Forex Trading for beginners can be confusing and difficult to understand how Forex Trading works. If you are looking to understand Forex starting from scratch then this article will help guide you on your way to a better understanding of what exactly Forex is, how it works and where you can go to take your Forex Knowledge to the next level.
It will allow you to grasp the basics and set you up to make Forex a success for you. If you are new to Forex Trading then in this article you can find Forex explained in a straight forward way.
We’ll explain for beginners what the Forex Market is and how it works. Whether Forex Trading is a form of gambling and if Forex Trading is Legal. We’ll give you the reasons why many traders lose money and also explain how you can start Forex Trading with only a small amount of money.
We’ll then show you where you can start learning all about Forex Trading before showing you how to decide on which broker to use once you commence your Forex Trading journey.
What is Forex and How Does it Work?
Forex is an abbreviation of Foreign Exchange or FX for short. It’s also known as Currency Trading as it involves the process of converting funds from one currency into another.
For example US Dollars into British Pounds.
The Forex Market is a global marketplace where currencies can be traded. With daily amounts traded reaching as much as $5 Trillion, it is one of if not the largest and most liquid financial markets there is.
For the most part, Forex is undertaken by huge financial conglomerates, countries, and central banks participating in Forex in order to hedge against fluctuations in interest rates and international currency prices as well as to spread their investment portfolios.
Import and export operators are also involved in the currency markets as they try to negate the effects of currency fluctuations between the countries that they are based and sell into or buy from.
The FX market is decentralized and facilitates the buying and selling of currencies.
The prices of currencies fluctuate against one another according to demand and supply and there are many different reasons that currencies move up and down in price against one another.
As a retail Forex Trader, you are looking to take advantage of these price movements and make a profit by buying low and selling high. You can inversely sell high and buy low, which makes the Forex Market more attractive to speculators as you can profit from the markets regardless of which way the prices move.
A word of warning though as you can also make a loss on trades as inevitably they do go against you. This is why it is extremely important to use Stop Losses when trading and you can find out more about this on the Forex Trading for beginners courses and websites that I recommend you look at next.
Retail Forex Explained For Beginners
The overriding aim of Forex Trading for Retail Traders is to make a profit by buying a currency at a lower price and subsequently selling for a higher price (conversely you can sell at a higher price first and buy it at a lower price).
Forex prices are always shown in currency pairs showing the rate of exchange between those two pairs. For example British Pounds vs US Dollars (GBP/USD). You can trade almost any currency against another but there are a few major pairs that are most common, these includes USD/JPY (US Dollar vs Japanese Yen), EUR/USD (Euros vs US Dollars), EUR/GBP (Euros vs British Pounds).
Is Forex Like Gambling?
When corporations use Forex it’s not with a view to making a profit (not always). It’s more of a risk protection mechanism to protect them from swings in currency prices. For example, if a company purchases raw materials that they are reliant upon in say US Dollars but they sell their products in GBP. Should the GBP decrease in value against the US Dollar it makes it more costly to purchase those raw materials. Therefore by investing in US Dollars they can dampen the impact of such currency movements.
With Institutional Investors and Retail Investors Forex could be seen as gambling as you are speculating on a certain event happening and essentially placing your money at risk that your speculation is correct. However when that particular trade is incorrect then your money is at risk and you lose that money.
It’s therefore important when Forex Trading for beginners to be disciplined with your trading and use stop losses to protect your trading funds from total wipeout.
Can You Actually Make Money Forex Trading?
Whilst it is possible to make money from trading Forex as a beginner there are a number of pitfalls that you will inevitably come across. These are highlighted in the next section of this article so keep reading for more details.
Using a few defensive measures can help you increase your chances of being successful. Principally limiting your leverage, using appropriate stop-losses, and trading via a reputable Forex Broker will all help towards this endeavor.
Most retail Forex Traders do lose money as they think it is a way of making a fast buck. Large amounts of money can be lost if you don’t know what you are doing, which again is why it is really important to take the time to learn from reputable sources.
All this being said there are traders out there that make a regular return on their trades. In order to achieve between 5% and 15% per month, you need a proven strategy, with a good win rate and risk to reward ratio. Combined that with a committed attitude and ability to keep your emotions in check then you could be on to a successful trading career.
Why Forex Traders Lose Money
Many new (and old) Forex Traders lose money when trading Forex. It’s widely accepted that between 70% and 90% of traders lose money and give up altogether.
In order that you can avoid the Forex Trading for beginners pitfalls and minimise your losses on the Forex Markets I have listed the most common reasons for losses made by Newby Forex Traders:
- Poor Money Management
- Mis-application of trading signals
- Poor Trade Execution
- Trading too aggressively
- Over leveraging your account (i.e. trading with more than you can afford to lose)
- Trying to get Rich Quick
- Over Trading
- Bad Risk Management
- Letting emotions take over
- Chasing Losses
- Being greedy and letting profitable trades turn into unprofitable ones
- Trying too many different strategies and systems at once
In order that you can avoid all of these costly mistakes I highly recommend that you take the time to learn as much as you can about Forex Trading first and follow some of the courses, I recommend below.
Is Forex Trading Illegal?
Forex Trading is not illegal in the UK or the US. In the US you have to trade with a broker that is regulated by the CFTC or Futures Trading Commission and the NFA – National Futures Association.
In the UK trading is governed by the FCA Financial Conduct Authority and again brokers must be registered and be compliant with the rules and regulations.
Forex also takes place and is permitted in many other countries. However there are some places where Forex is illegal as it is seen as a method of gambling. This is actually debatable but it is true that money can be lost as well as gained when trading on the Currency markets and so it is not something to venture into without first understanding at least the basics. There is a plethora of information on the internet on how to go about trading Forex with many free courses available.
With the evolution of Forex trading online retail Forex trading has really taken off over the past few years.
With smart mobile phones and trading mobile apps means that almost anyone can get involved making it even easier to start Forex Trading for beginners.
Trade Forex With A Small Amount Of Money Using Leverage
Forex Leverage is a concept and method that allows retail traders to trade with larger sums of money than they actually have available. Usually, the Forex Broker will loan you an amount to trade with, which is a certain ration of the money you have to trade with.
For example with 100 to 1 leverage a broker will permit you to trade with $100 for every $1 dollar you have in your account. However, there will be margin requirements that you must meet in order for the broker to provide this leverage. So for a 100:1 leverage position (or trade), you would need to have 1/100 of the trade value or 1% available as cash in your account.
Currency prices don’t tend to change more than 1% on a daily basis. Therefore due to these relatively minor changes in currency fluctuations, brokers are able to provide what would otherwise seem like an extremely risky loan. This is why you can start trading with a small amount of money as if you tried to purchase currency with say £100 that’s all you would be able to trade with and you would make less than pennies on your trades (or lose pennies). With leverage, you are able to trade with much larger sums and potentially win or lose much greater amounts.
How do you start to trade Forex?
Trading Forex is very popular as there is so much choice and flexibility in what you can trade.
Practicing on a demo account is the best way to learn Forex Trading for beginners so you can see how it works without risking any of your own money.
In essence you
- choose a currency pair you want to trade.
- Decide whether to go long (buy) or short (sell) that currency pair.
- Place a stop loss and limit order. Ensuring you know and minimise your loss should the trade go against you.
- Open the trade and then keep monitoring it.
- At a pre-determined level close the trade for either a loss or profit.
Even though you might want to dive straight in you don’t want to be self-taught and fall foul of the many pitfalls as mentioned above.
First, you should thoroughly learn all about Forex Trading for beginners before you take the plunge.
As a new trader, there is a great deal to learn. Understanding how the Forex market works, becoming aware of the different types of trading strategies, and getting used to actually without letting emotions take over placing trades.
The markets can be impacted by major events across the world so keeping an eye on those is important. Also continually studying with either free or paid Forex Courses is certainly worth it to help improve your trading and profitability.
With a little bit of time and effort, you can find everything you need for free on the internet.
However, you do want to ensure that the information you are reading is legitimate and trustworthy. That’s why we have covered a number of sites that you can use to help you on your way with your trading journey.
When first starting out with your Forex Education Babypips.com is one of the best sites to go to learn all about Forex Trading for beginners.
It’s really easy to use and has a School of Pipsology that really makes it stand out from other sites. With a humorous approach they have 11 courses set out like a real school or college curriculum. Starting at the pre-school level right through to graduation.
Once you have worked your way through the Babypips course and become more experienced then Forex.com offers a lot of good resources for intermediate and advanced traders.
Forex.com is a top forex broker in the UK and regulated by the FCA (Financial Conduct Authority) so you can rest assured they are trustworthy and reputable.
The information is free to access so there is no need to have an account with them if you don’t want to. They provide insight on Trading Strategies, technical analysis and Risk Management.
With Forex.com you can also get training on how to use trading platforms including Metatrader. This is one of the most commonly used platforms by Forex brokers so this is really useful.
The other site you may want to check out whilst studying and learning about Forex trading is Investopedia.
They have many articles covering a range of topics from common forex terminology to advanced strategies. Investopedia also has an Investopedia Academy which you do have to pay for but it provides a comprehensive curriculum from beginner Forex Trading to advanced level with on-demand videos, quizzes exercises.
If you learn better from watching and listening to others then Udemy could be a good option to learn Forex Trading for beginners.
Udemy is an online marketplace for training courses in many different niches.
They include hundreds if not thousands of courses on Forex Trading so there is no end of choice. However, they do have a star rating system that allows you to identify the better quality courses. You can usually take a preview of some of the course content so that you can gain an insight into what the course is like.
One course I would recommend you check out is this Forex Basics Course for a basic get your feet wet introduction to Forex.
For a more in-depth but pricey option try Forex Trading A-Z.
Udemy quite frequently offers promotional discounts so it’s well worth waiting for a promotion period before you purchase a course. That way you can probably enroll for two or three courses for the same price as one course outside the promotional period.
Which Forex Broker To Use
Choosing a broker is the next step with Forex Trading for beginners and there are a number of them you can choose from. Also, there are a number of factors that you will want to consider before signing up for an account with any of them.
- Spread/Commission Levels
- Ease of Fund Transfers (Deposits and Withdrawals)
- Trading Platform Used
- Execution of Trades
- Customer Service
Check out this article from Investopedia showing a number of key features and ranking for some of the best Forex Brokers.
This article has hopefully shown you that Forex Trading can be a profitable way to make money. However, there are many pitfalls that you will encounter making it a tough activity to get involved with.
Spending time on your Forex Education would be the most valuable way to get started as a beginner and following strict money and risk management techniques will help you avoid a disastrous loss of funds.
If you found this article useful then please leave a comment below or check out some of our other Home Money Making Articles that give you insight into how you can make money from home.
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