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Last updated on May 22nd, 2024
  Written by 
Cate Cook

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Cate Cook
Cate is a journalist by profession who started trading shares in 2008, after which she became a full time CFD day trader for more than 10 years. She now combines her passions for writing and trading at MarketMates. Join the blog to receive the latest articles from Cate.
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  Reviewed by 
Sam Eder

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Sam Eder
Sam is the Cofounder and CEO of MarketMates. He has traded since 2008 and is the Author of the Amazon best-seller The Consistent Trader. Over 42,000 traders have taken his Advanced Forex Course for Smart Traders. Join the blog to get his latest articles.
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How Forex Trading Works Explained for Beginners

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In this article

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At MarketMates, we are committed to providing accurate information. Our content undergoes a rigorous process of fact-checking before it is published. Learn more about our editorial policy.

In this article

Forex trading, also known as foreign exchange trading, is the process of buying and selling currencies with the aim of profiting from changes in their exchange rates.

It is the largest and most liquid financial market in the world, with an average daily trading volume exceeding $6.6 trillion.

In this comprehensive guide, we’ll explore how forex trading works, covering everything a beginner needs to know.

How does forex trading work?

Forex trading involves the exchange of one currency for another for an agreed exchange rate.

Currencies are traded in pairs, such as EUR/USD or AUD/JPY, where the first currency is known as the base currency, and the second currency is the quote currency.

The exchange rate indicates how much of the quote currency is needed to purchase one unit of the base currency.

The Forex Market

Forex trading takes place over-the-counter (OTC), meaning that transactions occur directly between parties without a central world exchange.

Participants in the forex market include banks, financial institutions, corporations, governments, and individual retail traders.

Trading occurs 24 hours a day, five days a week, across different time zones, allowing traders to take advantage of market opportunities almost around the clock 24/7.

It relies on a network of banks, financial institutions, brokers, and individual traders, all interconnected through electronic trading platforms.

How do I start trading forex?

The mechanics of trading forex are relatively simple. Anybody with a computer and an internet connection can start trading forex almost immediately.

However, it takes a lot of time and effort and determination to become really good at it.

These are the basic steps involved in starting to trade forex:

  1. Learn how to trade: Before diving into forex trading, educate yourself about the basics of forex trading, including what are currency pairs, how to read trading charts, how to develop a trading strategy and risk management principles
  2. Choose your charting program: To trade forex you are going to need to view trading charts, which will tell you the price trends of different currency pairs. There are many different charting programs available for traders. 
  3. Choose your broker: Select a forex broker that offers competitive pricing and a reliable trading platform. Here at MarketMates we offer subscription-based trading. This means for a flat monthly fee, you have unlimited trading per month, with no additional charges per trade. We also have a free plan for new traders with no monthly fees or charges. 
  4. Open your trading account: Once you’ve chosen a broker, open a trading account and fund it with the amount you’re willing to risk. You should never trade with money that you need for your essential living costs such as housing and food.
  5. Develop a trading plan: Create a detailed trading plan outlining your goals, risk tolerance, and trading strategy. Stick to your plan and avoid emotional decision-making.
  6. Practice with a demo account: Before trading with real money, practice trading with a demo account to familiarise yourself with the trading platform, and to test your trading strategy without risk.
  7. Start trading: Once you feel comfortable with your trading skills, start trading with real money, but remember to start small and gradually increase your position size as you gain experience.
  8. Reflect, and continue learning: Forex trading is a journey where you can learn more every day. Even traders who have been trading for years always have something new to learn.

We have years of trading experience here at MarketMates. However, we never stop learning how to improve as traders.

If you want to learn how to trade like a pro, you can take our free course:

 The Advanced Forex Course for Smart Traders 2.0

What does forex trading consist of?

Once you’ve chosen your forex broker, you’ll need to download software called a trading platform.

This software connects you to the international forex market through your broker, and allows you to buy and sell currencies.

Through your trading platform you carry out all your trading. It allows you to choose which currency pair you wish to trade, and how much of that currency you wish to buy and sell.

You do this by simple keyboard entries specifying the relevant numbers and selections you wish to choose.

You will also need to download or log into your chosen charting program, such as TradingView.

Steps involved in forex trading

Forex trading consists of the following steps:

  1. Choose your currency pair: Identify the currency pair you want to trade, considering factors such as the time you have available to trade, the current price trend, market volatility, and your trading strategy. Currency pairs are categorised into major, minor, and exotic pairs based on their liquidity and trading volume.
  2. Conduct market analysis: Carry out technical analysis by analysing price charts, identifying trends, and using technical indicators to make your trading decisions. You may also want to think about doing some fundamental analysis, by reading about central bank policies and geopolitical events that may impact currency prices.
  3. Decide on your trade entry point: Identify potential entry points based on your trading strategy, technical analysis, and market conditions. Look for a simple entry point based on a support or resistance level, a price breakout, or a technical indicator trigger to increase the probability of a successful trade.
  4. Decide on your stop-loss point: Determine your stop-loss level based on your risk management strategy and the maximum amount of capital you’re willing to risk on a trade. You place your stop-loss order at a level that will protect your capital in case the trade moves against you.
  5. Decide when you will exit the trade, and how: Set your take-profit targets based on your trading strategy, risk-reward ratio, and potential support and resistance levels. Take-profit targets should be realistic and achievable, and guarantee a favourable risk-reward ratio.
  6. Determine your position size: Calculate your trade position size based on your risk tolerance, account size, and the distance between your entry and stop-loss levels. Use a position sizing calculator to determine the optimal position size for each trade.
  7. Place your trade: Once you have all necessary parameters in place (such as your entry, exit and stop-loss points) place your trade using your trading platform. This is a relatively simple process and most trading platforms are very intuitive to use.
  8. Monitor and manage your trade: Monitor your trade closely after entering the market, keeping an eye on price movements and market developments. Adjust your stop-loss and take-profit levels if necessary, based on changes in market conditions or new information. Consider scaling in or out of trades to manage risk and maximise your profit potential.
  9. Close your trade: Close your trade when it reaches your predetermined take-profit or stop-loss levels. Alternatively, use trailing stop-loss orders to automatically adjust the stop-loss level as the trade moves in your favour.
  10. Review and analyse your performance: After closing a trade, review and analyse its outcome to identify strengths and weaknesses in your trading strategy. Keep a trading journal to record details of each trade, including entry and exit points, reasons for the trade, and lessons learned.

It is a good idea to continuously evaluate and refine your trading approach based on feedback and experience to improve your trading performance over time.

Stay updated on market developments, trading strategies, and risk management techniques through ongoing education and learning.

By following these steps in your forex trading journey, you can make informed decisions and learn to trade like a pro.

Get this week's best trading content

Lessons for all levels of trader. Nail the basics, master your mindset and learn advanced techniques.

Cate Cook

Cate Cook

Cate is a journalist by profession who started trading shares in 2008, after which she became a fulltime CFD day trader for more than 10 years. She now combines her passions for writing and trading at MarketMates. Join the blog to get the latest articles from Cate.
Cate Cook

Cate Cook

Cate is a journalist by profession who started trading shares in 2008, after which she became a fulltime CFD day trader for more than 10 years. She now combines her passions for writing and trading at MarketMates. Join the blog to get the latest articles from Cate.

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General Advice Warning: From time to time, you may receive general non-binding advice from us. This information is intended to be general and is not personal financial product advice. It does not take into account your objectives, financial situation, or needs. Before acting on any information, you should consider the appropriateness of the information provided and the nature of the relevant financial product having regard to your objectives, financial situation, and needs. MarketMates is not liable for or held responsible for any loss, financial or otherwise in relation to information received from MarketMates.

© 2024 – MarketMates.
All rights reserved | Privacy Policy | Risk Disclosure

General Advice Warning: From time to time, you may receive general non-binding advice from us. This information is intended to be general and is not personal financial product advice. It does not take into account your objectives, financial situation, or needs. Before acting on any information, you should consider the appropriateness of the information provided and the nature of the relevant financial product having regard to your objectives, financial situation, and needs. MarketMates is not liable for or held responsible for any loss, financial or otherwise in relation to information received from MarketMates.

© 2024 – MarketMates.
All rights reserved | Privacy Policy | Risk Disclosure

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