Forex Trading for Beginners – How does it work?
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In this section of tradingonlineguide.com, we will explain a bit more about Forex&CFDs trading.
If you’re asking yourself: what is forex trading and can I really learn to trade with it? You are in the right place.
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You may also be wondering how does it work? Well in this tutorial we’ll start with the theory behind it and look at what CFDs are.
Finally, you can learn about the most important investing terms and if you can really learn to trade Forex.
Let’s now see what investing in Fx means and why a lot of people are getting involved with it.
What is forex trading and how does it work?
Probably you have heard about it, but maybe you’re not sure what it means.
In this section, we will explain to you what forex trading is and what happens when you start online trading in the market.
Let’s start step by step.
Forex is the acronym of FOReign EXchange and it represents the biggest market in the world. More than 53 trillion dollars of trading volume are generated every day.
In this market, it’s possible to exchange currencies such as Dollars, Pounds and Euros- plus many others. They are all international currencies and all of them are represented with a 3 letter name:
- USD is the American Dollar
- GBP is the British Pound
- EUR is the Euro
- JPY is the Japanese Yen
- AUD is the Australian Dollar
- CAD is the Canadian Dollar
- NZD is the New Zealand Dollar
- CHF is the Swiss Franc
In forex, all these currencies are always compared against each other. For example, the most common pairing is Euro with Dollar (EUR/USD).
So now you know what the term means, but what exactly is forex trading and how does it work?
The key point to remember is if you decide to buy or sell a pair of currencies, then you are actually investing.
To clarify: when you trade, you are deciding which one of the two currencies will become stronger/more valuable than the other.
For example which one will have more power in the market and will be worth more.
Considering our previous example with EUR/USD, imagine now to buy it in this tutorial.
Let’s say you buy the EUR/USD currency, you could consider that the Euro will become stronger than the Dollar. However, you could also speculate that the Dollar will get weaker than the Euro.
Why? It’s all about a simple Maths concept that we all know: fractions.
For instance, if the EUR/USD price (exchange rate) is 1.22, this means that 1 Euro is worth 1.22 Dollars. So if the price of EUR will grow to 2.22, the price of EUR/USD will be 2.22.
Now let’s look beyond currencies and apply the same concept to other assets like indexes, commodities and stocks.
With that in mind, now we can examine the world of CFDs.
What is CFD trading and how does it work?
If Forex is just about currencies, with CFDs (Contract for Difference) it’s possible to trade Indexes, Commodities, Cryptocurrencies and Shares too.
A CFD is a contract between a trader and a broker where the trader can buy or sell commodities, currencies, indexes or stocks in the market via the broker.
People usually trade more with this product because they prefer to speculate on market movements instead of buying and owning stocks or commodities.
Investing in CFDs means deciding if a price will grow up or drop down.
Let’s make an example using the commodity ‘Oil‘. Imagine that the current price is $50 for 1 barrel of oil. You also believe that in the upcoming days, the oil price will grow.
In the market, it doesn’t really make much sense to buy a barrel of oil and then to sell it a few days later.
It makes more sense to ‘buy’ it through a CFD. In this case, you don’t need to store any oil barrel at home because you are just speculating on the price movement (you’re not actually owning the physical barrel.)
After a few days when you finally close your trade, you’ll just benefit from any profits made due to the oil price’s growth. It’s as simple as that!
With this example it’s very easy to understand how CFDs trading works: if you open a sell position, you will make money if the price goes down.
Alternatively if you open a buy position then you’ll only earn money if the price increases.
All of this can be done without actually owning anything, but by predicting the price movement.
There is a vast range of tradable products in CFDs:
Now that the key concepts are clearer, let’s dig deeper!
Is Forex Trading a Scam?
A lot of people consider online trading as a good way to possibly make some extra funds, whilst others consider it to be a scam.
The first thing to remember is that online trading is legal and is officially regulated by many global authorities. So we can not consider a scam- a market which is permitted worldwide.
Instead Forex should be considered as a revolutionary instrument which has changed the way people trade worldwide.
The only possible scam you can find in this market is unregulated brokers. These are investing platforms in the market which are not legally allowed to provide their service.
To become regulated a broker must be registered and licenced to an official regulating body. Some important monitoring authroities include CySEC or the FCA-(Financial Conduct Authority) who ensure good practice.
If you decide to sign up with one of our suggested platforms you won’t face any risk of scams because we just promote trusted and fully regulated brokers. All the brokers featured on this page and website are CySEC regulated for instance.
Keep regulated and stay scam free!
Forex Trading for Beginners
If you want to start trading Forex, you will need to practice in order to fully learn how the market works.
It’s possible though, even if you’re a beginner, to achieve your goals.
Like any financial markets, there’s always an element of risk when it comes to forex.
However if you learn how to trade forex, you can manage the risk a bit more plus gain further knowledge. Click here to learn more in our guide.
To practice trading techniques and strategies, most brokers have the option for you to try trading with a free forex demo account.
What is a forex trading demo account?
This is a very important tool for beginners who want to see if trading is right for them without risking any real money.
A demo account allows you to test your selected broker’s platform. You can also try the broker’s services and support without any real deposit required.
This is a very good opportunity because it gives traders the option of starting their trading activity with the platform that suits them best.
It doesn’t matter whether you’re new to trading or are fairly experienced. Professional traders can use it to test more complicated trading strategies. Whereas for new traders, it’s a great way to try out an online platfrom and practice.
There is usually no time limit on how long you can use a demo account for. But if there is an expiry date, you’ll have to contact the customer support team in order to have the account renewed.
Of course all the funds in a demo account are virtual funds, so any profits made whilst in the demo account will of course be virtual too. The upside to that thought is that any losses made are also virtual funds and not your own money.
Depending on the broker the demo account usually come with virtual funds ranging between $10,000 to $100,000. This is a good amount of ‘money’ for you to practice with.
Finally, thanks to the combination between the financial leverage and a very good strategy, it’s possible to have high profits.
Here you can find the best forex strategies:
You just need to remember that to start online trading, it’s possible to start with a very small amount of money.
Leverage also plays an important part. Leverage which multiplies the money you are investing, can also bring in relatively high profits.
However, it’s necessary to mention that the leverage can also bring losses if used with the wrong strategy.
So how is it possible to trade Forex?
Learn to Trade Forex
Now that we’ve answered the questions of what is Forex trading and how to be aware of choosing the right regulated broker, it’s time to see how to invest in Forex.
The Forex market is open 24 hours each day Monday to Friday, but it’s closed on the Weekend. So it is technically possible to trade all the time during the week- (for more details about the times see this page).
We also need to consider that forex is a market which is Over the Counter (OTC). This means that it’s a virtual place without any physical base/building to trade in.
Let’s see an example:
Think of the currency pair EUR/USD. The exchange rate between the 2 currencies is at 1,22 at the moment.
You have €100.000 EUR that you want to invest in exchange for Dollars. For that exchange rate, you’ll have $122.000 in return.
But what if the exchange rate increases to 1,25?
In that case with your €100.000 you would have in return $125.000 because the Euro became stronger than the Dollar.
Your profit would be the difference between the $125.000 and $122.000, which is a total of $3.000 USD.
This example represents perfectly the core of Forex trading.
Forex trading is all about speculation on prices and exchange rate changes.
As shown in the example, if a trader decided to buy the currency pair EUR/USD and invested on the price rise. Then they would have made some profits because the exchange price moved from 1,22 to 1,25.
The same concept can be applied to commodities, indexes, stocks, and cryptocurrencies too. All of them are tradable as CFDs which are very similar to Forex.
As we have already explained in the ‘what is forex’ section, forex is just about currencies and all the rest work in the same way. They have just a different name: CFDs.
To see the best trading platforms and their characteristics, read the best trading platform page and chose the perfect one for you.
How Does Forex Trading Work?
Forex Trading is very simple to understand. Now that you know it, let’s examine how forex trading works.
You need to think about the stock and shares market. In that situation if the price of a stock goes up and you bought that stock, then you’ll earn money.
Well, Forex works in the same way!
In Forex you have the opportunity to buy or sell a certain stock, currency pair, cryptocurrency or commodity.
If you buy it, and the price of that asset grows up, you will earn some money. Alternatively if the price goes down, you will lose some money.
The same concept can be applied to the case should you sell that specific asset. If the price drops down you will earn some money, if it goes up you will have a loss.
There is a second step in the process where you can control the risk you take for every investment as well as the potential profit you can make.
This is when you apply some indicators called ‘stop loss‘ and ‘take profit‘. (to learn more about them, visit our page called “how to trade Forex”)
Finally, there is the third step where you can apply some strategies and indicators to trade forex. This can be done in order to analyze better how the market could move.
All professional traders use these techniques to trade. To learn more about forex trading strategies please visit our page on this website.
Forex Trading is about the currency pairs, but if we talk about CFDs we need to involve also Commodities Trading.
What is Commodities Trading?
When trading CFDs it’s also possible to trade some precious metals, natural gas or agricultural products.
Commodities Trading is exactly this, the investment and speculation on the price movement of these assets.
All of the leading trading platforms have the following tradable assets:
- Gold (xauusd)
- Silver (xagusd)
- Copper (hg)
- Natural Gas (ng)
- Oil (wti)
- Wheat (zwz8)
- Corn (cornusd)
- Cotton (cotusd)
Trading these assets is like trading a normal currency pair. It’s always necessary to sell or buy the asset at a specific price. You also must set up the different take profit, stop loss or pending orders.
Normally their price is measured in points instead of pips.
Finally, the maximum leverage for commodities is usually lower than the currency pairs, but here it depends on the chosen trading platform.
To give you an idea the leverage is normally between 1:5 to 1:20.
Trading Forex and CFDs means trading Index too. Most broker give users the chance to trade many different types of indexes.
The most important ones are:
- FTSE Mib
- S&P 500 (Standard and Poor’s)
- Wall Street
- US Tech 100
Trading an index is different than trading commodities or trading forex.
An index is measured in points and its movement is related to political decisions. It can also influence the fluctuations of currencies.
In this type of trading, it’s possible to invest using a stop loss and take profit, an important characteristic of forex trading.
The index trading is available in every demo account with the same conditions as in a real money account. Most trading platforms will provide this in their demo accounts.