Forex Trading Basics
Everything you need to know to start trading currencies. From understanding pips to choosing your first broker.
What is Forex Trading?
Forex (FX) is the global marketplace for exchanging national currencies. It's the largest financial market in the world, with $7.5 trillion traded daily.
When you travel abroad and exchange dollars for euros, you're participating in forex. When you trade forex online, you're speculating on whether one currency will strengthen or weaken against another.
If you think the Euro will rise against the US Dollar, you buy EUR/USD. If you're right and the Euro strengthens, you sell for a profit. If you're wrong, you take a loss.
Key Terms You Need to Know
Currency Pair
Two currencies quoted against each other. EUR/USD means the Euro vs US Dollar. The first currency (EUR) is the base, the second (USD) is the quote.
Pip
The smallest price movement in forex, usually the fourth decimal place (0.0001). If EUR/USD moves from 1.1000 to 1.1001, that's 1 pip.
Spread
The difference between buy (ask) and sell (bid) prices. This is how brokers make money. Tighter spreads mean lower trading costs.
Leverage
Borrowed capital that amplifies your position. 1:100 leverage means $100 controls $10,000. Increases both profits AND losses.
Lot Size
Standard lot = 100,000 units. Mini lot = 10,000 units. Micro lot = 1,000 units. Most beginners start with micro lots.
Margin
The deposit required to open a leveraged position. With 1:100 leverage, you need $100 margin to control $10,000.
Major Currency Pairs
Major pairs include the US Dollar and are the most traded. They have the tightest spreads and highest liquidity.
| Pair | Name | Nickname | Typical Spread | Volume |
|---|---|---|---|---|
| EUR/USD | Euro/US Dollar | Fiber | 0.1-1.0 pips | Highest |
| GBP/USD | British Pound/US Dollar | Cable | 0.5-2.0 pips | Very High |
| USD/JPY | US Dollar/Japanese Yen | Gopher | 0.2-1.0 pips | Very High |
| USD/CHF | US Dollar/Swiss Franc | Swissie | 0.5-2.0 pips | High |
| AUD/USD | Australian Dollar/US Dollar | Aussie | 0.4-1.5 pips | High |
| USD/CAD | US Dollar/Canadian Dollar | Loonie | 0.5-2.0 pips | High |
Minor Pairs
Currency pairs without USD but with major currencies. Examples: EUR/GBP, EUR/JPY, GBP/JPY. Wider spreads than majors.
Exotic Pairs
Major currency paired with an emerging market currency. Examples: USD/TRY, EUR/ZAR. Widest spreads, higher volatility.
Forex Trading Sessions
Forex markets are open 24 hours, 5 days a week. Different sessions have different characteristics.
Sydney
5 PM - 2 AM ET
Opens the trading week. Lower volatility, good for AUD pairs.
Tokyo
7 PM - 4 AM ET
Asian session. JPY pairs most active. Generally lower volatility.
London
3 AM - 12 PM ET
Highest volume session. Major moves happen here. EUR and GBP most active.
New York
8 AM - 5 PM ET
Overlaps with London for peak volatility. USD pairs dominate.
Pro tip: The London-New York overlap (8 AM - 12 PM ET) is the most active period with the highest volatility and tightest spreads.
What Moves Currency Prices?
Understanding these factors helps you anticipate market movements.
Central Banks
Interest rate decisions from the Fed, ECB, BoE, and other central banks are the biggest market movers. Higher rates typically strengthen a currency.
Economic Data
GDP, employment (NFP), inflation (CPI), and PMI reports move markets. Better than expected = currency strength.
Geopolitical Events
Elections, trade wars, conflicts, and political instability create volatility. Safe-haven currencies (USD, JPY, CHF) benefit during uncertainty.
Market Sentiment
Risk-on vs risk-off moods affect currency flows. Risk-on favors AUD, NZD. Risk-off favors USD, JPY, CHF.
How to Start Forex Trading
Follow these steps to begin your forex trading journey the right way.
Learn the Basics
Understand how currency pairs work, what pips and lots mean, and how leverage affects your trades. Spend at least a week studying before trading.
Choose a Regulated Broker
Pick a broker regulated by FCA, ASIC, or CySEC. Look for tight spreads, fast execution, and a good trading platform.
Practice on Demo
Open a demo account and trade with virtual money for at least 2-4 weeks. Treat it like real money to build good habits.
Start Small
When you go live, start with micro lots and risk only 1% per trade. You can always increase size as you gain experience.
Find a regulated broker with tight spreads
Types of Forex Analysis
Successful traders use one or more of these approaches to make trading decisions.
Technical Analysis
Study price charts, patterns, and indicators to predict future movements. Tools include trend lines, support/resistance, moving averages, and RSI.
Best for: Short-term trading, day trading, scalping
Fundamental Analysis
Analyze economic data, central bank policies, and geopolitical events. Focus on interest rate differentials and economic strength.
Best for: Swing trading, position trading, long-term holds
Sentiment Analysis
Gauge market mood through positioning data (COT reports), news sentiment, and social media. Useful for contrarian signals.
Best for: Timing entries, identifying extremes
Common Beginner Mistakes
Avoid these pitfalls that trap most new forex traders.
Using Too Much Leverage
High leverage magnifies losses. A 1% move against you with 1:100 leverage wipes your account.
Solution: Start with 1:10 or lower. Increase only as you gain experience.
Trading Without a Plan
Entering trades based on gut feeling or tips leads to random, unprofitable results.
Solution: Write down your entry rules, exit rules, and position size before every trade.
Ignoring Risk Management
Not using stop losses or risking too much per trade. One bad trade shouldn't hurt you significantly.
Solution: Never risk more than 1-2% of your account on a single trade. Always use stop losses.
Overtrading
Taking too many trades hoping to find winners. Quality matters more than quantity.
Solution: Wait for your setup. 2-3 quality trades per week beats 20 mediocre ones.
Best Forex Brokers for Beginners
Regulated brokers with beginner-friendly platforms and educational resources.
AvaTrade
- 55+ forex pairs
- Spreads from 0.9 pips
- MT4, MT5, AvaTradeGO
- Free education & webinars
- Partner code: 128979
eToro
- 49 forex pairs
- Copy top traders
- User-friendly platform
- $50 minimum deposit
- Social trading features
Axi
- 70+ forex pairs
- Raw spreads from 0.0 pips
- ECN execution
- Free Autochartist
- Great for beginners
Forex Trading FAQs
Answers to the most common questions from forex beginners.
Is forex trading profitable?
Forex trading can be profitable, but most retail traders lose money. Studies show 70-80% of retail forex traders are unprofitable. Success requires education, discipline, proper risk management, and realistic expectations. Treat it as a skill that takes years to master, not a get-rich-quick scheme.
How much money do I need to start forex trading?
You can start with as little as $50-100 at most brokers using micro lots. However, $500-1,000 gives you more flexibility for proper position sizing. The key is starting small and only risking money you can afford to lose while you learn.
What's the best currency pair for beginners?
EUR/USD is the most popular choice for beginners. It has the tightest spreads, highest liquidity, and most predictable behavior. After mastering EUR/USD, many traders move to GBP/USD or USD/JPY.
Is forex trading legal?
Forex trading is legal in most countries, but regulations vary. In the US, brokers must be registered with the CFTC/NFA. In the UK, the FCA regulates forex brokers. Always trade with a broker regulated in your jurisdiction.
When is the best time to trade forex?
The London-New York overlap (8 AM - 12 PM ET) offers the highest liquidity and volatility for major pairs. For Asian pairs like USD/JPY, the Tokyo session (7 PM - 4 AM ET) is best. Avoid trading during low-liquidity periods like weekends and major holidays.
What's the difference between forex and stocks?
Forex trades currencies in pairs (EUR/USD), operates 24/5, uses higher leverage, and has no central exchange. Stocks trade company shares, operate during market hours, typically use lower leverage, and trade on exchanges like NYSE. Forex generally has lower transaction costs and higher liquidity.
Ready to Start Trading Forex?
Open a demo account to practice risk-free. When you're confident, start live trading with a regulated broker.
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