Speculating in the stock market has been a regular source of income for a select few savvy traders for generations. In contrast, the foreign exchange or forex market has only recently become available to small retail traders after the introduction of online forex brokers was facilitated by the Internet. In just a few short years, forex trading has now become as widespread among retail traders as trading in stocks or commodities. If you’ve ever wondered how to start forex trading, then keep reading for an introduction to forex trading, how to start off on the right foot, and what it takes to become a successful forex trader.
What is Forex?
The forex market is where national currencies trade in pairs against one another at a quoted rate of exchange or “exchange rate.” The forex market is the largest capital market in the world with a daily turnover in excess of $6.6 trillion.
The primary participants in this massive financial market include commercial banks and other financial institutions; central banks; retail traders; high-net-worth individuals; investment and hedge funds; online forex brokers; and corporations.
Unlike the exchange-traded stock and commodity markets you might be familiar with, the forex market is an over-the-counter market that has no centralized location or exchange. You can trade currencies in the forex market around the clock from 5 p.m. on Sunday until 5 p.m. on Friday New York time since the over-the-counter market opens and closes in different money centers that have overlapping time zones throughout the trading week.
Each day’s forex trading session starts in Wellington, New Zealand, and continues in Sydney, Australia. The Tokyo opening then overlaps with those markets, trading actively all night until the London forex market opens shortly before the Tokyo market closes. The New York session then begins after London’s lunchtime and closes as the markets in Wellington and then Sydney open again. This rounds out the forex market’s 24-hour global trading schedule.
Since the forex market stays open continuously during the trading week, knowing which session to trade in can make a substantial difference to your forex trading success because of variations in market liquidity for certain currency pairs.
The forex market also has no centralized regulatory agency. While regulatory oversight of the retail forex market exists in several specific jurisdictions, the quality of forex market regulators and the rules online forex brokers must follow can vary considerably depending on their legal domicile.
How Do I Trade Forex?
Trading is a speculative activity that involves buying and selling an asset with the goal of making a net profit. This basic principle applies to trading in all capital markets, whether it involves currency pairs, stocks, bonds, commodities, precious metals or any other tradable asset.
In general, forex traders aim to buy a currency pair at a low exchange rate and sell it at a higher exchange rate. That may sound easy in principle, but it can take years to learn to discern which levels are high enough to sell and which levels are low enough to buy.
To start trading currency pairs as a retail forex trader, you will first need to open and fund a margin account with an online forex broker to gain access to the forex market. Most online forex brokers only require a small minimum deposit to do that.
Online forex brokers will also generally let you open a free demo account funded with virtual money. This feature lets you practice forex trading without putting your real funds at risk while you learn the ropes.
Forex Trading Example
Currencies trade in pairs, which means you’ll always be long one currency and short another if you’re holding a forex position. The shorthand for a particular currency pair, such as EUR/USD, shows the EUR or euro as the “base currency” on the left and the USD or U.S. dollar as the “counter or quote currency” on the right. The base currency is quoted in terms of the amount of the counter currency needed to buy one base currency unit.
As a retail forex trader, your online broker may require you to trade in lots, which are standardized amounts of base currency units. At such brokers, a standard lot consists of 100,000 base currency units, a mini lot of 10,000 units, a micro lot of 1000 units and a nano lot of 10 units.
As a forex trading example, if you believe the euro will appreciate versus the dollar, then you might look to buy 1 lot of the EUR/USD currency pair at an attractive exchange rate. This means you will buy 100,000 euros and sell the equivalent amount of dollars consecutively to lock in a rate.
Once executed, the forex transaction will settle in two business days, which is known as the spot value date, unless you roll it over periodically. Most online forex brokers will automatically perform such rollovers for their clients’ open positions held after 5 p.m. New York time so that the positions stay value spot.
Forex quotes from your broker might show an offer rate where you can buy the currency pair on the right and the bid rate where you can sell the currency pair on the left. Such a quote might look like this: 1.0824/1.0829 where the difference of 0.0005 represents the dealing spread, the broker’s bid is 1.0824 and their offer is 1.0829. If you were to buy the pair to establish a long position based on your bullish market view, you would need to pay the broker’s offer of 1.0829.
After several minutes, the market in EUR/USD begins to rise sharply. You get a new quote of 1.0871/1.0876 from your broker, so you decide to sell your lot of 100,000 euros for 1.0871, the broker’s bid price.
This trade will net you a profit of (1.0871 – 1.0829) = 0.0042 or 42 pips (points in percentage). The amount of profit you would receive in your trading account for that one lot trade would be 100,000 x 0.0042 = $420.
11 Steps for How to Start Forex Trading
Before you decide to sell the ranch to become a forex trader, you can build your confidence and market acumen by following the steps outlined below for how to start trading forex:
Get Educated on Forex
Knowledge is power, so the more you know about trading forex and the methods traders use to analyze the currency market, the more likely you’ll be successful. If you want to learn from other traders and emulate their trades, you can research social trading so that you can copy the trades of professionals with an established and profitable track record.
Trade with a Demo Account
A demo account where you only trade with virtual money simulates real-time trading conditions in the forex market and can serve as a powerful learning tool without any financial risk involved. Once you’ve gained some experience trading in a demo account, and you feel confident with your trading plan and strategy, you can then open and fund a live margin account.
Control Your Emotions
Trading forex can send you on an emotional rollercoaster since making a large sum of money in a short time can be quite uplifting, but taking a big loss immediately after initiating a trade can be very disappointing. Trading in sensible amounts and using stop-loss levels can help you avoid traumatic losses. Keeping a cool head when trading can be attained by trading only with risk capital that you can readily afford to lose and by developing a viable trading plan with an objective trade entry and exit strategy that also incorporates sound money and risk management principles.
Decide Your Trading Risk Profile
Your “pain threshold,” or the amount of money you don’t mind losing, depends on your personality. Do you enjoy taking risks, or do you prefer less risky endeavors? For example, do you parachute jump on weekends or go for a long bike ride? To trade effectively you need to know what levels of risk you feel comfortable taking and avoid taking uncomfortable risks.
Choose a Trading Strategy
Choosing a profitable strategy is an essential element of successful trading. Forex trading strategies vary considerably from trader to trader, so you can personalize a strategy for your unique personality type and circumstances. Strategies can also be combined and fully or partially automated. For example, some traders prefer to keep themselves busy scalping the market by taking small profits or losses all day long, while other traders might use technical analysis as part of a longer-term trend or swing-trading strategy.
Don’t Expect to Get Rich Overnight
Profitable forex trading may not begin immediately, and most retail forex traders lose money. You can increase your chances of becoming a profitable forex trader with education and experience. Most profitable forex traders have achieved their success over time, so take your time to learn and practice before risking real money.
Use Stop Losses
Whenever you take a forex position, you can determine the amount of risk you wish to take on it and enter a stop-loss order at or near that risk level. This type of order is placed at a worse level than the prevailing market to liquidate your position at the market if that level trades. You can also use a stop-loss order to protect your gains on a winning position while allowing your profits to accumulate further potentially.
Be Aware of the Markets
Make sure you stay aware of key events happening in the countries of the currencies you’re trading. The forex market watches many different fundamental factors that can affect relative currency valuations. These include geopolitical events like natural disasters and elections, the release of major economic data and monetary policy shifts in one or both countries.
Don’t Expose Yourself to too Much Risk
You really want to avoid trading with money you can’t afford to lose. Also, resolve to use prudent money management techniques when trading forex to avoid taking excessive risks that can leave you with a loss you cannot easily recover from or even blow out your trading account entirely.
Develop a Trading Plan
Trading without a plan is like sailing without a compass. It’s preferable to either develop a viable trading plan of your own or find someone else’s plan that suits you before you begin to trade with real money. If you can’t do either of those things, then you can instead open a social trading account to copy a successful trader’s transactions in your own account or purchase reliable automated trading software that will make trades for you based on its internal programming.
Choose the Right Broker
The right online forex broker can provide quick trade executions, offer a great trading platform and tools and save you money by offering tight dealing spreads. You might even qualify to access an electronic communications network (ECN) where you can receive very competitive exchange rates for your forex trades directly from professional forex market makers.
Benzinga’s Top Broker Suggestions
When you’re learning how to start trading forex, start with finding the right broker. To help you decide on a competent and reputable online forex broker, Benzinga has provided the comparison table below listing some of the best forex brokers available.
CedarFX is not regulated by any major financial agency. The brokerage is owned by Cedar LLC and based in St. Vincent and the Grenadines.
AUD$200 or equivalent
$100 USD (or equivalent)
eToro USA LLC; Investments are subject to market risk, including the possible loss of principal.
Frequently Asked Questions
Can I trade forex with $100?
Yes, you can find online forex brokers that will let you open a micro account with $100 to use as margin.
Can I start forex trading on my own?
Yes, you can fund an account and start forex trading on your own via an online forex broker.
Is it hard to trade forex?
The mechanics of trading forex are easy enough for most people to learn, but learning how to trade forex profitably can take a lifetime.