A Step-by-Step Guide to Forex Trading for Beginners

1/24/2025, 2:42:40 PM

Forex trading has become quite popular recently. This is due to its ease of access and the probability of earning high returns. The fact that the forex market is available 24/5 means that people from all time zones can trade forex any time they want to.

The forex market is the world's largest and most liquid financial market. Unlike the stock market, forex trading offers a low barrier to entry, making it attractive to a wide range of individuals.

This guide will walk you through the forex market basics. After this guide, you will understand how the market works, and you will be able to develop trading strategies. Whether you are a beginner, a professional trader, or just want to refine your trading skills, this guide will give you the essentials to trade confidently.

What is Forex Trading, and How Does it Work?

Forex trading means buying one currency while selling another to earn a profit. It occurs globally in the forex market. People, companies, and even governments trade trillions of dollars daily.

In forex, currencies are traded in pairs, such as EUR/USD (Euro against the US Dollar) or GBP/JPY (British Pound against the Japanese Yen). These pairs show how much one currency is worth compared to the other. When trading EUR/USD, you predict if the Euro will rise or fall against the Dollar.

The forex market helps businesses handle international transactions and enables travelers to exchange currencies.

Why Start Trading Forex?

There are many reasons why anyone should start forex trading; some of the reasons include:

Flexible Trading Hours

Since the forex market is open 24/5, there is an opportunity for everyone in all time zones to trade at a specific time of their liking.

High Liquidity

The forex market has many buyers and sellers at any time, so you can find a counterparty to buy or sell quickly and easily.

Low Entry Barriers

There is no barrier to entry for anyone around the world. Thanks to the prop firms that have also solved the issue of funding. You can manage a substantial account size by passing an evaluation of a prop firm.

Key Challenges to Consider in Forex Trading

The first challenge is slippage. It occurs when a trader receives a different trade price than intended during high volatility, such as when news is released. You can get slippage when entering or exiting a trade.

When news on a particular currency is released, the price tends to shoot either up or down; this may lead to more than expected losses when the price goes beyond where you expected to exit in case of a loss. The solution is to be careful or avoid trading during news releases.

The other challenge is the cost of trading; depending on the broker or what you're trading, the cost of trading can eat into your profits significantly.

Trading psychology is another big challenge in trading because when you become addicted to trade, you may indulge in random trading. Sometimes, you desire to earn big, so you take significant risks and lose everything.

Key Concepts for Beginners

There are three categories of currency pairs in the forex market

Major Currency Pairs

This refers to the most traded currency pairs. Mostly, they are a combination of the US dollar and other currencies from strong global economies. These are

EUR/USD - Euro/US Dollar
USD/JPY - US Dollar/Japanese Yen
GBP/USD - British Pound/US Dollar
USD/CHF - US Dollar/Swiss Franc
USD/CAD - US Dollar/Canadian Dollar
NZD/USD - New Zealand Dollar/US Dollar
AUD/USD - Australian Dollar/US Dollar

Minor Currency Pairs

These currency pairs do not involve the US dollar but other currency pairs from other major economies. They can also be called cross-currency pairs, which include in no particular order.

EUR/CAD - Euro/Canadian Dollar
NZD/JPY - New Zealand Dollar/Japanese Yen
GBP/AUD - British Pound/Australian Dollar
EUR/GBP - Euro/British Pound
EUR/AUD - Euro/Australian Dollar
GBP/JPY - British Pound/Japanese Yen
AUD/JPY - Australian Dollar/Japanese Yen

Exotic Currency Pairs

Exotic current pairs comprise one primary currency and other less commonly traded currencies, which are included in no particular order.

USD/HKD - US Dollar/Hong Kong Dollar
USD/PLN - US Dollar/Polish Zloty
USD/TRY - US Dollar/Turkish Lira
EUR/TRY - Euro/Turkish Lira
USD/SGD - US Dollar/Singapore Dollar
EUR/THB - Euro/Thai Baht
USD/ZAR - US Dollar/South African Rand

Pips

A pip is the smallest unit of measurement for price movements of currencies in Forex.

A pip is short for percentage in point or price interest point.

Spread

Spread is the difference between two prices: the asking price, which is the buying price, and the bid price, which is the selling price. This serves as revenue to the broker for their services.

Leverage

Leverage allows traders to borrow capital from the broker to open larger trade sizes and earn more profits.

Role of a Prop Firm

The role of a prop firm in forex trading is to provide traders with a platform to buy or sell assets. These firms do not require hefty investments from the traders but rather take a small portion of the profit.

How to Start Forex Trading as a Beginner

Choose a Reliable Prop Firm

There are many prop firms around but only a few serve the common interest where traders and the firms go on a win-win situation.

You should also check the prop firm ratings on platforms such as TrustPilot before you deposit any money with them. Also, read the terms and conditions of the firm to get well aligned with your trading goals and methodology.

Open a Demo Account

Open a demo account and practice various trading strategies using virtual funds, not your hard-earned money. You should switch to a Live account only after you become profitable in the demo account.

Learn to Use Trading Platforms.

Brokers offer many trading platforms; you should learn to use the trading platform that is widely offered and used by brokers in your region. Some of the most popular trading platforms include MatchTrader, TradingView and cTrader. If your broker provides all these platforms, choose the one that is easy to use and suits you best.

Develop a Trading Strategy.

A good strategy can give you a profitable edge in the markets; various strategies are offered online, some work and some don't. A better option is to develop your own that will work for you using the different tools and indicators provided on the trading platforms.

Transition to a Live Account

Once you are confident enough working on your strategy on a demo account, you can then move to open a prop firm account as well. FundingPips allows you to start with a $100k account size where you keep 80% split in the profit.

Best Forex Trading Styles for Beginners

A beginner can opt any of the following trading styles. It all depends on one’s preference.

Scalping

This is a trading Style whereby traders profit off small price changes over a short period. Most scalpers open many trades daily, mainly using five-minute and one-minute charts.

Day Trading

With day trading, a trader tends to hold open positions from anywhere between a few seconds to a few hours but not more than a day and not overnight.

Swing Trading

With this trading style, traders seek to exploit medium-term price movements by holding open positions for a few days to a few weeks.

Position Trading

With position trading, traders can hold an open position for several weeks to years. Position trading has the most extended position-holding period of all of the above.

Lucky enough, FundingPips poses no restriction on any trading style. You can trade freely with them.

Forex Trading Tips for Beginners.

Below are some tips on trading styles, risk management, and emotions management during trading.

How to Choose the Right Trading Style.

Choosing the right trading style is necessary for success. Each trading style has its advantages and disadvantages, there are a few factors you need to consider before choosing a trading style.

Your Financial Goals

You should align your trading style and strategy with your financial objectives. If you're interested in short-term profits, then day trading or scalping might suit you. On the other hand, swing trading or position trading might be best for you if you don't care about the duration it takes to earn profits.

Your Experience

It is essential to familiarize yourself with the dynamics and risks of any market before making any trading decisions or building your strategy.

Your Risk Appetite

Day trading is the best style if you want to trade more and are not afraid of exposing yourself to high risk. If you'd like less risk, swing and position trading are the best for you.

Your Schedule

Day trading demands you to spend more time analyzing the charts. If you don't have this time, you can opt for swing or position trading, which is more flexible.

How to Manage Risk in Forex Trading

Risk management refers to a trader's strategies and tools to minimize potential losses. Some of these strategies include always using a stop-loss order and a good risk-reward ratio that ensures profitability even with a low win rate.

Importance of a Stop Loss Order

A stop loss is an order placed with a broker to buy or sell a specific financial asset because if the price goes against you, this ensures that you don't lose more than you are willing to lose in a particular trade.

How to Calculate Risk Reward Ratio

The risk-reward ratio refers to how much you stand to gain based on the amount you have risked on a trade.

To calculate it, you divide the distance from your entry point to your take profit by the distance from your entry point to your stop loss.

Managing Emotions While Trading.

The ability to control your emotions while trading can differentiate between success and failure. Your mental state determines your decisions, so you should train yourself to be calm and composed when holding a losing position.

Common Mistakes Beginners Make in Forex Trading

Overtrading

When you open more positions than you can handle for many reasons, including avenging losing trades, always stick to your trading plan to avoid overtrading, as it can lead to a series of losses affecting your productivity.

Ignoring Risk Management

When trading, always stick to your risk-reward ratios for consistency. You should always have a stop-loss for every open position if the price goes against you.

Chasing Trends Without Proper Analysis.

Before trading trends, you should be able to analyze the charts using technical and/or fundamental analysis to make sure you know whether a particular trend is starting, continuing or almost ending. This will help you better detect when the trend is virtually ending and the price is about to reverse on you.

Tools and Resources

Recommended Books, Courses and Websites

Books

Currency Trading for Dummies by Kathleen Brooks and Brian Dolan

This book covers the basics of trading, and it's very easy to understand,d especially for beginners

Day Trading and Swing Trading the Currency Market by Kathy Lien

This book explains strategies for both short-term and medium-term trading

Courses

Babypips School of Pipsology

This is a good online course for beginners; it covers everything from basic concepts to advanced trading strategies.

Investopedia Academy Forex Trading for Beginners

A paid course by Investopedia that teaches fundamental and technical analysis

Forex Trading Platforms for Beginners

MatchTrader

It is a straightforward, easy-to-use user interface.

TradingView

This platform looks more modern than MetaTrader, offering high-quality charting tools and some social trading features.

cTrader

This is another user-friendly platform, and it provides easy navigation and advanced order options.

Final Take

Forex trading offers a flexible and easy way to trade the financial markets. It provides opportunities for profit with high liquidity and the ability to trade almost any time.

FundingPips offers evaluation and master accounts where you can trade without risking your own capital. They have everything, including tools and strategies any beginner would need. You can even sign up for one of their accounts today to start trading the forex market without risking your capital.