Before diving headfirst into currency trading, it’s important to understand how forex trading works. This beginners’ guide to forex trading has real-life examples for you to look at and tips for trading success.
Forex trading for beginners
Forex trading, in simple terms, is the act of exchanging one nation’s currency for another.
A lot of people’s interactions with the currency market will be for practical uses, such as converting money for a holiday. However, forex traders speculate on the price movements of currency pairs to create profit.
Basics of forex trading for beginners
There are a few basic terms that every forex beginner should know before they start trading, including:
- Currency pairs – forex is listed in pairs, as you’ll always be buying one currency while simultaneously selling another. For example, EUR/USD is the pair for the euro against the US dollar
- Base currency – the base currency in a pair is the first listed unit. It’s the target of a transaction, or what a trader is looking to buy. For example, in EUR/USD, the euro would be the base currency
- Quote currency – the quote currency is the second listed unit in a currency pair. It’s the amount needed to buy one unit of the base currency. For example, in EUR/USD, the US dollar is the quote. If the pair was trading at 1.1132, it means that it costs 1.1132 dollars to buy a single euro
- Major pair – the major pairs, also just called ‘the majors’ are the most actively traded currency pairs in the world. Currently, the four majors are EUR/USD, USD/JPY, GBP/USD and USD/CHF. Notice they all include the US dollar, which is involved in nearly 88% of trades as the world’s leading reserve currency
- Minor pair – minor pairs also have a large amount of trading volume but they don’t include the US dollar. Examples include the EUR/GBP, EUR/AUD and GBP/JPY
- Exotic pair – an exotic pair includes a major currency and the currency of a developing nation, such as the Brazilian real, the South African rand or the Turkish lira. As these pairs are traded far less frequently than the majors and minors, they have significantly less liquidity
- Spread – this is the difference between the bid price (at which you sell a currency) and the ask price (at which you buy it). It’s wrapped around the market price and is how you pay for a typical FX trade
- Pips – this is the individual unit used to measure movement in an exchange rate. Each pip is worth 0.01% of the base currency – this is equal to the fourth digit after the decimal point. For example, if the EUR/USD rate is 1.1132 and it were to increase by 1 pip, the new rate would be 1.1133
- Lots – this is the standard size of a forex contract. As each unit of measurement is small, the lots have to be large for market movements to make any profit (or loss). The standard lot is 100,000 units of currency
Best way to trade forex beginners
There are a few ways to trade forex. Regardless of which one you choose, beginners need to understand each method as their prices are often correlated.
The main types of forex trade are:
- Spot – these contracts are agreements to exchange a currency pair at its current market rate. The transaction takes place immediately or ‘on the spot’. As the spot rate is the live market price for a currency pair, its value is used as the base for the other means of FX trading
- Futures – these contracts are agreements to exchange a currency pair at a set price on a specific date in the future, known as the expiry date. Futures contracts are commonly used among those looking to hedge against currency risk by locking in a future exchange rate
- Forwards – these instruments work in much the same way as futures contracts, except they’re over-the-counter (OTC) instruments. This means that the terms of the trade are decided directly between two parties. So, while futures are standardised by an exchange in terms of lot size and value per tick, a forward can be customised
- CFDs – or contracts for difference, are agreements to exchange the difference in the price of a currency pair from when the position is opened to when it is closed. The profit or loss would be determined by how far the market moved for or against the trade. Like forwards, CFDs are OTC products which means they’re more flexible. For example, with City Index, you don't have to use standard lot sizes, we offer minimum trade sizes from £1,000
Due to the large sizes of FX contracts, most traders will utilise leveraged derivatives – whether that’s futures, forwards or CFDs – to open a position for a fraction of its full value. The initial deposit is called the margin.
What’s important to note is that your profit and loss on a forex trade will still be based on the full market exposure, not just the margin. This makes forex leverage risky, as although your profits could be larger, so could your losses. And in such a volatile market, prices can change rapidly, and profits can turn to losses in the blink of an eye.
Forex leverage example
For example, if GBP/USD was trading at 1.2940, so you buy one lot. This is the equivalent of selling $129,400 to buy £100,000.
But a leveraged provider might only ask for 3.33% of the trade, or $4309, to open a position.
If the pair rises 50 points to 1.2990, so you close your position. Your £100,000 is now worth $129,900, a profit of $500. However, if GBP/USD fell 50 points, you'd lose $500.
See more forex examples
How to trade forex for beginners
- Open a forex trading account – with City Index, you can choose between a standard trading account or an MT4 trading account
- Find a forex pair to trade – we offer over 80 global currency pairs on our award-winning platform
- Decide whether to go long or short – this will depend on whether you think the base currency will strengthen or weaken against the quote
- Build a forex strategy – you’ll need to create a methodology for entering and exiting the trade, which should include suitable forex risk management
- Place your trade – then monitor the market and close the position when you’ve reached your profit target or maximum loss
Learn more about how to trade forex
Alternatively, if you’re not ready to trade on live markets just yet, you can open a demo trading account. You’ll have access to our full range of currency pairs and can take your position on their price using virtual funds instead of real cash.
Forex trading course for beginners
If you’re looking to learn more about currency markets, we have a forex trading course for beginners in the City Index Academy. We have a huge range of different lessons that might be of interest to new FX traders, including an introduction to forex trading, how to use technical analysis and how to enter a trade.
See our full range of courses for beginners
Best forex pairs to trade for beginners
Choosing the best currency pair to trade will always depend on your experience. For a beginner, it’s best to stick to the currencies with the most trading volume, as they come with greater liquidity – meaning they’ll always be easier to enter and exit positions in – and this tends to lead to lower spreads.
These would include:
These are the most traded currencies according to the Bank of International Settlements (BIS) Triennial Survey in 2022.
Exotic pairs tend to be less favoured by beginner traders because they’re far less liquid, making it more difficult to confidently enter and exit trades,
Best forex trading strategy for beginners
Forex trading strategies are rough guidelines that traders create that will inform when and how they’ll enter and exit trades. They’re usually based on some form of analysis – whether that’s fundamental or technical, or both.
For example, trend trading involves opening a position in the prevailing direction of the market and exiting it before the trend reverses. So, if the market was rising, you’d go long and close out before the market fell, and if the market was falling, you’d go short and close out before the market rose. Traders might use momentum indicators to assess the strength of these trends and find areas of weakening momentum to use as reversal signals.
Another popular FX strategy for beginners is range trading, which involves finding levels at which a currency rate has rebounded in the past, which are known as support and resistance levels. As currencies move in such small increments, these levels can be quite close together.
The idea would be to go long at support levels ready for a rebound in price and go short at resistance levels in preparation for a reversal. Support and resistance levels also tend to be found with momentum indicators.
Best forex trading platform for beginners
Every trader has their own opinion on which forex platform is best – it all depends on what your specific requirements are. It’s often a good idea to try out a few different options to see what works for you.
While MT4 is the world’s most popular FX trading platform, it is more specialised and requires previous knowledge of both forex markets and coding. So, this is not usually a recommended platform for forex beginners.
City Index’s trading platform is easy to use and comes with advanced charting, seamless execution and SMART Signals – which give you actionable buy and sell alerts. You can try out our platform for free by opening a risk-free demo trading account.
Our platform has won multiple awards, including Best Trading Platform.*
Best forex trading app for beginners
Whether you’re a forex beginner or an expert, it’s always important to be able to monitor and adjust positions on the go.
With our award-winning mobile trading app, you can easily open and close trades wherever you are.* You’ll have access to our full range of markets and the complete functionality of our web trading platform.
*Winner of Best CFD Provider 2022 at ADVFN International Financial Awards, Best Trading Platform 2022 at Online Money Awards and Best App 2022 at the Shares Awards.