Forex Beginners Guide

On an average day, more than $5 trillion of trading takes place on foreign currency exchanges. Forex trading can be a lucrative way to capitalize on changing currency values around the world, generating profit from these price movements.

But for all of the opportunity created by forex trading, this type of investment requires close study. The factors affecting foreign currency values are complex and ever-shifting. When you invest into a foreign currency pair, you’re not just investing into a single currency—you’re making an educated prediction that the relative values of two separate foreign currencies will move in your favor.

This high degree of uncertainty should give traders caution before diving full time into forex trading. If you’re reckless about your forex trading, you can quickly dig a deep financial hole. In high-risk, high-reward trading like contract-for-difference (CFD) trades, small investments into forex can quickly disappear. At some forex brokers, this can even produce a negative balance in your account, although Valutrades offers negative balance protection as a safeguard against this situation.

As a beginner entering the world of forex, the best way to minimize your risk is to take a patient approach to learning the ins and outs of forex trading. Study the fundamental strategies used in forex trading, and familiarize yourself with the definitions and currency pairings you’ll need to know to navigate this new world of investments.

In this guide, we’ll give you the basic information you need to get started on the path to being a seasoned forex trader.

When setting goals in forex, a common mistake new traders make is choosing goals that are profit-oriented. It’s tempting to want to challenge yourself to hit certain earnings thresholds, either as percentages or dollar amounts. But focusing on the end results can be dangerous, for one simple reason: When you’re obsessed with hitting a profit, you can be tempted to make ill-advised trades that actually work against your goals.

Instead of fixating on profits, focus on the process you’re using to identify trading opportunities. While forex trading tends to feature traders working on long-term timelines rather than day-trading and other short-term trades, there are still opportunities for goal-setting you can use to create a process-oriented, goal-driven trading strategy.

Approaching Short-Term Goals

In the short-term, prioritize identifying indicators and patterns that align with your strategy. In the course of learning how to study forex markets, you might find yourself leaning on certain patterns and indicators more than others.

For example, you might keep an eye out for pennant patterns on forex charts, which can signal a price consolidation preceding a breakout. By opening positions during this consolidation and setting stop-limits to protect against an unexpected move, traders can potentially earn quick profits while minimizing their exposure to risk.

Alternatively, you could make a daily practice of using market indicators such as economic reports to identify potential opportunities for swings in currency value. Part of the practice of becoming an experienced forex trader is identifying the indicators you rely on in making your trading decisions.

As you come to understand certain market forces and technical indicators that reflect price movements, you can solidify your criteria for evaluating prospective trades. 

Approaching Long-Term Goals

Over time, you might determine that a certain indicator isn’t proving useful in telling you whether to make a trade. Or you might overvalue, for example, the employment reports coming out of certain foreign economies—and through trial and error, you may decide to remove these indicators from your trade evaluation process.

Over time, you’ll want to create a blueprint for evaluating trades that you can rely on with each trade, with the ultimate goal of generating and increasing profits over time. Not every trade will bring in revenue, but the goal is to streamline your evaluation skills until you’re comfortable with relying upon your own trading strategy.

Confused about the terminology used in forex trading? Use this glossary of essential terms to get started in forex. Visit the Valutrades website for a more comprehensive glossary of terms.

Ask

“Ask” (or “ask price”) is a term used to describe the price at which a trader accepts to buy a particular currency.

Asset

“Asset” refers to an item or resource of value, such as a currency or currency pair.

Base Currency

Within a currency pair, the first currency listed is known as the “base currency”. For example, when it comes to the GBP/USD pairing, the GBP functions as the base currency.

Bear Market

This term is used to describe the price of an asset, currency, or security that is in decline. “Bear market” can also be shortened to simply “bear”, while the term “bearish” is also used to describe the state of the forex market when it’s in decline. 

Bull Market 

The opposite of a bear market, this term describes when the price of an asset, currency, or security is rising. Much like the term “bear market”, “bull market” is also often shortened, so you can expect to hear the terms “bull” and “bullish” used regularly.

Bid 

“Bid” (or “bid price”) is the term used to describe the price at which a trader is willing to sell a particular currency. 

Buy Limit Order

A buy limit order is an order to push through a transaction at a specified price or lower, with the term “limit” referring to the price threshold.

Closed Position

Closing a position means bringing a transaction to an end, incurring any related profits or losses as a result.

Currency Pair

The nucleus of the forex market, a currency pair is what’s being traded within any forex transaction. Currency pairs take on various forms, with most pairs labelled “major”, “minor”, or “exotic”. For example, GBP/USD qualifies as a major currency pair.

Daily Chart

A graph that breaks down the movements of a particular currency that have occurred within a single trading day.

Day Trade

A forex trade that is opened and closed on the same day.

ECN Broker

Representing a distinct type of broker. An ECN Broker makes use of Electronic Communications Networks (ECNs) to provide clients with access to liquidity providers.

Exchange Rate

Representing what the forex market is built upon, the exchange rate is the cost at which one currency can be traded for another.

Execution

This term refers to when a trade is put in motion and subsequently completed.

Fill Price

Addresses the completion of an order, along with the price that it has been completed at.

Fill or Kill

If an investor has a set price in mind for a forex transaction, he or she can choose to implement a fill or kill order. What this means is that if the order isn’t fulfilled at the exact predetermined price, it is terminated.

Forex Chart

Similar to a daily chart, a forex chart is a digital chart that highlights points and price movements related to a currency pair. Forex charts can usually be extended to cover days, weeks, months, and even years.

Hard Currency

A hard currency is one that is often most resilient in times of political and economic instability and thus is generally considered to be dependable. For example, the Great Britain Pound (GBP), US Dollar (USD), and Euro (EUR) are well-known hard currencies.

Hedge

A method of trading that is used to protect an investor by reducing the risk that is associated with volatile markets. Hedging requires the trader to make two independent investments that work to balance each other out. This works to minimise the loss that could be incurred by price fluctuations.

Limit Order

Representing an instruction to either close or open a transaction at a future price. For example, if EUR/USD is currently listed at 1.07503/1.07523, then a related limit order to buy EUR at a lower-than-current market value price would see the currency purchase occur at 1.07522 or below.

Liquidity

The amount (or volume) of a set currency currently available for active trading.

Long Position

Any investor who takes a long position buys a base currency with a view to profiting on a market price increase.

Lot

A lot is a standardised quantity of the currency you are choosing to trade with, with one lot equalling 100,000 units of a particular currency.

Margin

“Margin” refers to the account balance required in order to maintain an open position.

Market Order

For those who want to trade instantaneously, a market order is what’s required, as it is an order for a trade to be executed immediately (if possible) at the best price available.

Open Position

A simple term to describe the position that a trader takes on a currency pair, subject to any profits and losses that it may accrue.

Pip

Standing for “percentage in point,” it represents the smallest possible price change that can occur within an exchange rate. More often than not, a currency is presented to four decimal points, with the smallest alteration in price occurring within the final decimal of the price listed.

Profit-Taking

Closing a forex position as a means to collect the related profit.

P&L

A standard abbreviation for “profit and loss.”

Quote Currency

Within any currency pair, the second currency listed will always be referred to as the “quote currency”. For example, in the USD/GBP pairing, the GBP is the quote currency.

Rally

“Rally” references a currency’s recovery in price after a period of either short-term or long-term decline.

Resistance

The price level that a currency finds difficult to go beyond. In such instances, a currency will consistently knock on a price ceiling, only to see a decline begin when it isn’t able to break above it.

Short Position

Opposite of a long position, this involves taking a position that benefits from a currency’s decline in market price. When the base currency within the pair is eventually sold, then the position is assumed to be short.

Soft Currency

Opposite of a hard currency, a soft currency is one that is often hit hardest by economic and political events and thus is generally considered to be unstable. For example, both the Zimbabwean Dollar (ZWD) and North Korean Won (KPW) are routinely labelled “soft currencies”.

Spread

The spread represents the difference between the ask and bid price of any currency pair. In most instances, this figure represents brokerage service costs and replaces transactions fees, with it usually presented in pips. It should be noted the spread could take on one of three forms through a fixed spread, a fixed spread with an extension, and a variable spread.

Stop-Loss Order

A market order to either buy or sell a currency when it hits a certain price. Generally speaking, a stop-loss order is placed in order to control losses occurring (or due to occur) in a set position.

Take-Profit Order (T/P)

A market order that stipulates that a position is to be closed once it hits a predetermined price or price range, thus taking all generated profit.

Technical Analysis

Investors use technical analysis as a means to forecast future price changes within the forex market. How this is conducted is by sifting through current and prior market data via trading indicators, charts, and other related tools.

Volatility

This addresses the degree of uncertainty (and related price fluctuations) of a security, currency pair, or specific currency. It can also be used as a term to describe the state of the forex market as a whole.

Yield

“Yield” is a term that refers to the return on any forex investment made, with such usually displayed as a percentage figure within a trading platform.

When you’re just getting started in forex, it’s helpful to have some guidance in how to develop a trading strategy. Many new traders turn to popular beginner strategies to lean on as they develop and refine more sophisticated strategies for forex trading.

Here are two easy-to-use trading strategies you can use right away:

1. Breakout

The breakout is a great long-term trading strategy that is easy for beginners to identify and take action on. Breakouts occur after a period of consolidation with a given currency pair. This consolidation is marked by a period of range-bound trading between established support and resistance levels. Consider a given currency’s 50-day high or low: If the price breaks above or below either of these lines of resistance, it can indicate a potential price breakout in that direction.

Breakouts aren’t a perfect science, but they’re a reliable indicator to follow when you’re trying to identify potential trends before they happen. Typically, the longer the period of consolidation, the more significant a breakout. If the price moves above the 100-day high, that’s a much stronger signal than if the price of a particular asset were to break above the 20-day high.

2. Pin Bar

The pin bar is one of the easiest trading strategies to use in forex. This pattern is defined by a long candlestick wick that shows price movement that breaks through a line of resistance. In a bullish pin bar pattern, the long wick, or pin bar, will be pointed down, passing through the line of resistance, while the candlestick will be positioned entirely above that line of resistance.

When this pattern develops, it’s a strong indicator that continued price increases are on the way.

Notice how the market came into resistance during a rally but was soon able to break through that resistance. One of the basic principles of technical analysis is that former resistance becomes new support. Sure enough the market found support at former resistance and formed a bullish pin bar in the process.

In your early days of trading, you can save yourself from some painful losses by avoiding some common pitfalls of day trading. Do whatever you can to avoid the following mistakes:

• Don’t trust your intuition.

  A lot of money has been lost by forex traders who think their gut is more telling than chart patterns and technical indicators. Always use strategy and analysis to build a data-driven case for making a trade.
  
  

• Don’t try to guess economic news before it’s released.

  Even experts can’t accurately predict how jobs reports and other important currency-related news will affect currency prices. Don’t try to guess what will happen—just pay close attention and move quickly if an opportunity develops.
  
  

• Don’t abandon your trading strategy.

  You’ll almost certainly make changes to your strategy over time, but don’t throw away your principles in the heat of a decision. 
  
  

• Never put all of your money in one place.

  No forex trade is guaranteed. Play the numbers game and always diversify where your money is placed.
  
  

• Don’t trade with brokers that don’t offer negative balance protection.

  If you don’t have this coverage on your account, a simple CFD trade could lead to a huge negative balance you’ll have to pay to the broker.
  
  

• Don’t focus on hitting earnings goals.

  If you fixate on hitting earnings numbers, it could tempt you to make aggressive, risky trades in an effort to make up for lost earnings. If you’re ever tempted to make one more trade in hopes of hitting a certain benchmark, it’s time to walk away.

To start trading with your online broker, you’ll need to set up a trading account and then link to that account through the Metatrader 4 platform. If you already have a trading account opened, you need to download MT4 onto your device of choice, then use the platform to access your trading account using your brokerage credentials.

Once this is set up, you’ll need to deposit funds to execute trades on MT4. Or, if you’re not ready to trade with live money, you can set up a demo account through MT4 that lets you practice your forex strategy and get used to the MT4 platform without any real-world risk.

As you familiarize yourself with MT4, use the platform’s online resources, tutorials and other information to figure out how to make use of all of its features available for forex traders. You may be brand new to the world of forex trading, but Metatrader 5 will be a valuable tool in helping you grow into a savvy, experienced forex trader.

Ready to put your new knowledge to the test? Open a demo account today and start developing your own forex trading strategy.