let you trade contracts that give the holder the right, but not the obligation, to buy or sell a currency pair at a set price, if it moves beyond that price within a set time frame

All of these – spot, futures and options – can be traded with FX CFDs. These are financial derivatives that let you predict whether prices will rise or fall without having to own the underlying asset.

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What is a forex broker?

 

Forex Brokers provides access to trading platforms that can be used to buy and sell currencies. We Recommended: Exness, Octafx 

Forex brokers charge a fee, usually in the form of a spread. This is the difference between the buy (offer) and sell (bid) prices, which are wrapped around the underlying market price. The costs for a trade are factored into these two prices, so you’ll always buy slightly higher than the market price and sell slightly below it.

Traditionally, a forex broker would buy and sell currencies on behalf of their clients or retail traders. But with the rise of online trading, you can buy and sell currencies yourself with financial derivatives like CFDs, so long as you have access to a trading platform. This is because all forex trades are conducted over-the-counter (OTC), rather than on exchanges like stocks.

Discover the risks and rewards of trading forex

 

  • Forex is the most-traded financial market in the world, which means that forex prices are constantly moving, creating more opportunities to trade
  • Some forex pairs are more volatile than others. Those with low liquidity are often more volatile, including many minor pairs.
  • Pairs that include USD are often more liquid because as the world’s reserve currency, USD is often in high demand
  • Slippage is sometimes an issue in forex trading, given how volatile the market can be. To help mitigate the effects of slippage on your forex trades, you should add stops and limits
  • However, if you are aware of the risks and take appropriate steps to mitigate your exposure, then the forex market can be the source of your next opportunity

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FAQs

Most Searched queries about Forex Trading

Forex trading means exchanging one currency for another. Forex is always traded in pairs which means that you’re selling one to buy another.
There is no difference between forex trading and currency trading, as both mean that you’re exchanging one currency for another. When forex trading or currency trading, you’re attempting to earn a profit by predicting on whether the price of a currency pair will rise or fall.
There is no difference between forex trading and currency trading, as both mean that you’re exchanging one currency for another. When forex trading or currency trading, you’re attempting to earn a profit by predicting on whether the price of a currency pair will rise or fall.
You can make money from forex trading by correctly predicting a currency pair’s price movements and opening a position that stands to profit. For example, if you think that a pair will decline in value, you could go short and profit from a market falling.
Alternatively, if you think a pair will increase in value, you can go long and profit from an increasing market.
You can get started trading FX with a forex trading account. Plus, you’ll also need to be familiar with what moves the forex market – like central bank announcements, news reports and market sentiment – and take steps to manage your risk accordingly.
The costs and fees you pay when trading currency will vary from broker to broker. But, you should bear in mind that you’ll often be trading currency with leverage, which will reduce the initial amount of money that you’ll need to open a position. Be aware though that leverage can increase both your profits and your losses.
Approximately $6.6 trillion worth of forex transactions take place daily, which is an average of $250 billion per hour. The market is largely made up of institutions, corporations, governments and currency speculators – speculation makes up roughly 90% of trading volume and a large majority of this is concentrated on the US dollar, euro and yen.
The tax on forex positions does depend on which financial product you are using to trade the markets.
When you trade via a forex broker or through CFDs, any gains to your forex positions are taxable. However, your losses are tax-deductible, and depending on your circumstances can also be used to offset gains made elsewhere.
Despite the enormous size of the forex market, there is very little regulation because there is no governing body to police it 24/7. Instead, there are several national trading bodies around the world who supervise domestic forex trading, as well as other markets, to ensure that all forex providers adhere to certain standards. For example, in the UK the regulatory body is the Financial Conduct Authority (FCA).

Gaps are points in a market when there is a sharp movement up or down with little or no trading in between, resulting in a ‘gap’ in the normal price pattern. Gaps do occur in the forex market, but they are significantly less common than in other markets because it is traded 24 hours a day, five days a week.

However, gapping can occur when economic data is released that comes as a surprise to markets, or when trading resumes after the weekend or a holiday. Although the forex market is closed to speculative trading over the weekend, the market is still open to central banks and related organisations. So, it is possible that the opening price on a Sunday evening will be different from the closing price on the previous Friday night – resulting in a gap.

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