Forex Trading for Beginners • Learn Forex for Free • Benzinga

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While stock stories usually occupy the headlines, the foreign exchange market (forex) often gets overlooked as one of the best testing grounds for those new to financial markets. With a low barrier of entry, high liquidity and 24-hour coverage, the forex market is a suitable pick for those who want to learn to trade. Read on to learn more about currency pair trading for beginners.

A forex trader is a person who buys or sells currencies intending to profit from fluctuations in the currency market. Although exchanging money in the bank is technically trading as well, because of the added costs, it is not practical. For this reason, dedicated traders use forex brokers that allow them to speculate quickly and at a low cost.

Traders usually conduct extensive fundamental or technical research — attempting to profit by correctly anticipating major policy shifts like interest rates or by identifying recurring chart patterns, which is the base for technical analysis.

Forex trading involves buying one currency while simultaneously selling another. Forex trading is decentralized, as it runs over-the-counter (OTC) directly between two parties. A network of banks and other financial institutions facilitates these transactions, ensuring stability, liquidity and global coverage. Retail traders access the forex market through brokers as intermediaries who buy and sell the currencies on their behalf.

Since currencies trade against one another in ratios, each currency has a base and a quote currency. For example, when trading the British pound against the U.S. dollar, a trader would buy GBP/USD, where GBP is the base currency and USD is the quoted currency. Thus, if GBP/USD trades at 1.30, 1 GBP equals 1.3 U.S. dollars.

About 500 years ago, the first forex market started in Amsterdam. The Dutch had extensive merchant operations globally, so they needed stable exchange rates.

More recently, the forex market took off after the collapse of the Bretton-Woods system that pegged the U.S. dollar to gold. Eventually, countries stopped fixed rates, and currencies started floating in the 1970s. Because of rising globalization, this market quickly became one of the largest; its current daily volume exceeds $6 trillion.

In contrast to the stock market, the forex market is decentralized — trading through a network of connected global banks. Except for the weekends, a forex market exchange is always open somewhere.

The forex market trades 24 hours per day, 5 days per week. It opens with an Australian session on Monday (Sunday at 5 p.m. ET in the U.S.) and ends with the U.S. session on Friday afternoon, again at 5 p.m. ET.

Although the forex market is highly liquid, this doesn’t mean depth is equally distributed. Minor and exotic currencies often experience widespread and thin volumes outside the most popular market hours when the London and New York sessions overlap. This period is between 8 a.m. ET and 12 p.m. ET.

The financial world is full of jargon. Here are some key terms you should understand before starting trading forex.

A trading platform is essential to the process of trading currency pair in the foreign exchange. A broker is an intermediary between the trader and the market. It provides this access through various software in exchange for trading fees. Some brokers might create the market, thus taking the other side of the trade, but most traders stick with ones that are just processing their trades.

The spread is the difference between the bid (the highest buying price) vs. the ask (the lowest selling price). This amount will be the market cost of entering the trade in forex trading, and it will be the lowest for the most liquid, most popular pairs.

Currencies trade in ratios, where two currencies make a pair that trades against each other. For example, USD/CAD shows the worth of one U.S. dollar in Canadian dollars.

On regular markets, going long means buying, while going short means selling. Forex is slightly different because to buy one currency means to sell another. For example, going long USD/CAD denotes the expectation that the value of the U.S. dollar will rise against the Canadian dollar. This outlook changes depending on the denominated currency. For example, going short EUR/USD means expecting the euro to fall vs. the U.S. dollar.

Charts are the visual expression of price movement over time. The most popular chart style for the forex market is the Japanese candlestick. It shows an open, a close, a high and a low for price movement over a defined time and forms patterns traders use to predict price movement.

Leverage means you use borrowed funds to amplify the trading position beyond what would be available by the cash balance. This concept works through brokers who provide the funds by a pre-defined maximum ratio, usually by a maximum of 1:30 or 1:50. Leverage can greatly enhance the returns but also create large losses.

A margin account is a type of trading account that allows the use of leverage. When entering a trade, the broker keeps a portion of the funds set aside to ensure the potential loss of the trade — this amount is referred to as the margin.

Pip is the unit of measure that shows the change in value between two currencies. Pip stands for percentage in point, which equals 1/100 of 1%, or 1 basis point.

The spot market is the market for immediate purchase and delivery, in contrast to the futures market, which guarantees delivery at some point in the future. Spot forex traders exchange currencies at the current price (rate price) at the point where the trade is settled.

The forex market offers many opportunities, but it’s a risky environment for beginners. Risk management is the primary objective for traders, so consider the following practices:

• Use a stop loss: The essential step of forex risk management. It requires experience and a keen eye, but beginners should use 10% of the average true range (ATR) as a minimum stop-loss guideline.
• Don’t abuse leverage: Leverage is a double-edged sword. It can enhance the returns but also destroy an account quickly. While there are no strict rules, using up to 1:10 leverage for beginners is a good rule of thumb.
• Minimize time in the market: Anything can happen at any time in the forex market. Thus, beginners should choose not to overstay their trades and think twice before holding trades over the weekend — especially in an unstable environment.
• Check the news calendar daily: Checking the daily calendar is a part of the trader’s routine. News moves the markets, and trading around them can be perilous. Beginners should avoid trading for at least 30 minutes around the high-impact news.

Although often overlooked by retail traders, the forex market is more suited for beginners than other popular markets. In contrast to stocks, forex traders don’t need $25,000 to day trade since forex is tradeable with as little as a few hundred dollars. Furthermore, the forex market trades 24 hours per day, and it is so liquid that one can become a multi-millionaire before scalability becomes an issue.

Yet this sounds easier in theory than it is in practice. Like any other market, forex requires patience and planning — resisting the temptation of entering a trade for simply being in the position. Finding a quality broker is the first step on that journey, but ultimately a successful forex career comes down to planning a trade and trading the plan.

It is also recommended to start trading in the foreign exchange market using a demo account, that way you can practice matching the best currency pair, day trading strategies, implement a trading plan, and practice trading opportunities.

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A reliable broker is the best partner a beginner forex trader can have. Check out Benzinga’s recommended forex brokers in the comparison table below to help you create a forex trading strategy, implement market analysis, learn about forex pair, and achieve trading success through a trading plan.