Forex Trading for Beginners – How does forex work?

Forex Trading for Beginners – How does forex work?

 

In this section of tradingonlineguide.com, we will explain a bit more about Forex&CFDs trading.

If you’re wondering how forex works, and want to know what terms like pips and the spread really mean, then you’re in the right place. We’ll explain all you need to know about forex trading and the brokers that offer it.

The Forex Brokers listed on this page all offer a free demo account, they are all fully regulated too.  

You may also be wondering how does forex work? Well in this tutorial we’ll start with the theory behind it and look at what CFDs are. These are key things to know if you want to be a forex trader.

Finally, you’ll learn about the most important investing terms and how to make a forextrade.

Let’s now see what investing in Forex means and why a lot of people are getting involved with it.

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What is forex trading and how does it work?

Probably you’ve heard about it, but maybe you’re not sure what it means.

In this section, we’ll explain to you how investing in forex works, and what happens when you start online trading.

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 on the forex market, which is open 24 hours a day, Monday to Friday.

Around the world, millions of individual traders and retail traders place trades on the latest foreign exchange prices.

In the forex 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

forex trade

In forex, all these currencies are always compared against each other. So you will pick two currencies to compare against each other. One of the most common pairings is the Euro with the Dollar (EUR/USD).

So now you know what the term means, but So how does forex work exactly? 

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.

To show an example of this, let’s use the Euro and USD currency pairing.

You believe that the Euro will become stronger than the Dollar. However, you must remember that there’s always the possibility 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.

forex trading

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.

what is cfd

 

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 go up or go down.

Let’s make an example and see how to trade forex 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:

  1. Currencies
  2. Indexes
  3. Commodities
  4. Stocks
  5. Cryptocurrencies

Now that the key concepts are clearer, let’s dig deeper!

 

Is Forex Trading Illegal?

A lot of people consider forex 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 the forex market is not illegal, because it’s 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 regulation body.  Some important monitoring authorities 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, your security is very important to us. 

That’s why all the brokers featured on this page and website are CySEC regulated for instance.

So to make the most of your investing, without any nasty surprises, make sure that you only trade with a regulated broker.

Forex Trading for Beginners

forex definition

If you want to start trading Forex, you’ll need to practice in order to fully learn how the foreign exchange 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. 

To practice investment techniques and strategies, most brokers have the option for you to try trading with a free forex demo account.

 

Forex demo account and strategies that work

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 with the platform that suits them best.

It doesn’t matter whether you’re new to the forex market, or are fairly experienced.

Professional traders can use it to test more complicated buy and sell strategies. Whereas for new traders, it’s a great way to try out an online platform 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 that work.

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.

 

Learn to Trade Forex

make money online trading

Now, let’s take a look in more detail at how to invest in Forex.

The forex market is open 24 hours a day, 5 days a week, and is closed at the weekend.

So it’s 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.

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.

How Does Forex Trading Work?

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 market 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 you’ll 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 use buy and sell strategies, plus indicators, to help you predict the movement of the forex market. This can be done in order to analyse better how the market and foreign exchange prices could move.

 

Forex Commodities Trading

commodities trading

Forex is about the currency pairs, but if we talk about CFDs we need to also mention 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 the leading broker platforms have the following tradable assets:

  • Gold (xauusd)
  • Silver (xagusd)
  • Copper (hg)
  • Natural Gas (ng)
  • Oil (wti)
  • Wheat (zwz8)
  • Corn (cornusd)
  • Cotton (cotusd)

With these assets, it’s 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 broker platform.

To give you an idea the leverage is normally between 1:5 to 1:20.

In ancient times, people used to trade tokens made of clay in order to buy livestock, as the clay discs were viewed as a source of money.

The only difference is that today, investing online has helped traders gain access to many international markets where they can invest in commodities. So instead of livestock, you can now invest in gold, silver and oil.

A lot of people also like commodities because they’re seen as a fairly safe haven during economic turbulence and market disruption. This is mainly because an asset like gold will hold their physical value when currencies may be dropping in value.

Marco Sbalchiero

Author of this article and founder of Tradingonlineguide.com

My aim is to help you increase your trading knowledge with helpful content. I come from an economic background and have a strong passion for forex trading. With more than 6 years in the online trading world, I want to share my financial knowledge so that anyone can develop their investment skills.

In my spare time I enjoy cooking and travelling.

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