Learn Forex Trading: Instructions & Guide For Beginners

Use our free PDF Guide for Trading Beginners, if you want to learn forex trading. You’ll learn the most important basics, definitions and tips & tricks for fast learning success in forex trading.

Do you want to learn Forex trading and build up an extra income? Or even become a full-time trader? With our Forex Guide you will make the first steps.

The Trading Guide is divided into four chapters and explains step by step how to trade forex for beginners.

Learn Forex Trading: What is Forex Trading? (Part 1)

The first part of our series of articles “Forex Trading for Beginners” is about providing basic knowledge about foreign exchange trading. What is Forex? Which technical terms are there? How can you trade Forex?

This article is the first part and teaches the basics of the Forex market and Forex trading on a level that is as practical as possible. Take the time to read the individual articles in a concentrated manner so that no important passages are overlooked, because one thing is very clear:

Forex trading is difficult! The attraction of fast money will be the downfall of over 90% of all beginners.

After completing these modules you will have a solid understanding of Forex trading and be ready to put theory into practice.

What is the Forex market?

Basically, the Forex market is the place where banks, companies, governments, investors and traders meet to speculate or exchange currencies (also called forex).

The Forex market is also called the Forex or Foreign Exchange market and is the largest and most liquid market in the world with an average daily turnover of $5 trillion.

The foreign exchange market is open 24 hours a day, 5 days a week. The major world trading centers are located in London, New York, Tokyo, Zurich, Frankfurt, Hong Kong, Singapore, Paris and Sydney. This results in three main trading sessions: Asia Session, London Session and New York Session.

It should be noted that there is no centralized marketplace for the Forex market and therefore there is a significant difference from the equity market:

A little background knowledge about the history of the Forex market can’t hurt, so you will learn a little about why Forex exists.

In 1876 a so-called gold standard was introduced. Basically it meant that all paper currencies had to be backed by physical gold; the idea was to stabilize the world currencies by linking them to the price of gold. It was a good idea in theory, but in practice it did not really work.

The gold standard was dropped around the beginning of World War II because the major European countries did not have enough gold to support all the currency they printed to finance major military projects. Although the gold standard was eventually dropped, the precious metal never lost its place as the ultimate form of monetary value. To this day, we see gold serving as a “safe haven” in times of crisis.

The world then decided to take advantage of fixed exchange rates, which led to the US dollar being the primary reserve currency and it would be the only currency backed by gold (Bretton Woods Agreement).

In 1971, the US declared that it would no longer exchange gold for US dollars held in foreign exchange reserves, which meant the end of the Bretton Woods system.

It was this collapse of the Bretton Woods system that finally led to the largely global acceptance of floating exchange rates in 1976. This was virtually the “birth” of today’s foreign exchange market, although it was not until the mid-1990s that it was largely traded electronically.del.

Instead, trading is carried out “over the counter”, unlike shares, on a central market place (Xetra, NYSE, …) where all orders are processed.

Forex is a product that is quoted by all major banks at not always exactly the same price.

The online brokers take bank quotes and add their own parameters (spread) to the quotes, resulting in a price. The broker often works as a broker and handles the trade effectively, so that you as a trader can buy and sell continuously.

For example, if you believe that the euro will rise against the US dollar, you can buy the EURUSD currency pair and then (hopefully) sell it at a higher price to make a profit.

Of course, you can also lose money if the US dollar gets stronger and the EUR loses value. So it is important to be aware of the risk involved in trading foreign exchange, not just the positive result.

Why is the Forex market so popular?

The human factor plays a major role here. Human beings are greedy by nature and our quest for “more” is particularly pronounced in western civilized countries with high security standards.

Forex trading offers the opportunity to make money. From home or from any place in the world (where there is internet). In theoretically unlimited amounts.

Read that last sentence again…

Sounds like a dream job, right?

  • Unlimited “salary” possible
  • Flexible working hours
  • No boss
  • Infinitely many holidays
  • – …

Being a Forex trader can fulfill many dreams if you do it right.

The only question is: When do I do it right and most importantly, how?

If you want to make a living from Forex trading, you need a working plan and a working system that enables constant profits. But how is that possible, if nobody knows how the price of a forex pair will develop in the next seconds, minutes, days, weeks, …?

With every trade you take you take a risk. So every trade means profit or loss. If you want to be successful in the long run, you need more gains than losses.

It is not easy to get there, but if you are determined and disciplined, you can get there.

Here is a quick list of the skills you need to achieve your goals in the Forex market:

Ability – to take a loss without getting emotional

Trust – in yourself and your trading strategy

Motivation – To work hard every day to become a successful Forex trader

Discipline – calm and unemotional in a realm of constant temptation

Flexibility – to successfully deal with changing market conditions

Focus – on the “right” strategy and the “right” trades

Logic – look at the market from an objective and straightforward perspective

Organization – to collect and analyze trades and data

Patience – only waiting for 5-star setups with the best risk/reward ratio

Realism – not believing to get rich quickly and understand the reality of the market and trade

As a trader we can use the high leverage and volatility of the Forex market to trade quickly and with low equity.

But as described above, a trader needs a suitable trading strategy and the right mindset to survive in the market.

These topics will be covered here at tradingfreaks.com and in this series of articles, so that you can gather and use all the necessary information for successful trading.

Another advantage of the Forex market, besides the 24/5 opening hours, is the easy access for beginners.

You can open a trading account for free in just 5 minutes and equip it with small funds. Due to the high liquidity in FX trading, you can open a trading account from 100 EUR with many online brokers and get started.

But first you should clarify further questions for you.

Who trades with Forex and why?

Banks – The interbank market allows the majority of commercial foreign exchange transactions as well as large amounts of speculative trading per day. Some major investment banks trade billions of dollars a day. Sometimes this trading is done on behalf of clients, but much is done by proprietary traders who trade on their own account. These jobs are highly sought after because they promise millions in bonuses to successful bank traders.

Businesses – Businesses must use the foreign exchange market to pay for goods and services from abroad and sell goods or services abroad. An important part of the daily activity of the Forex market comes from companies looking for foreign exchange to trade in other countries. These orders are often carried out by investment banks for the commercial clients.

Governments / Central Banks – A country’s central bank can play an important role in the foreign exchange markets. They can cause an increase or decrease in the value of their nation’s currency by trying to control money supply, inflation and/or interest rates. They can use their substantial foreign exchange reserves to stabilize the market.

Hedge funds – about 80% of all foreign exchange transactions are of a speculative nature. This means that the person or institution that bought or sold the currency has no intention of actually taking the currency; instead, the transaction was carried out with the sole intention of speculating on the price movement of that currency. Retail traders (you and I) are insignificant little people compared to the big hedge funds. Even if a successful trader has millions of dollars in his account, he won’t play a role in the FX market because the trading volume is just so huge.

Individuals – If you have ever traveled to another country and exchanged money at the airport or bank for another currency, you have already participated in the foreign exchange market. When the money is physically present, it is called a foreign currency (not foreign exchange).

Investors – Investment firms that manage large portfolios for their clients use the foreign exchange market to facilitate transactions in foreign securities. For example, an investment manager who controls an international stock portfolio must use the Forex market to buy and sell multiple currency pairs to pay for foreign securities he wants to buy.

Retail Forex Traders – Finally we come to Retail Traders (you and me). The retail traders industry is growing every day. With the spread of the Internet, online brokers have always come into the market, fighting for every private trader. Retail traders access the market indirectly through a broker or a bank. There are two main types of retail forex brokers that allow us to speculate in the foreign exchange market: Brokers and traders. Brokers act as intermediaries for the trader, trying to find the best price in the market and execute on behalf of the client. To do this, they charge a commission on the price obtained on the market. Traders are also called market makers because they make the market for the trader and act as counterparties to their trades. They quote a price at which they are willing to trade and are compensated by the spread, which is the difference between the buy and sell price (more on this later).

Conclusion:

The first lesson of the Forex Trading Series is complete. You now know that the Forex market is the most liquid market in the world, so you can become rich (or poor) and need an online broker as an intermediary and executive body for your trades.

Now you do not have a strategy yet, but you do have a sound basic knowledge that we will expand on in the next chapter.

Learn Forex Trading: Definitions and technical terms (Part 2)

In this part of our “Learn Forex Trading” series we will clarify individual technical terms and definitions of Forex trading.

I remember when I read the first analyses of professional traders at the beginning of my career. I understood NOTHING! If you feel the same way, it is not bad, it gets better 😉

The Forex market comes around the corner with its own terms and jargon. So if you want to learn Forex trading, it’s important that you understand some of the basic Forex terminology that you’ll encounter on a daily basis from now on.

Basic Forex Terms:

Below is an explanation of the most important forex trading terms:

Exchange Rate – The value of one currency expressed in terms of another currency. For example, if EUR/USD is 1.3200, 1 Euro is worth 1.3200 US$. The first currency mentioned first is always 1. A GBPJPY of 170.00 means that for 1 GBP I have to spend 170 JPY.

Cross Rate – Denotes the exchange rate of two currencies that are not the local currency. A cross rate can be calculated by taking, for example, Euro-US dollar and Euro-yen to determine the US dollar/yen exchange rate.

Pip – The smallest step in price movement a currency can take. Also called a point or points. Generally, the fourth digit after the decimal point is a pip. For JPY pairs, there is one exception, where it is the second decimal place. For example: 1 pip for EUR/USD = 0.0001 and 1 pip for USD/JPY = 0.01.

LOT – The units or pieces I buy from an FX pair are called LOT. 1 LOT equals 100,000 EUR. 0.1 LOT therefore equals 10,000 EUR, etc. So if I buy 1.0 LOT in EURUSD, I move 100,000 EUR, etc.

Margin – The deposit required to open or hold a position. Used margin is the amount used to maintain an open position, while free margin is the amount available to open new positions. With a 1,000 EUR margin balance in your account and a 1% margin requirement to open a position, you can buy or sell a position up to 100,000 EUR. This allows a trader to use his account up to 100 times or with a leverage ratio of 100:1.

Leverage – Leverage refers to the ratio of equity to debt. In classic FX trading, I use only a small amount of my own money per trade and receive the remaining capital from the broker. For this I deposit a safety margin, as described above. If I have a 1000 EUR trading account and trade 0.1 LOT in EURUSD, the broker retains about 2% margin. So he blocks 20 EUR of my available capital. However, since I move 10,000 EUR in 0.1 LOT, I get 9980 EUR of debt capital from him. If I now make a profit of 50 EUR on my EURUSD trade, this corresponds to a return of (50/20×100=) 250% based on my invested capital. In relation to the trading account, it is a 5% return (50/1000×100). The higher the leverage, the more leverage you get from the broker and the higher the profit and loss can be.

To calculate the leverage used, you divide the total value of open positions by the total margin balance in your account. For example, if you have 10,000 EUR margin in your account and open 1 lot of EUR/JPY (100,000 units of the base currency) for 100,000 EUR, your leverage ratio is 10:1 (100,000 / 10,000).

If a trader’s account falls below the minimum amount required to maintain an open position, he will receive a “margin call” asking him to either deposit more money into his account or close the open position. Most brokers automatically close a trade if the margin balance falls below the amount required to keep the trade open. The amount required to maintain an open position depends on the broker and could be 50% of the original margin required to open the trade.

Spread – The difference between the sell price and the buy price or the bid and ask price. For example, if EUR/USD prices are 1.3200/03, the spread is the difference between 1.3200 and 1.3203 or 3 pips. You will usually see two prices per Fx pair at your broker. So the spread is a cost that must be earned first time.

The major forex pairs and their nicknames:

Curiously, some currencies have nicknames that analysts like to use.

USD = Greenback
GBP = Sterling or Pound
GBP/USD = Cable
CAD = Loonie
NZD = Kiwi
AUD = Aussie
CHF = Swissy

If you read analyses or comments on sites like Bloomberg in the future, you will know from now on which currency is meant.

Learn to trade Forex: Opening positions – How do I go long and short? (Part 3)
In the penultimate part of the Forex Trading Learning Series, we’ll go into more detail and look at how you open a trade.

Since you can speculate on rising and falling prices in Forex trading, you need to know which direction to trade in.

It is also important to know that prices can be quoted in price quotes (EUR/USD) or volume quotes (USD/EUR). The rate is of course the same, but the way it is displayed is reversed.

The exchange rate of two currencies is quoted in a pair, such as EURUSD or USDJPY. The reason for this is that with every foreign exchange transaction, you buy one currency and sell another at the same time.

If I want to trade the EUR/USD long, I bet on a rising EUR against the USD and buy the pair. So I press the buy (Buy) button.

If I want to trade the EUR/USD short, I bet on a falling EUR and sell the pair. So I press the Sell button.

If I want to trade the EURUSD long, I buy the EUR and sell the USD at the same time.

If I trade the GBPJPY long, I buy the GBP and sell the JPY at the same time. I am betting on a rising GBP and a falling JPY.

The first currency of the pair, which is to the left of the slash, is called the base currency, and the second currency of the pair, which is to the right of the slash, is called the counter or quote currency.

Here is the graphical representation again.

The spread is set by the broker and can vary from provider to provider. These are costs you have to bear as a trader, so a broker comparison can be very worthwhile. Other costs such as commission or order fees are unusual in Forex trading. But if you hold positions overnight, you have to expect financing costs (swap).

How do I determine the correct position size?

Success and failure in trading are often very close together. In order not to destroy your entire account with two failed trades, you should keep the risk as small as possible.

This is where the position size comes into play, i.e. the LOT number. Once again, be aware that with 1 LOT you move 100,000 units of the respective currency! That is a lot of money.

With 1 LOT, a change of 1 pip (fourth decimal place) already brings about noticeable changes in your trading account.

Especially for beginners who want to learn Forex trading, it makes sense to work with a position size calculator.

Investing.com provides a calculator for free.

However, I don’t like the choice of words “Profit Calculator”, because you should not calculate your possible profit, but the loss.

If you use the calculator, you have to specify the units/number of pieces and not the LOT size. The following conversion will help you:

1 LOT = 100000 units; 0.5 LOT 50000 units, 0.01 LOT = 1000 units, etc.

You can see from the picture that with 1 lot in EURUSD and a potential win of 20 pips, you will make 161.54 EUR.

Is that a lot?

Well, if your account is 1000 EUR, yes. If your account is 100,000 EUR, it is not.

Remember that if you had -20 pips, you would already have lost 161.54 EUR. Nobody knows whether a trade is good or bad. It is not the trader with his wishful thinking that decides, but the market. You only trade probabilities.

So you must always consider your account balance to determine the right position size. Especially as a beginner, you should never risk more than 1% of your capital per trade.

So if you have 1000 EUR capital and want to risk 1%, the maximum loss in the following trade is 10 EUR. With a small position size of e.g. 0.01 lot you have enough “air” for the trade, namely about 50 pips.

But more about this in the context of strategy development.

When do I make a profit? When do I make a loss?

When you make a trade, you usually have a market opinion. The EUR rises now because… or: the USD falls now because…

You want to profit from this market opinion and go long or short accordingly.
Let’s assume you are trading EURUSD and go long at 1.2400 with 0.1 LOT. This means that you are moving a volume of 10,000 EUR in this currency pair.

After a few hours, the rate turns down and is quoted at 1.2340. You are 60 pips in book loss, which is -48.43 EUR for this amount.

Have you lost money? No, not yet, because the position is still open. The good thing about Forex trading is that you can open and close positions 24 hours a day, except Saturday and Sunday.

So you are always spoilt for choice: let the trade run and hope that it will still turn positive? Or will it get worse?

In general: Limit losses, let profits run.

Depending on your trading strategy, you can take 10-20 pips of profit, several times a day or week (scalping), or you can trade just a few times a month and have a point target of 200-500 pips per trade.

Here there is no right or wrong. You have to find out which strategy suits you.

A strategy is ultimately a set of rules that tells you exactly what to do:

  • When do I make a trade…
  • When do I end the trade
  • What form of protection do I take
  • When do I not trade
  • What quantity do I take

A trading strategy must generally fit the trader’s characteristics and circumstances.

This takes time and practice.

To help you find the right strategy for you, we have provided a lot of content for you at tradingfreaks.com.

You can try out your newly acquired knowledge on free demo icons. This way you get to know your trading environment, but don’t risk your own money, because it is only “play money”.

Learn Forex Trading – What can you earn with day trading? (Part 4)

Which monetary possibilities day trading or swing trading offer you and which views are extremely dangerous you will learn in this, last part of the article series.

In the following example I have written about day trading returns and realistic returns in general. The examples have been calculated with CFDs (Contracts for Difference). But it also fits to the classic Forex trading, because FX and CFDs are almost identical in the way they work.

Daytrading yield in practice:

The nice thing about trading is that with a functioning trading system you can adjust your position size to your account size at any time. If you start out with a 1 CFD because your portfolio value is only 5,000 EUR, you can easily trade 10 CFDs when you reach 50,000 EUR.

With 5 CFDs and 10 index points in the right direction, you already have 50 EUR return. If your trading setup works sustainably, you will be able to achieve exponential growth by adjusting the position sizes and following the money management.

A realistic calculation example:

At the moment of the “aha moment”, when you have managed to trade a duplicable setup, you start with 15.000 EUR and achieve an average net return (after tax) of 4% per month. This is a reasonably calculated value, but also only an average, because not every month is the same.

Here you can see the power of exponential growth. The successive increase of the position sizes is not even necessarily taken into account here and offers further room for maneuver.

But this scenario is a luxury scenario, because the biggest hurdle will always be to create a functioning trading system that fits your account, your financial instrument and your personality. In other words:
“The first million is the most difficult! After that it’s almost a foregone conclusion.”

Of course you start your trading experience with the great euphoria of getting rich as fast as possible. But that will not work. Hard work and a clear plan are essential!

If you want to know how I did in my first year as a trader, you can find the article here.

On our site you will find numerous tools to become a successful trader.


Read my other articles about Forex Trading:

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