Complete Guide to Forex Trading for Beginners

Forex trading has become one of the largest and most powerful markets in the world.

According to the 2019 quarterly report from the Bank for International Settlements, "Trading on the FX market reached $ 6.6 trillion per day in April 2019, up from $ 5.1 trillion 3 years earlier."

The Forex market, in particular, is attractive for various reasons including; traders can enter into it simply and easily, this is one of the most technologically advanced markets, and you can trade on your own time.

In this Forex guide, we will study:

What, exactly, the Forex Market.

How both can help you make money.

How to protect yourself from potential big losses along the way.

We will also discuss the risks involved, so you can make the best decision on your path to becoming an expert trader, from the start.

A pleasant life? Let's get started.

Overview and Summary

The foreign exchange market is where currencies are traded. Currency is used and recognized by almost everyone who takes part in society because we need it for many things.

The Forex market is the most popular market, making it the largest and most active, trading more than $ 5.09 trillion every day.

Exchange rates determine the value of your currency in another currency. You can think of it as the price you have to pay to buy a certain currency.

Currency pairs are currency quotes from two countries that are combined for trade.

Foreign exchange trading will have supply and demand prices. Bid is the price you want to buy the currency and demand is the price you want to sell.

Currency speculation is when a trader buys and holds a currency in the hope that it will change in value.

Hedging is an investment that protects your finances from the risk of currency changes.

Forex trading is a complex, risky and highly unpredictable industry, with various regulations.

What is Forex?

Let’s begin by defining the term Forex. It stands for foreign exchange, and has many abbreviations including, FX. Foreign exchange is simply the process of exchanging currencies from one to another.

The foreign exchange market therefore, is where currencies are traded. Currencies are used and recognised by almost everyone who partakes in society because we need it for so many things.

The World’s Largest Financial Market

Today, the Forex market is the most popular market, making it the biggest and most active, with over 5.09 trillion USD in trades every day. This also makes the market very volatile and unpredictable, enabling traders to profit off both positive and negative fluctuations

Trade in Your Own Time

Forex is the market that never sleeps. It’s active 24 hours a day, 5 and a half days a week, which means that you can trade at a time that suits you.

The Forex market is an over-the-counter market (OTC) which means that traders don’t need to be in any physical location to trade currencies.

As a result, Forex traders are never restricted to any particular hours of the day. It also means that currencies are always moving somewhere around the world, because someone is always actively doing business.

For example, during daylight hours in the U.S, the U.S dollar will fluctuate the most. While in Europe, the euro will fluctuate the most during their daylight hours, or between 8:00 to 16:00 GMT.

This is a fantastic set-up for anyone that’s busy during the day because it means you can trade currencies in the evening and visa versa. If you’re busy at night, or you just like to sleep at night, then you can trade currencies in the morning.

An Accessible Market

One of the best advantages of Forex trading is its accessibility. The Forex market is one of the most technologically developed markets, and is accessible to people around the globe, once they have an internet connection.

While other markets use out-dated trading platforms, the Forex market is constantly upgrading the software used.

This means that we are constantly updated about how country’s situations affect the market.

For instance, traders can stay up-to-date on fluctuations on the British pound in the midst of BREXIT in real-time, which is important for individuals and companies alike due to its potentially turbulent exit from the European Union.

Similarly, after President Trump’s impeachment in mid December 2019, traders could immediately see if it had an effect on the value of the U.S dollar. However, true to the unpredictability of the market, the announcement barely affected it.

The Evolution of Forex

The Forex market is well and truly the market that never sleeps. It may be a new concept to many, and of course it has evolved and grown into what it is today, but the concept of changing currencies has been around a hella’ long time.

So, where did it all begin? The first known sign of currency exchange has been traced as far back as 259 BC in Egypt.

Fast forward to 1944 when the Bretton Woods Accord was signed which allowed currencies to fluctuate within a tight range.

Not long after, in 1971, a free-floating currency system was introduced and thereby, creating the market as we know it today.

This same year, computer monitors were introduced, replacing old-era telephone and telex methods. Then, in the 1980’s, electronic Forex trading was born. Traders could now trade on real-time.

Why We Need to Trade

Most people around the world will need to trade currencies at some stage in their lives. Whether they’re buying something online or going on holidays. In the age of technology, it’s unlikely you’ll manage to avoid the trade.

Commerce

If you are in England and you want to buy a phone online from the U.S, then someones currency needs to be exchanged for the purchase to take place.

For example, the person in Britain would need to change their pounds (GBP) into U.S dollars (USD).

Tourism

Travel and holidays also require the exchange of currencies. When you go on holidays to a region that has a different currency, you will need to exchange your money into whichever currency the country you’re going to has so that you can pay for your ice-cream, fake pair of Raybans, or 10 shots of tequilas, say.

If you’re a Spaniard going on holidays to Mexico, then you can bet your bottom dollar you’re not going to be able to buy that oversized sombrero off the local in Cancún with Euro. You’ll need to trade in your euro, at the current exchange rate.

Exchange Rates and What Affects Them

Exchange rates define how much your currency is worth in another currency. You can think of it as the price you’ll need to pay in order to purchase a particular currency.

The price of most currencies is decided by Foregin Exchange Traders who trade the currencies twenty-four hours, five and a half days a week. In 2019, $5.1 trillion market trades were made a day

A strong currency is good because it allows you to buy more of other currencies, which is great for many reasons, but especially for commerce.

What Affects Exchange Rates

The price of currencies is constantly changing and there are a lot of complex factors that influence this.

Currencies are not directly regulated by Governments or banks, and usually the most a Government will try to do is influence the rate.

However, it is intrinsically linked with how well a country is performing economically, and the interest rates of the country’s central bank, in addition to how much of that currency there is available.

The Role of Interest Rates

The first way an exchange rate can be influenced is through the interest rate paid by a country’s central bank.

Higher interest rates increase the value of a currency because more investors swap their currency for the better paying one and then invest it in that country to yield the higher interest rate.

In the U.S the nation’s central bank is the Federal Reserve, an independent arm of the government that influence exchange rates by raising or lowering the fed funds rate.

For example, if the Federal Reserve lowers the fed funds rate, interest rates will go down across the U.S. This in turn makes loans cheaper to encourage investing and spending in the economy.

When interest rates are significantly lowered, investors are less likely to exchange their currency to the U.S dollar. This is because they won’t get good returns on their money.

The Money Supply Effect

The central bank can also affect exchange rates by printing too much money to induce price inflation.

When a country spends, they get the money from taxing, borrowing, or printing more money. Countries that choose to print more money usually have inadequate tax revenue, high spending, and may have run out of any borrowing options.

When there’s too much money, demand outstrips supply causing the prices of their goods and services to increase.

In certain cases, when far too much money is printed, hyperinflation will occur. This is rare but it can happen when countries have extreme debts to pay, such as war debts.

The Role of the Economy

The country’s economic situation and financial stability also impact the value of its currency.

Investors are more likely to buy goods and services from a strong, growing economy. In order to do this, they’ll need to pay in the currency of the country they’re investing in.

Countries with less financial stability won’t be invested in as much because they need to know that they will get their money back if they hold government bonds in that currency.

Currency War: An Intentional Devaluation of Currency

Until now, it might have seemed straightforward enough that a stronger currency equates to good news for a country. But formulas are a rarity in this industry, and things are never that simple.

In some cases, a strong currency isn’t what’s best for a nation. Let’s look at China as an example of this.

In the past couple of decades, the Chinese Government have been accused of consistently devaluing the Chinese currency (Renminbi) in order to advance its own economy, especially by Donald Trump.

Why Devalue Currency?

China has a strong export sector which allows them to run a current account surplus.

A weak currency keeps chinese exports very competitive in a global market, and at the same time, it makes imports more expensive.

Chinese exports has been a key factor in the economic growth of the country, creating better paid jobs for traditionally low-paid agricultural workers.

The U.S have criticised this strategy as currency manipulation. A devalued Chinese currency results in an overvalued U.S dollar, which causes a loss of U.S jobs, they argue.

The negative effects of a devalued currency aren’t usually worth it however. It can create uncertainty in global markets and potentially spur a recession.

In the case of China and the U.S, it could result in a currency war where by both countries consistently devalue their own currency into the ground. This behavior can have negative and dangerous consequences.

Spot Markets and Futures Markets

Let’s broaden the scope a bit. Until now we’ve only been referring to the cash market in our Forex guide.

This is also known as a spot market, because transactions are settled right away, or on the ‘spot’. This the most popular market.

Stocks and currencies are the most well-known spot market instruments. Therefore, Forex, the exchange of currencies, is a global spot market.

The opposite of the spot market is the futures market. This is a contract based market where transactions are settled in the future, at a later date. This market was started to create currency futures to provide a place where banks and corporations could hedge against potential risks or huge losses when trading.

How Do Forex Quotes Work?

A Forex quote is the price of one currency when valued against another. This involves currency pairs, because there are two currencies involved; you are buying one currency with another.

Currency Pairs

A currency pair is the quotation of a currency from two countries that are coupled for trading.

The currencies involved are known as the base currency, which appears first, and the quote currency, which appears second.

Currency pairs are valued against each other. The base currency is always valued against the quote currency. This tells traders how much the base currency will cost in the quote currency.

Each currency is identified by The International Organization for Standardization codes, or ISO codes. These codes are 3 letter abbreviations of each country’s currency.

For example, the US dollar’s ISO code is USD and the Euro is EUR. ISO codes are the same around the world and are one of the few rules in the trading industry.

How to Buy and Sell to Make a Profit

Asking & Bidding

Foreign exchange trading will comprise of both a Bid and Ask price. The bid is the price you would like to buy the currency at and the ask is the price you want to sell it at.

What is a Long or Short Position?

A long-trade is when the first currency is bought while the second is sold. To go long on a currency means that traders buy a currency in the hope that their currency pair increases in value, so they can sell it and make a profit. In other words, they’re buying low and selling high.

This is particularly the case for long-term investments, including investments in bonds or stocks, where traders rely solely on the value of their assets increasing in value.

Traders can also sell currency or ‘go short’, with the hope that their currency pair decreases in value, so they can re-buy it at a cheaper rate. ‘Shorting’ is selling high and buying low, and it allows you to make profits on market trends moving both upward and downward. When ‘going short’, it’s important to utilize one of the top brokers for short selling, as not all brokers are geared toward this type of investing.

Speculate on Rising or Falling Prices

George Soros

Currency speculation is when traders buy and hold currency in the hope that it changes in value. If they believe that a currency is undervalued, then they will buy that currency and hope to sell it later to make a profit. If they believe that it’s overvalued then they will start short selling it.

The most famous example of currency speculation happened, on what we know today as ‘Black Wednesday’, in 1992 when hedge fund manager George Soros shorted the pound, and forced the British Government to pull from the European Exchange Rate Mechanism (ERM).

During a time of economic instability, with low interest rates and high inflation, Britain made the unsound decision to increase its interest rates to attract attention to the pound.

After noticing this, Speculator George Soros shorted the pound, resulting in The British Government withdrawing its currency from the ERM because they were losing billions trying to artificially increase its value.

Soros went down in history as a world renowned currency speculator, earning himself a whopping $1 billion.

Keep in mind, extraordinary deals like this are done by extraordinary traders, and we don’t hear about all the unsuccessful speculations.

Fees and Commissions

Trading forex beats other trading when it comes to fees and commissions. One reason is that most brokers charge a variable commission on the spread as opposed to a fixed fee, or a percentage fee on the value of the trade.

Charging a fixed commission can happen but it’s not as common, especially with recent market moves towards eliminating fees, which we’ll discuss a bit further down.

Understanding the Forex Spread

The Forex Spread is the difference between the bid and ask price of a currency pair.

For example, if the asking price of currency is 1.15558-1.15557, the spread is 0.0001, or 1 pip. This means that in order to make a profit, the value of a currency pair will need to increase more than the spread.

Currency pairs with too large a spread will take more time to become profitable. Low-spread trading earns a quicker profit and is therefore preferred by many Forex traders. They make a lot of smaller trades, instead of depending on larger trades to make a profit.

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