Forex trading for beginners
Forex trading for beginners doesn’t have to be intimidating. Equip yourself with the skills needed to start your forex trading journey – using an award-winning 1 online forex trading provider.
Start trading today. Call 844 IG USA FX or email newaccounts.us@ig.com. We’re here 24 hours a day, from 3am Saturday to 5pm Friday (EST).
Start trading today. Call 844 IG USA FX or email newaccounts.us@ig.com. We’re here 24 hours a day, from 3am Saturday to 5pm Friday (EST).
What’s on this page?
- What is the forex market?
- How do forex pairs work?
- What factors affect exchange rates?
- How do you trade forex?
- Example of a forex trade
- How to practise forex trading
- What are the advantages and risks of forex trading?
- How do you open a forex trading account?
What is the forex market?
The forex market is not a centralized place or physical place, it’s an abstract concept related to the buying and selling of foreign exchange. It’s made up of transactions from various organizations such as banks, institutions, private individuals and governments. On average, the forex market sees trillions of dollars worth of trades daily.
The forex markets are extremely liquid, and often quite volatile, depending on the currency pair you’d like to trade. Some of the most well-known currency pairs include:
- GBP/USD is the US dollar and British pound currency pair – one of the popular forex pairs traded globally
- EUR/USD is the currency pair for the European Union’s euro currency against the US dollar – one of the major forex pairs traded worldwide
- USD/JPY is the US dollar and Japanese yen currency pair, one of the traditional major forex pairs
- USD/CHF is the US dollar and Swiss franc, one of the four major currency pairs
How do forex pairs work?
A forex pair consists of two currencies that are being exchanged (or traded for each other). Forex pairs are composed of a base and quote currency. A base currency is the first currency that is quoted against the other.
For instance, the GBP/USD currency pair has the British pound as the base currency and the US dollar as the quote currency. The price represents how many dollars you’d need to spend to buy one British pound. If the price of GBP/USD is 1.21, it means that you would need $1.21 to buy a single British pound.
What is a ‘pip’ in forex?
‘Pip’ is an acronym for ‘point in percentage’ representing a movement that’s equivalent to a hundredth of one percent (1%). For example, GBP/USD with the quote currency equivalent to 1.21494 means a pip movement would be seen on the fourth decimal point, which is the 9 in this case, while the last 4 is a ‘baby pip’.
Example of a change in an exchange rate
EUR/USD is one of the major currency pairs that are popular because of its high liquidity and tight spreads. This forex pair likely has low volatility compared to other pairs since both the base and quote currency belong to countries that make up some of the world’s biggest economies – they tend to be more stable.
For example, if the price quoted for EUR/USD was 1.1800, you’d have to spend $1.18 to buy €1.
What factors affect exchange rates?
Ultimately, exchange rates are set by supply and demand. When demand for one currency outstrips that of the other in the pair, the price of that currency goes up. For instance, in the case of USD/EUR pair, this will take place when more people want to buy US dollars than euros at one time.
Whatever affects these market forces will have an impact. These never work in isolation from each other or other economic variables. Below are some factors that affect the exchange rate:
- Global economic health. Strong, stable economies with no political risk and conflict are likely to attract a healthy amount of foreign direct investment, increasing the country’s wealth
- Domestic interest rates. When a country’s central bank changes interest rates, this has a direct impact on the inflation and exchange rates. Higher interest rates mean higher returns for the lender
- Inflation. A relatively lower inflation rate results in a stronger currency value, increasing a country’s purchasing power against other currencies
- Changes in domestic stock prices. A rise in the domestic stock market price increases investor confidence as it indicates the strengthening of a country’s economy. This is likely to attract foreign investors and increase demand for the domestic currency
- Changes in commodity markets like oil and gold. The price fluctuations of highly valued commodities like oil and gold have a strong influence on the exchange rate movements. Oil and gold prices have an influence on a country’s currency and volatility
- Domestic or national economic health and events. A country’s domestic events have an influence on market sentiment. Positive economic events attract investment into a country, while negative ones are likely to result in disinvestment
- Balance of payments (BOPs). These are transactions a country makes with other economies across the globe within a specified timeline. BOPs can result in fluctuations in domestic and foreign exchange rates, depending on the supply and demand of the stronger currency
How do you trade forex?
Forex is traded in ‘lots’, which are often very large, equivalent to 100 000 units of the base currency. You’ll likely want to buy the currency you believe will strengthen and then sell it later for a profit. Alternatively, you’d sell the currency you believe will weaken and then buy it back later at a lower price, thereby making a profit.
Going long vs going short in forex
You’ll buy a currency pair to go long and sell it to go short. When you ‘go long’ it means you’re buying the base currency and selling the quote currency. For example, in the case of GBP/USD, you go long if you expect the pound to strengthen against the dollar. You’ll earn a profit if your long position on the currency pair increases in price.
If you short (‘sell’) a currency pair, you’d be expecting the base currency to depreciate against the quote currency. Using the same GBP/USD as an example, you could short pounds for dollars. If the dollar strengthens, the price of the pound would have dropped.
This means you can buy more pounds for your dollars than you originally spent, earning you a profit.
What is the spread?
In forex, a spread is a small fee built into the buy (bid) and sell (ask) price of every currency pair you trade. This is seen on a deal ticket as a difference between the buy and sell prices quoted for a currency pair.
Example of a forex trade
Buying on the spot forex market
You’ll go long (‘buy’) on the spot price of a forex pair, if you expect the base currency’s value to rise against the quote. For example, if USD/EUR is trading at 2.1200, with a 2.1210 buy price and a 2.1190 sell price, you’d buy at 2.1210 since you expect USD to rise in value against EUR. You can also set a stop-loss to manage your risk.
Selling a spot forex market
You’ll short a forex pair on its spot price if you expect the quote currency to rise in value against the base. For example, if USD/EUR is trading at 2.1200, with a 2.1210 buy price and a 2.1190 sell price, you’d sell at 2.1190 since you expect EUR will rise in value against USD.
How to practice forex trading
You can open a demo account to practise your FX trading. It’s free. Known as paper trading, the demo lets you to build your confidence and gain deeper insight into how FX markets work. You’ll get $10,000 in virtual funds, and you’ll be able to take positions on spot forex markets.
What are the advantages and risks of forex trading?
Means that large movements can happen very quickly. This could result in sizeable returns
Means that large movements can happen very quickly. This could result in sudden and unexpected losses
Trading on margin ‘gears’ your exposure. If you only put down a 3.3% deposit to open a larger position, this means your leverage ratio is 1:30. Every 1% rise in the market will mean a 30% profit on your deposit amount
When you trade on margin, it’ll increase your exposure. If you only put down a 3.3% deposit to open a larger position, this means your leverage ratio is 1:30. Every 1% drop in the market will mean a 30% loss to your deposit amount. Losses can exceed deposits
Less complex to buy or sell, so you can exit or open trades quickly
Less complicated to buy or sell, which may contribute to market volatility
How do you open a forex trading account?
Here are a few simple steps on how to open a forex trading account with us:
1. Fill in a form
Fill in an application form and review required documentation to open a live account with us. We’ll ask you about your trading knowledge to ensure you get the best experience.
2. Wait for verification
Verifying your identity usually takes a couple of days.
3. Fund your account and start trading
You can easily withdraw your money from your funded account, whenever you like.
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Leveraged trading in foreign currency or off-exchange products on margin carries significant risk and may not be suitable for all investors. We advise you to carefully consider whether trading is appropriate for you based on your personal circumstances. You may lose more than you invest. We recommend that you seek independent advice and ensure you fully understand the risks involved before trading. The information on this website is not directed at residents of countries where its distribution, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.
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