Can you make money trading forex? Well, there is no easy answer to this question – not least because while some forex traders are able to make consistent profits, others are not so successful.
Therefore, the purpose of this beginner’s guide is to understand what is forex trading and explore profitable forex trading strategies to ensure that forex currency traders enter this marketplace armed with the right mindset
What Is Forex Trading
The purpose of this beginner’s guide is to fully explore the question – What is forex trading and how does it work?
So, what is forex trading? Forex trading is a method of investing. Trading forex is speculating on the value of one currency against another. For example, making a prediction that the GBP (Great British Pound) will decrease in value against the USD (United States Dollar) with the aim of being correct and making money.
Forex trading decisions are often made based on fundamental or technical analysis. Fundamental being things like the news, for example, Brexit is a trading opportunity based on fundamental news, whereas technical analysis is looking at charts and recognising patterns, for example, previous levels of support or resistance in the price of a currency pair.
Forex trading is widely accessible, there are a huge number of individual traders that are normal everyday people, working a 9-5 job and using it as a potential extra source of income it is not just reserved for bankers or the rich.
Due to very volatile market conditions some people trade forex very short term and can be in and out of the market within minutes, as oppose to traditional investments such as purchasing stocks where you may hold on to them for a significant amount of years
Forex trading is a skill and one that could generate you a source of income but its not without its risks, you can make money but you can also lose money.
How Big Is The Forex Market?
In a nutshell, the forex market is the biggest and most dynamic financial market in the world with a daily volume of more than $5 trillion. It is considered to be the closest to the concept of “perfect market” because it is the most liquid one, it is open 24 hours a day, and it is available for everyone who wants to participate.
In addition, you are not required to have a large initial capital at your disposal in order to enter the market. In most cases, you won’t need to pay a high commission to your broker either.
Just like the largest financial institutions in the world, you can easily enter the forex market thanks to the internet. All you need to do is open a free trading account which you can do here and start putting what you have learnt into practice.
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What Is A Currency Pair?
The first currency listed in the pair is called the base currency and the second one is called the quote currency.
The price of the pair is determined by the difference between both measured in one unit. Normally, the exchange rate will constantly fluctuate.
What's It Like Being A Forex Trader?
Being a forex trader does not mean that you have to be stuck to your computer screen 24/7. A lot of forex traders trade in the market as a side job along with their conventional careers.
Due to certain trading tools such as an economic calendar, traders can plan when they will trade rather than being on the computer all of the time
Forex Traders have a lot of flexibility and freedom, as long as you have internet access you could trade from anywhere, even the beach.
It can be emotionally challenging to be a forex trader as they often deal with loses and cannot let it impact trading, in essence there can be no emotional attachment to money.
If you put in the time and effort to learn the skill it can offer financial rewards and most importantly freedom.
What Are Pips In Forex Trading?
Pips are the units that measure the increase or decrease in the price of a currency pair. Normally, the pip will be equal to a one-digit movement in the fourth decimal of a currency pair. To make things clearer for you, one pip is the increase in the pair GBP/USD when the price increases from $1.36471 to $1.36481.
An exception is considered when the currency is listed in significantly smaller denominations. Like with the example with Japanese yen, a single pip is the equivalent of the movement in the second decimal place.
What Is A Spread In Forex Trading?
When taking a look at the forex quotes you will note the two different prices listed there that are available for each currency pair. These are ask and the bid prices. The ask price is basically the price at which you can buy the currency. The bid price, on another hand, is the price at which you can sell the currency.
You will also note that the ask price is always higher than the bid price. This is the spread you will notice the price to buy your currency is a bit cheaper than how much it will be sold for. The difference between the ask and the bid price is known as the spread. The tighter the spread is, the more liquid the market is and this is the best case for all participants. However, this is not always the case and major price gaps may occur at times, especially during major news releases.
Every trade in the forex world is both a “buy” and a “sell”. In order to make a profit and depending on your trading strategy as a forex trader, you close the order whenever you decide that you can sell the currency you have purchased by purchasing another currency or simply exchange one currency for another. While this process of exchanging may seem like a bit confusing at first it is really not that hard once you become familiar with the basic mechanism of forex.
What Does Leverage Mean?
As an example, if you are offered leverage of 1:100 by your forex broker, this pretty much means that you can trade with 100 times more money than the capital you have deposited into your trading account.
The high leverage in the forex world is the reason why so many people with a less funds available enter the market.
In fact, you are not required to have a lot of capital at your disposal in order to be able to trade forex. You can start with as little as $100 as an initial capital and this is something that other markets do not offer as an opportunity.
However, keep in mind that entering with $100 and expecting to become a millionaire overnight is completely impossible or at least very unlikely.
Your success as a trader and whether or not you will be able to make a profit from forex trading is a subject to many factors. Keep in mind that the leverage may be a subject of government regulations in your country and can be limited. However, there will be brokers regulated in other countries that can offer leverage as high as 1:1000 and even higher but not all brokers are good so it’s important to choose reputable forex brokers.
What Are Long And Short Trades In Forex?
The basic concept of the long and short trade consists of a couple of simple principles.
If you have placed a buy trade on EUR/USD in hope that the euro is going up against the USD this is also known as long position or going long on EUR/USD.
In a contrast, if you placed a sell trade on EUR/USD in hope that the Euro will decrease in value against the USD, this is called the short position or going short on EUR/USD.
What Is Analysis When Referring To Forex Trading?
When it comes to forex trading, the analysis is not only the key but also the most important instrument of your forex trading strategy.
The two principal fundaments of the forex market analysis are fundamental analysis and technical analysis.
Fundamental analysis is news at its core, this news is often data released to show the economic condition of a country and includes various elements of a country’s economy including important events affecting the stability of the country’s currency, future prognosis, political events, and the possible impact on the market in terms of supply and demand.
This is a form of financial forecasting that has been used since the early days of forex trading. In order to be good at fundamental analysis, you would like to be familiar with the concepts of international economics.
Fundamental analysis is often used by market players aiming towards long-term trading and investing. However, it is not necessarily the best choice for forex beginners as it can be pretty overwhelming and even confusing to understand at first plus you will be bombarded with too much information you still don’t know how to prioritise.
However, once you master fundamental analysis and how to perform it correctly, you definitely increase your chance of predicting price movements and placing successful trades.
Technical analysis, on another hand, deals with only two main variables – time and price. Both are undeniable facts so the element of uncertainty is not present in this case. Both price and time are also strictly quantifiable elements.
In order to be able to make a good technical analysis, you would like to learn how to study charts. Some of the aspects of technical analysis also include drawing support and resistance lines, applying technical indicators, comparing candlestick formations, identifying key levels, etc. Technical analysis is the only thing available to quick-style traders but it is also often used by traders aiming towards long-term trading too.
In the following sections, we explore whether or not it is possible to make money by trading forex, we explain what you need to do to get your online forex trading career off on the right foot and what steps you need to take to ensure you are able to trade in a risk-averse manner.
But, again, how do traders make money from forex, especially when the forex market is so volatile?
How To Make Money By Trading Forex? 6 Steps To Get You Started
Forex trading, like any other investment market, can be profitable and traders can make lots of money trading the forex market. However, this is on the proviso that the trader has a firm understanding of how the forex market works and that they have a solid strategy in place.
After all, the only way to make money in the forex industry is to consistently predict the future direction of a currency pair.
Bellow we explore the best ways to make money trading forex:
Step 1: Learn the Basics of Forex
Forex - otherwise referred to as ‘foreign exchange’ or simply ‘FX’, involves buying and selling currencies.
The idea here is that you will be attempting to make financial gains when the exchange rate of a currency pair changes - such as GBP (British pound) and the USD (US dollar). In simple terms, if the price of GBP/USD is 1.30 - you need to determine whether you think the price will go up or down.
If your prediction comes to fruition, then you will increase the value of your stake. It goes without saying that in order to make consistent profits in the forex trading scene - you need to have more winners than losers.
Before we get to the ins and outs of how you make a profit by trading forex, we first need to explore how currency pairs work.
Currency pairs sit at the core of the online forex space. In simple terms, a ‘pair’ will consist of two currencies.
As per the section above - GBP/USD is a currency pair. You then have the likes of AUD/NZD - which consists of the Australian dollar and the New Zealand dollar.
Some online forex trading sites give you access to other 100+ pairs. In most cases, we can split forex pairs into three different categories - majors, minors, and exotics.
Major currency pairs are the most traded pairs in the forex scene. They benefit from the most liquidity as the underlying currencies are in high demand from financial institutions around the world. Crucially, while major pairs will also contain two strong currencies - one half of the pair most consist of the US dollar.
Here are some examples of major forex pairs that you are all-but-certain to find at your chosen broker.
We should also note that major currency pairs come with the tightest ‘spreads’ - meaning that they can be traded in a super cost-effective manner. Don’t worry - we cover the ins and outs of the spread later on.
Are you ready to start trading major currency pairs?
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In a similar nature to major pairs, minors will always contain two strong currencies. The key difference is that they will not contain the US dollar. We should note that although minor pairs are heavily traded globally - demand and liquidity is somewhat lower in comparison to majors. As such, spreads will be slightly higher.
Here are some examples of popular major pairs that you can trade online.
Outside of major and minor pairs you then have exotics. These are pairs that contain a weaker currency - often from an emerging market. This might include currencies such as the Mexican peso or South African rand.
It goes without saying that exotic pairs carry far less liquidity in comparison to majors/minors - meaning that the spreads are higher.
Furthermore - and perhaps most importantly, exotic pairs can be extremely volatile. While this might suit an experienced trader that knows how to profit from volatile price swings - you might want to steer clear of exotic pairs as a newbie.
Nevertheless, here are some examples of popular exotic pairs that you can trade online.
Base and Quote Currencies
In addition to majors, minors, and exotics - you also need to have an understanding of base and quote currencies. In simple terms, the currency situated on the left of the pair is the base currency, while the currency on the right is the quote currency.
For example â”€ When trading GBP/USD, the base currency is the British pound and the quote currency is the US dollar. In turn, the quote currency lets us know how many units are required to purchase the base currency.
As such, if GBP/USD was priced at 1.30 - this means that you need 1.30 US dollars (quote) to buy 1 British pound (base).
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Understanding ‘percentage in points’ or simply ‘pips’ is crucial if you want to forge a career as a successful forex trader. In simple terms, this is how we quantity the movement of a currency pair.
Taking a step back momentarily, think about the last time you went abroad and used your debit card at an ATM. In a basic example, we’ll say that you withdrew €200 on Monday and a further €200 on Thursday.
When you get back home and check your bank account statement - you notice that two different amounts were taken from your account. The first transaction amounted to £181.56 and then second at £180.96.
Crucially, although we are only talking about a difference of £0.60 - this highlights how currency pairs change on almost a second-by-second basis. That is to say, even if you had made two €200 ATM withdrawals just a few minutes apart - the GBP equivalent would still be different.
So, how does this relate to forex pips?
Well, the overarching concept when trading forex online is to speculate whether a currency pair will increase or decrease. With that said, when you Google the current exchange rate of a pair - you will only be shown 2 digits after the decimal point.
For example, when Googling GBP/USD - you might be shown 1.29. However, the forex markets typically utilise 4 digits after the decimal point - meaning that GBP/USD will look something like this: 1.2958
Crucially, every time a forex pair changes in value (which is every second), we view this movement in pips.
Note: As we cover shortly - not all currency pairs have 4 digits after the decimal point. With pairs that contain the Japanese yen (JPY) - just 2 digits are used.
Example of Pips in Forex
It can take some time to get your head around pips - so let’s look at a couple of basic examples to help clear the mist.
- You are trading EUR/USD
- The pair is currently priced 1.1750
- A few minutes later, EUR/USD is now priced at 1.1759
- This means that the pair has increased by 9 pips
If, for example, your stake amounted to £1 per pip and you speculated on EUR/USD increasing in value, then you would have made a profit of £9 (9 pips x £1).
Let’s look at another example of a pip movement to ensure you understand the process fully.
- You are trading AUD/NZD
- The current price of the pair is 1.0782
- A few hours later, AUD/NZD is priced at 1.0717
- This means that the pair has decreased by 65 pips
If you speculated that AUD/NZD would fall in price and you staked £2 per point, you would have made a profit of £130 (65 pips x £2).
Step 2: Understand How Forex Orders Work
Now you have currency pairs and pips sorted - the next part of your learning journey is to understand forex orders. Put simply, orders tell your chosen broker what you want to achieve.
That is to say, if you think that the price of EUR/USD is likely to increase, then you need to action this by placing an order. Similarly, if you want to exit your position - again, you need to do this with a suitable order.
At the core of this are ‘buy’ and ‘sell’ orders.
If you think that the price of a currency pair is likely to increase then you simply need to place a buy order. If you think that the pair will drop in value then you will place a sell order. It’s as simple as that.
But, we should note that each and every trade that you place will always require both a buy and sell order.
For example, if you open the trade with a buy order, then to close it you will need to place a sell order. Similarly, if you open with a sell order then you will close the trade with a buy order.
Once you have determined whether you want to place a buy or sell order, you then need to choose from a market or limit order. By placing a market order, this means that your chosen broker will execute your trade at the next available price.
Taking into account that exchange rates change on a second-by-second basis - the price that your trade opens at is likely to be just above or below the price you see on screen.
When it comes to limit orders, this allows you to specify the exact price that your trade should be executed at. For example, if EUR/USD is priced at 1.1767, you might want to place a buy order when the price hits 1.1789.
It is important to note that limit orders will remain pending until your desired price is matched by the markets. As per the above example, you would need EUR/USD to increase to 1.1789. As such, your order remains inactive until the price is matched or you decide to manually cancel it.
Both stop-loss and take-profit orders are not compulsory. However, most, if not all seasoned forex traders will make use of these order types as they allow you to enter a position in a risk-averse manner. This is because you have an exit strategy in place to cover both outcomes.
- Stop-loss orders will close a forex trade automatically when you are losing by a certain amount. For example, let’s suppose you want to cap your potential losses to 50 pips. If the market goes against you by 50 pips - then the stop-loss order will kick in and exit the trade.
- Take-profit orders work in the same way as stop-loss orders but in reverse. That is to say, you might set a price target of 150 pips. If and when your position goes in your favour by 150 pips, then the taker-profit order will kick in and exit the trade.
Ultimately, each and every forex trade that you enter should have both stop-loss and take-profit in place. Not only does this ensure that you have a clear exit plan in place - but it removes the need to set your device to close the trade manually.
Example of Placing Multiple Forex Orders
As per the above - you essentially have three sets of orders that you need to place. This includes a buy or sell order, a market or limit order, and both a stop-loss and take-profit order.
Placing several order types at once can seem somewhat overwhelming at first glance, so let’s explore how this works in practice.
- You are looking to trade GBP/USD - which is currently priced at 1.3076
- You think that the pair will increase, so you will be placing a buy order
- But you don’t want to enter the market until GBP/USD drops to 1.3050
- As such, you place a limit order at 1.3050
- You want to limit your losses to 20 pips, so you set up a stop-loss order at 1.3030
- You have a profit target of 60 pips, so you set up a take-profit order at 1.3110
A few minutes later, the price of GBP/USD hits 1.3050 - meaning that your buy limit order is now active. As such, only one of two things can happen hereon.
- If your prediction is correct and GBP/USD increases to 1.3110, then your take-profit order will kick. This means that the trade is automatically closed and you make a profit of 60 pips.
- If your prediction is incorrect and GBP/USD drops to 1.3030, then your stop-loss order will kick. This means that the trade is automatically closed and you make a loss of 20 pips.
Note: As you can see from the above example, the risk-reward on this trade was 1:3. This is because you were risking 20 pips to make 60 pips. This is a sensible risk/reward ratio to utilize and one that is often used by seasoned traders.
Step 3: Learn how to Calculate Profit and Loss When Trading Forex
In simple terms, in order to make money by trading forex online, you need to speculate correctly more times than you speculate incorrectly. However, there are some basics to get your head around before this can be realised.
At the forefront of this is being able to calculate your profit and loss figures. If you don’t, you won’t have a clear idea of whether or not your trading endeavours are successful.
As such, let’s start with stakes.
When you enter a forex trade online, you will need to let the broker know how much you wish to stake. The general rule of thumb is that you should never risk more than 1% of your total bankroll.
In other words, if you deposit £2,000 into your chosen forex broker, then you should avoid staking more than £20 on a single trade. This is where a lot of newbie traders fail - as they don’t follow basic risk management principles.
On the one hand, it is virtually impossible to make a full time living trading forex with such small stakes. After all, a 2% gain of £20 would make you just 40p. Think how many hundreds of successful trades you would need to make just to be able to make ends meet.
Fortunately, with the aid of leverage and margin - you can significantly increase the value of your stakes. We’ll come to that shortly.
Profit and Loss in Percentage Terms
Although we have so far discussed forex price movements in pips, we would argue that the most effective way of doing this is to focus on percentages. In doing so, you can easily assess your potential profits and losses.
In fact, the best forex brokers in the online space display everything in percentage terms anyway. For example, let’s suppose that EUR/USD goes from 1.1790 to 1.1870.
Sure, you likely won't know what this amounts to in percentage terms. But, your chosen broker will display this figure automatically. To clarify, this translates into an increase of 0.67%.
As such, if you staked £500 on this order and you speculated correctly - you would have made a profit of £3.35.
In another example, let’s suppose that you place a sell order on USD/JPY at 105.260. A few hours later, USD/JPY is priced at 104.100 - representing a decrease of 1.10%. On your stake of £500, this amounts to gains of £5.50. As you can see, it’s much easier to figure out what you are making or losing when quantifying price movements in percentage terms as opposed to pips.
Leverage and Margin
This leads us on to a very important part of the online forex space - leverage and margin. In a nutshell, leverage allows you to trade with more money than you have in your account. In other words, it will amplify your stake by a predefined factor.
For example, let’s suppose that you stake £20 on a GBP/USD trade, at a leverage of 1:20. This means that you are effectively trading with 20 times more than you originally staked - taking a £20 position to £400.
Leverage comes with several benefits. At the forefront of this is being able to boost your trading capital and thus - be able to make more money from your profitable forex positions. As also we cover shortly - leverage also comes with its risks - as it will amplify your losses, too.
Before we get to that, let’s look at an example of how a leveraged forex trade might look.
- You are trading USD/CHF
- The pair is priced at 0.9139. You think this is undervalued, you so you decide to place a buy order at a stake of £500
- You are confident in your prediction, so you apply leverage of 1:20
- A few hours later, USD/CHF is priced at 0.9408 - representing an increase of 2.94%
- On a stake of £500 - this means you made a profit of £14.70
- However, you applied leverage of 1:20 on this trade - meaning that your £14.70 profit is amplified to £294
As you can see from the above, you only need one successful, highly leveraged trade like this to make some serious capital trading forex. But, it is crucial to understand that leverage can also amplify your losses very, very quickly.
In fact, if your leverage position is ‘liquidated’, then you will lose your entire ‘margin’. There are two new terms here to explore, so let us elaborate.
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Margin and Liquidation
In order to trade with leverage, you are required to put a margin up. This is essentially a security deposit in case your forex trade goes horribly wrong. In the example above, your £500 stake allowed you to trade with £10,000 - as you applied leverage of 1:20.
As such, the margin on this position was £500 - or 5%. Why does this matter?
Well, put simply, if your forex trade went against you by 5% then the broker would be forced to close the position automatically as your margin balance has been consumed. In turn, the broker would keep the entire 5% margin, which in this example, amounted to your £500 stake. This is known as being ‘liquidated’.
You can avoid being liquidated by adding more funds to your margin balance. However, a more sensible safeguard is to set up a stop-loss order well below the point of liquidation. Sticking with the same example, had you inserted a stop-loss of 2%, then you would never get close to the 5% liquidation point.
There will always be limits to the amount of leverage that you can apply when trading forex online. This is determined by several factors, including:
- Your country of residence
- What forex pair you are trading
- Your choice of forex broker
- Whether you are a retail client or professional client
First and foremost, some countries have installed leverage limits to protect forex traders from losing more than they had hoped. In the UK and Europe, these limits are determined by the European Securities and Markets Authority (ESMA).
The limits are as follows:
- A maximum of 1:30 can be applied when trading major forex pairs
- A maximum of 1:20 can be applied when trading minor or exotic forex pairs
As such, any licensed forex broker that accepts UK or European traders must abide by the above limitations. Residents from within these regions can obtain higher limits - but they must prove that they meet the requirements to be classed as a professional trader.
If you’re based outside of the UK/EU - then you should be able to get significantly higher limits. US retail traders, for example, can obtain leverage of up to 1:50 when trading forex.
On the other hand, if your country of residence does not have any specific regulations in place regarding leverage - you might be able to get up to 1:500 when trading forex.
In other words, a $500 account balance would permit a maximum trade size of $250,000. In turn, if your trade went against you by just 0.2% - you would be liquidated.
Please Note: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage
Step 4: Learn how to Research Currency Prices
By this point in our guide, you should now have a firm understanding of how forex trading works and what you need to do to make a profit. That’s the easy part.
The difficult part is understanding how to actually know which way a currency pair is likely to move. After all, if there isn’t an underlying basis to your decision-making process - you are essentially flipping a coin. For example, if GBP/USD is priced at 1.2960 right now - do you think the price will increase or decrease?
Of course, if you have never placed a single forex trade in your life, then knowing the answer to this question is like asking a four-year-old child to recite the first 40 digits of pi!
As such, you need to understand how to perform in-depth research on the currency in order to evaluate which way its price is likely to move in both the short and long run. Crucially, this centres on two types of research methods - fundamental and technical research.
Irrespective of which financial market you are trading - fundamental research will play a role in whether an asset increases or decreases in value. In its most basic form, fundamental research is focused on real-world news developments. That is to say, it evaluates how a news story will impact the value of a currency.
For example, let’s suppose that the US government decides to increase the money supply by printing more dollars. In turn, there will be more dollars in circulation and thus - the value of the dollar is likely to go down. As such, a pair like EUR/USD would therefore increase in price.
In another example, let’s suppose that the Bank of England decides to increase interest rates. In turn, this makes the currency more attractive for outside investors as they will receive a higher rate of return on their cash. As a result, a pair like GBP/USD would likely increase in value.
There are countless other examples of hope real-world news developments can impact the value of a currency. But, the key point is that you should not only ensure that you keep abreast of key financial developments - but also that you understand how to interpret the news story in question.
If you want to brush up on your fundamental research knowledge, why not consider reading a book? Here are some top-rated books on the subject that are worth a read:
- Currency Forecasting: A guide to fundamental and Technical Models by Michael Rosenberg
- Forex: A Guide to fundamental analysis ( Peter.R.Dockery )
- Fundamental Analysis: Forex trading techniques by Eugenio Milani
Some would argue that fundamental research is the easy part. This is because once you understand the basics surrounding interest rates, fiscal and monetary policy, GDP, and geopolitical events - you’ll know how this is likely to impact the value of a currency.
However, technical analysis is significantly more complex. This is because the process requires you to read, analyse, and interpret pricing charts. The main concept is that you will be looking for potential trends and how these trends might impact the future movement of a pair.
Furthermore, and perhaps most importantly - technical analysis is a lot more important in the forex scene in comparison to its fundamental counterpart.
This is because forex traders typically utilise a day trading strategy - meaning that they place many buy and sell positions throughout the day. In other words, they might keep a position open for no more than a few hours or minutes.
As a result of this, the trader will focus almost exclusively on technical analysis and this can help paint a picture of where the currency is likely to go in the very short-term.
After all, it’s unlikely that there will be an important fundamental news development on your preferred currency pair every day - or even every week.
So that begs the question - where does a newbie trader start when it comes to learning the ins and outs of technical analysis?
The simple answer is that it can take many, many months before you have the slightest idea how to interpret a pricing trend. Nevertheless, in order to achieve this goal - you need to have a firm grasp of technical indicators.
Put simply, technical indicators help you identify potential trends that are in the making. Each indicator will look at something specific - such as whether a currency pair is overbought or oversold, or which support/resistance lines are the most important.
Our Trading Education website has a solid library of guides and explainers on all-things technical analysis - so we strongly suggest that you spend some time reading through the content.
In the meantime, below you will find several technical indicators that are popular with beginner forex traders.
Relative Strength Index (RSI)
This technical indicator is a great one to start with. Put simply, the RSI seeks to inform us whether a currency pair is potentially overbought or oversold. It runs from 0 to 100 - with anything above 70 indicating that the pair is overbought. Anything below 30 and it means the opposite.
If the pair is oversold, this means that there is a significant imbalance between buyers and sellers in favour of the latter. In turn, this means that a slight trend reversal might be in play.
In other words, some short-sellers will look to cash in their profits, which will push the price of the currency pair up momentarily. This is known as a ‘market correction’. As a result, the RSI technical indicator will tell us to place a buy order.
If the pair is overbought, the above applies but in reverse. That is to say, although the longer-term trend is going up, a slight market correction southwards is likely to occur. As such, the RSI indicator will tell us to place a sell order.
Moving Average Convergence Divergence (MACD)
The MACD is used by traders of all shapes and sizes. This crucial indicator will give us an idea of market ‘momentum’. In other words, which direction the momentum of a specific currency pair is moving.
In order to determine this, the MACD will look at the relationship between two 'moving averages'.
The most useful moving averages is that of the 50-day, 100-day, and 200-day. These timeframes refer to the average price of a currency pair over the respective period. For example, if the 200-day moving average of GBP/USD is 1.3270 - this is the average price of the pair over the past 200 days.
It is important to note that the MACD is particularly valuable when used in conjunction with the RSI. Although both indicators look at market sentiment, they quantify this by looking at different variables.
Any seasoned forex trader will tell you the importance of market volatility and how this can influence the price action of a currency pair. One of the best ways to analyse this is to use the Bollinger Bands indicator.
In a nutshell, by having a firm grasp of how volatile a specific currency pair is, it can help you evaluate what entry and exit prices to target. In addition to this, Bollinger Bands can also help you identify the potential risk of a trade. After all, the more volatile a currency is - the higher the risk/reward ratio.
Step 5: Consider Help From a Third-Party
If you’ve it through our guide this far, then you’re probably feeling somewhat overwhelmed with the sheer amount of information and knowledge required to succeed in the forex trading space.
The good news is that there are several options on the table that will allow you to access the forex markets without you needing to have any prior experience.
- Forex Signals
- Forex EAs
- Copy Trading
Let’s breakdown the above options in more detail.
By entering ‘Forex Signals’ into Google - you will be presented with thousands upon thousands of providers that claim to have that secret sauce you’re looking for. In a nutshell, signals are simply trading suggestions that are sent to you in real-time - largely via email, SMS, or Telegram. Although signals are present in many sectors of the financial scene, they are particularly popular in the case of forex.
So how do they work? Well, the forex signal provider will send you a message when a trading opportunity has been identified. This will be sent out from a human trader or by a pre-programmed algorithm. Either way, the best forex trading signals will provide the following information:
- Currency Pair: The signal will tell you which currency pair the suggestion relates to.
- Buy or Sell: Whether you should place a buy or sell order.
- Entry Price: This is the entry price that you need to place the limit order at.
- Take-Profit: This is the price that you should set the take-profit order at.
- Stop-Loss: This is the price that you should set the stop-loss order at.
In some cases - especially if the forex signal service offers a community via Telegram, you’ll get some background information that explains what the signal is based on. For example, this might be because the pair is approaching oversold conditions.
Make no mistake about it - forex signals allow you to start trading currencies virtually overnight. This is because you don’t need to perform any research of your own. Instead, you simply need to place the orders that the signal advises.
The key problem with signals is that the vast majority of providers make really bold claims about how much money they can make you - when in truth, the signals are worthless.
After all, anyone can create a flash website and claim to make guaranteed monthly returns of 50%.
As such, if you are planning to try out a forex signal service - make sure that you run the signals through a demo trading account first. In fact, you should probably do this for at least one month to see whether or not you are likely to make a profit in the long run.
Forex EAs (Expert Advisors) will trade forex on your behalf. They come as a software file which you need to install into a third-party trading platform like MT4.
The underlying software will have a range of pre-set conditions that it is instructed to follow. For example, the EA might place a buy order when a major currency pair breaches an RSI of 70.
The key point here is that the forex EA operates in an autonomous manner. As such, once you load the EA into MT4, you won’t need to lift a finger.
Whether or not you are able to make a profit from your chosen EA remains to be seen. In fact, it can be somewhat nerve-wracking to allow the software to make decisions on your behalf and ultimately - trade with your capital.
On the other hand, if you are able to locate a forex EA that has the capacity to make consistent gains - you can effectively make money in a 100% passive manner.
There are several other benefits that come with a successful forex EA, such as:
- The EA will trade 24 hours per day
- It can trade as many currencies as it has been programmed to follow
- It can take advantage of scalping and arbitrage opportunities with ease
- It does not make reckless or emotional decisions
- It does not suffer from fatigue
With that said, there is every chance that your forex EA goes on an awful run of form when you are away from your device - subsequently whipping your account balance out. To counter this risk, you can tweak the EA through MT4 to ensure that it does not risk more than you want it to and that it always sets up stop-loss orders.
Once again, if you are planning to make use of a forex EA, you’ll want to test it out for several weeks via a demo account. At the end of your testing phase, you should have a clear idea of whether or not the EA has what it takes to make you consistent, long-term gains.
Forex Copy Trading
An additional option that you might want to consider as a newbie forex trader is that of ‘copy trading’. This is a feature offered by several platforms in the online space - albeit, eToro is the preferred option.
This is because eToro is a heavily regulated broker that is easy to use, it offers heaps of forex pairs, and you can deposit funds instantly with a variety of payment methods.
The main concept of the eToro copy trading tool is that you will be copying the buy and sell orders of an experienced, proven trader. You can choose which copy trader you wish to use by researching their historical trading performance.
Each and every position the trader has ever made at eToro is publicly available - meaning that you can make an informed decision before parting with your money.
Here’s an example of how eToro and its copy trading feature can allow you to trade forex without you needing to do any of the work:
- After researching the many profiles available at eToro, you decide to invest $5,000 into a forex trader that has a long-standing track record of outperforming the market.
- On day one, the trader risks 1% of their portfolio on a EUR/USD buy order. The trader applies leverage of 1:20 on the position.
- In turn, your portfolio will place the exact same order - but proportionate to what you invested.
- So, a 1% stake on your $5,000 investment means that you are risking $50 - with leverage of 1:20 also applied.
- Later in the day, the trader closes the EUR/USD position - making gains of 2.9%.
- On your stake of $50 - that’s a profit of $1.45. When you factor in the leverage of 1:20 - that’s a total profit of $29.
All in all, you were able to make that $29 without needing to do any research or place any orders.
Step 6: Choose a Forex Broker to Trade With
Irrespective of whether you plan to day trade, swing trade, or make use of a forex EA or signal service - you will need to open an account with a forex broker.
With millions of people now trading forex online - it goes without saying that there are thousands of forex trading platforms that allow you to trade from the comfort of your home.
As such, knowing which forex broker to trade with can be a time-consuming process - as no two platforms are the same.
Below we discuss some of the most important factors that you need to look out for to help you find a broker that meets your trading goals.
Licensing and Safety
If you want to make money by trading forex online, you need to risk your own hard-earned capital. Therefore, you need to be 100% sure your chosen forex broker is safe and secure - and that it plays by the rules.
In order to evaluate the legitimacy and credibility of an online broker - you need to check what its regulatory standing is like. That is to say, does the broker hold a license and if so - which body was it issued by?
Some of the most reputable forex broker license issuers include:
- Financial Conduct Authority (FCA) - UK
- Cyprus Securities and Exchange Commission (CySEC) - Cyprus
- Australian Securities and Investments Commission (ASIC) - Australia
- Commodity Futures Trading Commission (CFFC) - US
- Financial Services Agency (FSA) - Japan
You might come across online forex brokers that are regulated by less reputable license issuers, too. Typically, these are located ‘offshore’ and might include bodies located in:
- The British Virgin Islands
- Cayman Islands
Fees and Commissions
We haven’t covered the ins and outs of forex trading fees yet. However, this is actually one of the most important factors to consider by signing up to a new broker. After all, the more fees that you end up paying - the less profit that you get to keep for yourself.
The fees that online brokers charge can and will vary quite considerably. With that said, the most important fees that you need to look out for are as follows:
Trading commissions are charged when you place a trade and again when you close it. This might be a flat fee or a percentage of the amount you stake. The good news is that there is a selection of online forex brokers that allow you to trade commission-free, such as eToro.
The spread is the difference between the buy and sell price of a currency pair. For example, let’s suppose that your chosen broker is offering a buy and sell price on EUR/USD of 1.1775 and 1.1776. This amounts to a spread of 1 pip.
This means that regardless of whether you place a buy or sell order - you need to make a profit of at least 1 pip just to get back to the break-even point. It goes without saying that the tighter the spread, the better.
When you trade forex online, you are accessing leveraged products. This is because forex pairs are typically traded by financial institutions in ‘lots’ - which is usually 100,000 units of the respective base currency.
In turn, this means that you are effectively borrowing the funds from the broker - even if you do not apply leverage per-say. As such, you will need to pay a small amount of interest for each day that you keep the forex trade open. This is known as overnight financing - although some also refer to it as swap or rollover-fees.
Trading Tools and Features
You should also explore what trading tools and features your chosen forex broker offers. This might include:
- Copy-trading facilities
- Demo accounts
- Technical indicators
- Chart drawing tools
- Fundamental news stories
- Price alerts and notifications
- Support for MT4
- Negative balance protection
- Leverage and margin trading
- Economic calendars and trading calculators
Payments and Account Minimums
You should also check to see what payment methods the broker supports. We prefer debit/credit cards or e-wallets to bank transfers, as deposits are usually instant and burden-free. Check to see what, if any, fees apply on your preferred payment method.
You should also assess how long the forex broker takes to process withdrawal requests. Anything more than 48 hours and you should probably look elsewhere.
In addition to this, most forex brokers will have a minimum deposit policy in place. At eToro, this stands at just $100 - which is great if you want to start trading but you don’t want to risk too much money.
Best Forex Trading Strategies Revealed
There are many different types of forex trading strategies that you can deploy in the currency arena. The one that you opt for will depend on several factors - such as your skill-set and how actively you wish to trade.
It’s probably a good idea to stick with one strategy if you are just starting out. This way, you can ensure that you master it before attempting to learn a new one.
Below we list some of the most widely used strategies in the forex trading scene.
1. Day Trading
Day trading - as the name suggests, will see you place multiple orders throughout the day. The overarching concept is that you never keep a forex position open when the market closes. Instead, day traders might keep a position open for several hours or even minutes.
In turn, the amount of profit that a day trader will target from a position will be very small in percentage terms. After all, there is only so much that a currency pair can move in a few hours of trading. To counter this, the day trader will likely place a lot of orders throughout the day.
Additionally, it’s likely that they will rely heavily on leverage to turn small margins into big gains.
2. Swing Trading
While day traders keep positions open for minutes or hours, swing traders have much more flexibility. They might keep a position open for days or weeks - but rarely more than 2-3 months.
The main principle that swing traders follow is that the money should follow the trend - for as long as the trend remains in place. In other words, if AUD/NZD has been in an upward trajectory for several weeks, the swing trader will look to keep their buy position open for as long as the trend lasts.
Similarly, if EUR/USD is moving in a downward trajectory, the swing trader will look to capitalise on this by holding their sell order until a reversal looks likely. As a newbie, swing trading is simpler to master in comparison to day trading.
This is because fundamental research will play a much bigger role -which as we discussed earlier, is easiest to understanding than its technical analysis counterpart.
3. Scalping Trading
Scalping trading is a highly advanced form of trading that in truth - can take many years to truly master. In its most basic form, this style of forex trading will look to place hundreds of buy and sell orders throughout the day to capitalise on super-small price shifts.
While the margins on offer are minute, they can very quickly add up. This is, however, on the proviso that the scalping trader has more winning trades than losing ones.
The most conducive market conditions for scalpers is when a currency pair sits within a consolidation period. This is when the pair trades within a tight range for a prolonged period of time. In the case of a scalper, the longer the better.
- Let’s assume that EUR/CAD has been trading between 1.5505 and 1.5590 for several days
- This means that the pair has not gone higher than 1.5590 or lower than 1.5505
- As such, consolidation period sits within a tight range of just 0.54%
- From the perspective of a scalping trader, they are able to make quick, low-risk, and frequent profits for as long as the aforementioned consolidation period remains in place
Once you master the ins and outs of scalping trading, you’ll find that it is actually a low-risk way to access the forex markets. This is because you can place orders just above and below the identified consolidation range in anticipation of a breakout.
Forex Trading Strategies To Consider
There are various strategies you can consider using for your forex trading. However, before we delve into the details of those, you need to remember the following key aspects:
- Position sizing
- Risk management
- Exit strategy
It is also important to understand that there is no single solution or answer to arrive at the best and most profitable Forex trading strategy. What is best for you may not be the best for another forex trader. It means that your personality and ways of work influence the strategies and you must find the right mix of strategies to suit you. Don’t blindly copy someone else’s strategy because it could backfire on you.
Here are some of the best forex trading strategies you can try individually or in combination:
Limited pips a day
One of the common Forex trading strategies used by traders recently is to restrict to a limited number of pips, say 50-pips, a day. If offers an early market move leverage of certain highly liquid currency pairs such as the GBPUSD or EURUSD currency pairs. In this, you will place two positions or opposite pending orders as early as 7 am GMT candlestick is formed. As one of them activates through price movements, the other gets cancelled automatically. The profit target is put at 50 pips with the stop-loss order is placed somewhere between 5 and 10 pips above or below the 7 am GMT candlestick, after its creation. This strategy helps to manage risk.
Forex daily charts
According to expert Forex traders, daily charts are more effective than short-term strategies. This is because daily trade signals will be more reliable than shorter timeframes, and the potential profits are greater too. Although there are no profit guarantees in trading, you don't have to be concerned about daily news and random price fluctuations.
Forex daily charts are based on three main principles:
- Identifying the trend
- Staying focused
- Less leverage and larger stop losses
Forex 1-hour trading
In this strategy, you take advantage of a 60-minute time frame. You can use this strategy best to trade in currency pairs such as the EUR/USD, USD/JPY, GBP/USD as well as the AUD/USD. You can use a combination of buy trade rules or sell trade rules according to the indicators.
Forex weekly trading
Several forex traders prefer intraday trading because of the market volatility which offers more opportunities in narrower timeframes. However, forex weekly trading strategies are more flexible and stable. A weekly candlestick arms you with extensive market information based on which you can make decisions. Weekly Forex trading strategies are usually based on smaller position sizes and avoiding excessive risks.
Forex Strategies Based On Price Action
As mentioned elsewhere, the strategies are personal to the trader and hence they vary from one trader to another. However, regardless of what strategy you use, you will invariably use price action. Also known as technical analysis, these are divided mainly into two:
- trend following
- counter-trend trading
Both aim to generate profit by recognising and exploiting price patterns. In this context, you must be aware of the most important concepts - support and resistance. These terms are used to indicate the tendency of a market to bounce back from previous lows and highs.
- Support indicates a market's tendency to rise from a previously established low
- Resistance indicates a market's tendency to fall from a previously established high
Generally, the support and resistance can contribute to the market behaving in a certain expected manner. However, you should remember the three following key points:
- Support and resistance levels do not mean rigid rules, they are just indicators of a common effect of the behaviour of the participants
- Trend-following systems try to profit from the situation where support and resistance levels break down.
- The counter-trending style aims to sell when there's a new high, and buy when there's a new low
Trend-following forex strategies
Sometimes the market breaks out of a range and move below the support or above the resistance, setting off a trend. This happens naturally when support collapses and the market plunges into new lows, where buyers begin to hold off as they wait for a bottom to be reached. Meanwhile, some traders resort to panic selling or force out of their positions or build short positions because they believe it can go lower. This trend will continue until selling depletes and buyers gain confidence that the prices will not decline further.
In short, trend-following strategies inspire traders to buy once the market breaks through resistance and sell once they have fallen through support.
4-hour forex trading strategy
Another potentially profitable Forex trading strategy is the 4-hour trend following strategy which also doubles up as a swing trading strategy. Here, you can use a 4-hour base chart to check for potential trading signal locations. You can use a 1-hour chart as the signal chart to find out where the actual positions will be. Don’t forget that the timeframe for the signal chart must be at least an hour lower than the base chart.
Counter-trend forex strategies
These strategies assume that most breakouts do not develop into long-term trends. Therefore, you can use this strategy to profit from the tendency of prices to bounce off previously set highs and lows. Theoretically, counter-trend strategies are one of the best Forex trading strategies for building confidence as they have a high success ratio. However, it also needs better risk management.
Conclusion - Forex Trading
This guide on What is Forex Trading has explained everything you need to know about trading forex from the basics of what it takes to begin speculating on currencies today. We have covered many important forex principles, such as pairs, pips, leverage, spreads, and technical analysis.
This forex trading guide has also explored the best strategies to make money trading forex. To conclude, forex trading can be profitable, but traders must ensure that they have a risk management plan in place, alongside a suitable strategy.
With that said, by ensuring you put the legwork in and continuously build on your forex trading knowledge - there is every chance that you can make a success of things.
If you're craving to get started making money trading forex but you don't quite know where to begin, it might be worth considering a signal service. That way, you won't need to have an understanding of technical and fundamental analysis.
Additionally, the copy trading feature at eToro is also worth considering, as you will be able to actively trade forex without needing to lift a finger. Either way, just make sure that you understand the risks of forex trading and that you never stake more than you can afford to lose.
FAQs Forex Trading
What exactly is forex trading?
Forex trading is a speculating trade that enables traders to speculate on the future value of any currency pair – such as GBP/USD or AUD/USD. If the trader speculates on the price movement correctly, they will make a profit. Forex is the largest trading scene globally, with trillions of dollars worth of currency changing hands each day.
Is forex trading legal?
Yes, forex trading is legal in most regions of the world. Traders should, however, ensure that they are opening an account with a forex broker that is fully regulated.
Which is the most profitable forex strategy?
There are many profitable forex trading strategies traders can use. However, while one forex strategy might work for one trader, it might not be suitable for the next. For example, seasoned traders might opt for a low-risk scalping strategy while beginners might find this strategy complex.
Is forex a good way to make money?
Forex trading offers the opportunity to make money from the price movements of currency pairs. In order to make money, traders will need to speculate correctly on whether the currency pair will rise or fall in value.
How much can you make trading forex online?
There really is no one-size-fits-all answer to this. After all, there are so many variables that you need to factor in. For example, the amount that you stake, whether or not you apply leverage, how actively you trade, and of course - what your win/loss ratio amounts to.
How much money do you need to trade forex?
In terms of account minimums, there are several brokers in the forex trading space that allow you to get started with a small amount of capital. eToro (great for UK and Australian traders), for example, requires a minimum deposit of just $200. You then have Forex.com (great for US traders) - which requires a minimum of just $100 when using your debit/credit card and no minimum at all when opting for a bank wire.
Can you trade forex on your phone?
You certainly can. In fact, the best forex trading platforms now offer a fully-fledged mobile app - which is usually available on iOS and Android devices. If your chosen broker doesn't offer a native app, you might still be able to trade forex on your phone. Albeit, you will need to do this through your mobile web browser.
Can I make a living day trading forex?
Anyone can make a living day trading forex, but most don’t. If you want to succeed in this space, then you need to dedicate countless hours learning your trade. This is an ongoing learning journey that also requires technical research and a firm understanding of fundamental analysis.
Which strategy is profitable in forex?
No forex strategy is guaranteed to be profitable. However, one that suits many different types of traders is the Fibonacci Flush. This can be used by day traders, scalpers, swingers, and more.
What is the most successful strategy in forex?
Trend trading is one of the most successful forex strategies. This can be achieved using various technical indicators, such as the stochastic oscillator and MACD. No currency trade is risk-free, however, so even the top forex strategies require plenty of research and careful consideration.