Empowering Beginners: A Guide to Getting Started in Forex Trading

The largest financial market in the world, Forex is a popular destination for beginner financial traders for its low costs, easy access, and low capital requirements. It is open 24/5, which makes it easy to trade from anywhere in the world as it never stops working till weekends. Forex or foreign exchange markets offer traders the potential to generate substantial profits without the need to operate like a traditional 9-6 job. However, it requires serious knowledge and understanding, and we are going to outline a super useful guide for beginners in this text below. 

Fundamentals of Forex trading - What you need to know

Accessing a proper beginner’s guide to FX trading is critical, as this sector is full of scams and fraud, making it tricky for beginners to find reliable sources. When trying to learn FX trading, it is crucial to start with the basics. Forex or foreign exchange is a global marketplace for national or fiat currencies. It is the largest and most liquid financial market in the world, working 24 hours per day, 5 days a week. Liquidity in financial markets refers to the trader’s ability to quickly buy or sell their instruments, meaning there is always a willing buyer or seller when you want to execute a trading transaction. 

Top 5 reasons why Forex attracts so many retail beginners:

1. 24/5 access - Only closes on weekends.

2. High liquidity - You can buy or sell at any time of the day in milliseconds.

3. High leverage - Ability to access up to 1:1000 leverage (open positions 1000x times your deposit).

4. Accessibility - Trade from anywhere in the world at any time you prefer without limits.

5. Budget-friendly - You can start from 1 USD, no other market compares in this category. 

FX market participants

Knowing who is moving the markets is critical here. Major players include central and international banks, hedge funds, large institutions, and retail traders (like you). These institutions can move markets, and it is important to follow central bank announcements like interest rates, inflation, and so on. 

Currency pairs - Main trading instruments

Currency pairs are traded on FX markets. Let’s take an example of a major pair, EUR/USD. The EUR is called a base currency, and the USD is a quote currency; in other words, it shows how many dollars you need to buy 1 euro. If the EUR/USD rate is 1.1010, it means you need to pay 1.1010 dollars to buy 1 euro. 

Core concepts - Must-know terms and slang

Mastering these terms is non-negotiable:

1. Pips - Usually the 4th decimal point. 1 pip in EUR/USD = 0.0001 and for JPY pairs, 1 pip = 0.01. Example: If EUR/USD moves from 1.1050 to 1.1051, it rises by 1 pip.

2. Lots - 1 standard lot is 100,000 units of the base currency. 1 lot in EUR/USD is 100,000 euros. Mini lots are 10,000 USD or 0.1 lots, and micro lots are 1,000 units. 

3. Leverage and margin - Leverage means borrowing capital from your broker to control larger trading positions. 50:1 leverage lets you control a 50,000-dollar position with just 1,000 dollars. Margin is the deposit required to open and hold a leveraged position. Free margin is the available margin after you open a position, and a certain amount is locked away to let you open a position. 

4. Spread, bid, and ask - The main source of income for barkers. If you watch closely to pricing in the FX market, you will notice that buy and sell prices are typically slightly different. The difference between the buy and sell price or the bid and ask is called the spread, and you pay it twice, when you open and close your trading position. 

5. Stop-loss and take-profit - Stop-loss closes a trading position when it is losing money and hits a predetermined pips. Take-profit is the opposite of stop-loss as it enables traders to lock in profits. 

6. Risk-reward ratio - If your stop-loss is 5 pips away and take-profit is 10 pips, then you have a 1:2 risk-reward ratio, meaning you risk 1 dollar to make 2 dollars. 

7. Win rate - A 50% win rate with 1:2 risk-reward, means you consistently make money. Win rate is your probability of winning out of 100 trades. 50% win rate means you win 50 trades on average out of 100. 

Technical analysis and fundamental analysis

Now when you have a basic understanding of the Forex market and its main concepts it is time to actually switch to trading. Here, we need to differentiate between fundamental and technical analysis. Fundamental analysis is when a trader monitors macroeconomic data such as GDP, employment rates (NFP), interest rates, and so on. This type of analysis allows investors to determine what the currency markets are doing and what might come next. Technical analysis is where traders look at historical price data on price charts to gauge the market dynamics and understand what’s happening in the markets. Remember: technical analysis is for determining not the future prices but what the market is doing and how you can profit from it, while fundamentals allow you to determine possible scenarios in the medium and long term. 

Example of fundamental analysis

The Fed announces interest rates cut from 4% to 3.25%. This is crucial information that inflation will increase due to cheaper loans and more money into the US economy. This inevitably leads to USD depreciating, meaning that EUR/USD will most likely rise. 

Example of technical analysis

Trader spotted that the 20-period moving average went above the 100-period moving average and RSI indicator is in overbought condition. This information tells them that the price is already in an uptrend and it might be a good time to enter. 

The power lies in hybrid approach

The best approach is to use fundamental analysis as the main filter and use technical analysis for entries and exits. In our case, the EUR/USD (theoretical scenario) was most likely to move in an uptrend due to rate cuts which would confirm our technical analysis by signal.