Forex trading, also known as foreign exchange trading or FX trading, is the process of buying and selling currencies with the aim of profiting from changes in their exchange rates.
In this comprehensive guide, we’ll explore exactly what currency trading involves and how forex trading works, covering everything a beginner needs to know.
Key takeaways:
- What forex trading is and how it works
- How currency pairs are traded
- How to start trading step-by-step
- Key concepts every beginner must understand
What is Forex Trading?
Forex trading, also known as foreign exchange trading or FX 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 now exceeding $7.5 trillion, according to the latest survey from the Bank for International Settlements.
💡 In simple terms
Forex trading means exchanging one currency for another – with the goal of making a profit from price movements.
- What forex trading is and how it works
- How currency pairs are traded
- How to start trading step-by-step
- Key concepts every beginner must understand
A line graph showing the increase in volume of forex trading from 1998 to the present year 2024
Source: BIS Triennial Central Bank Survey
How does currency 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.
How the forex market is organised
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.
Forex traders don’t exchange currency in physical bank notes or coins. Rather, they electronically trade a derivative product offered by a forex broker, known as a Contract for Difference (CFD trading).
These financial products allow you trade the difference in the price of a currency pair, without actually owning the currency itself.
Forex trading relies on a network of banks, financial institutions, brokers, and individual traders, all interconnected through electronic trading platforms.
Three different types of forex market
1️⃣ Spot forex market
This involves the immediate exchange of a currency pair when the trade is finalised – meaning ‘on the spot’ – or within a very short time frame. Brokers such as MarketMates offer over-the-counter derivatives based on this market.
2️⃣ Forward forex market
A forward contract involves agreeing to buy or sell a specific amount of currency at a predetermined price, with the trade being settled on a specified future date or within a defined period in the future.
3️⃣ Futures forex market
This is an exchange-traded agreement to buy or sell a set quantity of a currency at a predetermined price on a specific future date.
Forex trading hours
Forex trading hours are divided into four major sessions:
- the Sydney session (also known as the Australian session, which includes New Zealand)
- the Tokyo session (also known as the Asian session, including Singapore, Japan and China)
- the London session (also known as the European session)
- the New York session (also known as the US session)
The diagram below shows the various session opening hours in global UTC time, and how the four main forex sessions overlap.
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 so you are able to use technical analysis to predict price movement.
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, effort, and determination to become really good at it.
⚠️ Important to know
Starting is easy, but becoming consistently profitable takes time, discipline, and strong risk management.
8 steps to start trading forex
1️⃣ 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.
2️⃣ Choose your charting and trading platform
To trade forex, you’ll need a trading platform to analyse price movements and place trades.
MetaTrader 5 (MT5) is one of the most widely used trading platforms in the world, offering:
- Live price charts
- Technical analysis tools
- Fast order execution
At MarketMates, we provide MT5 as the main trading platform so you can analyse and trade from the same place.
3️⃣ 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.
4️⃣ 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.
5️⃣ Develop a trading plan
Create a detailed forex trading plan outlining your goals, risk tolerance, and trading strategy. Stick to your plan and avoid emotional decision-making.
6️⃣ 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.
7️⃣ 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.
8️⃣ 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.
Here at MarketMates, Sam and I have over 30-years of trading experience between us. However, we never stop learning how to improve as traders. If you want to learn how to trade like a pro, you can take the free MarketMates course The Advanced Forex Course for Smart Traders 2.0.
Steps involved in fx trading
Forex trading consists of the following steps:
- 1️⃣ 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.
- 2️⃣ Conduct market analysis: Carry out technical analysis by analysing price charts, doing trend analysis, 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.
- 3️⃣ 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.
- 4️⃣ 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.
- 5️⃣ 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.
- 6️⃣ 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.
- 7️⃣ 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.
- 8️⃣ 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.
- 9️⃣ 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.
- 🔟 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.
Setting a stop-loss is one of the most important steps in protecting your capital. When the market moves against your expectations, a stop-loss helps limit your downside and prevents a single trade from causing major damage.
What is Copy Trading?
Copy trading allows you to automatically replicate another trader’s positions. In simple terms, you follow a more experienced trader and the system mirrors their trades in your account.
📱 Real example: CopyMate
CopyMate is a copy trading app designed for beginners, making it easier to review trader performance, manage risk, and start copying trades with just a few taps.
- Simple and intuitive interface
- View trader performance and risk
- One-tap copy trading
CopyMate currently supports mobile only, making it suitable for managing trades on the go.
⚠️ What to keep in mind with copy trading
- Past performance does not guarantee future results
- Different traders have very different styles and risk levels
- Even with copy trading, proper risk management still matters
Final thoughts on forex trading
When you’re first learning to trade fx as a beginner trader, it’s a good idea to continuously evaluate and refine your trading approach based on feedback and experience.
This will help you improve your trading performance over time.
We’d also encourage you to stay updated on market developments, trading strategies, and risk management techniques through ongoing education and learning.
Gaining an understanding of how to master trading psychology is also a vital step in your trading education.
By following these steps in your forex trading journey, you can learn how to make better trading decisions and learn to trade like a pro.
🧠 Trading psychology matters too
Many traders struggle not because their strategy is bad, but because of:
- Emotional trading
- Failing to stick to a plan
- Overtrading
Learning emotional control and discipline is essential for long-term success.
Build strong foundations before rushing into the market
If you’d like more information, read my free trading course for beginners.
If you want to learn how to trade like a pro, you can take the free MarketMates course The Advanced Forex Course for Smart Traders 2.0.
Until next time, wishing you safe and successful trading,
If you like this article then sign-up for our newsletter or join over 42,000 traders and get The Advanced Forex Course for Smart Traders 2.0. It’s 100% free.
Glossary
Here’s an explanation of some common FX trading words:
ASX – the Australian Securities Exchange, Australia’s stock market
BC – base currency, the first currency in a pair
Brokerage fee – a fee you pay to a stock broker or brokerage site each time you use their platform to buy or sell an asset
Bear market – describes a market environment in which the majority of prices are falling
Bull market – an optimistic market in which most prices are rising
Cable – a slang market term for one of the most popular currency pairs – GBP/USD
Carry trade: A strategy where a trader borrows in a currency with a low interest rate and invests in a currency with a higher interest rate to profit from the interest rate difference
CC – counter currency, the second currency in a pair
CFD – a ‘Contract for Difference,’ which is a type of derivative financial product that is traded based on the value of an underlying asset such as a currency pair or company share or cyptocurrency
Correlation: The statistical relationship between two assets, for example two currency pairs, indicating how they move in relation to each other – either positively, negatively, or not at all
Cryptocurrency – a form of virtual currency which only exists in the cyber world. Cryptocurrencies can also be traded online through CFDs in a similar way to standard FX trading
CPI – Consumer Price Index, which reflects the inflation rate of a particular country, and is a very important market indicator in FX trading
Day trading – a trading strategy that involves buying and selling shares in one day, and closing all positions before the end of the trading day
Derivative – a financial product that is based on the underlying value of another asset. CFDs, options and futures are all examples of derivatives
Forex brokerage: A company or platform that provides access to the forex market, facilitating the buying and selling of currencies for traders
Forex or FX trading – foreign exchange trading, converting one currency to another in order to profit from price changes
Futures contract – a contract to buy or sell an asset at a specified future date for a specified price
Greenback – a FX slang term for the American dollar, based on the colour of American $1 notes
Hedge – an investment strategy designed to offset or reduce your exposure to risk. It is related to the phrase ‘hedging your bets’
Leverage – using ‘borrowed’ money to invest so you can trade a larger position with less initial outlay. Most FX brokers offer leverage starting from 5% up to 60% or more
Loonie – the slang FX market term for the Canadian dollar (because Canadian dollar coins formerly pictured a loon on them)
Margin: The amount of money required to open and maintain a leveraged position, often expressed as a percentage of the total trade size
OTC – ‘over the counter’ – which describes the global forex market method of operation, where there is no centralised exchange, but rather trades take place directly between two parties through an electronic network connecting traders all over the world
Share trading – buying and selling shares in public companies through a stock exchange
Short trading: Selling an asset with the intention of buying it back later at a lower price to profit from a reduction in the price
S/R – support/resistance. This describes specific price levels using technical analysis on a trading chart. Support is a level below the current price which has previously acted as a floor or lowest selling point. Resistance is a price level above which the price has previously shown reluctance to climb
Slippage – The difference between the expected price of a trade and the actual price at which it is executed, with the difference often due to market volatility or delays
SL Order – Stop loss order – a type of trading order which automatically kicks in at a certain price and closes a trade to prevent catastrophic loss
Sterling – another name for the British pound
Swap fees: Costs incurred when holding a position overnight, related to the interest rate difference between two currencies in a forex pair
Take a Position – this describes the action of opening a trade – you are said to ‘take a position’ when you choose to open a trade
TP Order – Take profit order – a price order which is set which automatically closes a position to take the profit made on that trade
Volatility – a measure of how much the value of a particular asset fluctuates on a regular basis
Sources
Marketmates uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial guidelines to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
- Sam Eder – The Consistent Trader. https://www.amazon.com.au/Consistent-Trader-Winning-Trading-Psychology/
- Investopedia – How to start forex trading https://www.investopedia.com/articles/forex/11/why-trade-forex.asp
- Bank for International Settlements (BIS) – Triennial Central Bank Survey 2022 https://www.bis.org/statistics/rpfx22.htm
Frequently asked questions
How do you make money trading forex?
FX traders make money by buying and selling currency pairs, one currency against the other. The aim is to buy at a low price and sell at a higher price, or sell high and buy low, profiting from changes in the exchange rate between the two currencies you trade.
What are pips in forex trading?
A pip (percentage in point) is the smallest price movement in forex, typically the fourth decimal place for most currency pairs (0.0001). However, for trades involving the Japanese yen, there are only two decimal places because the yen has a lower value than the US dollar.
What is margin in forex trading?
The margin is the amount of money a trader must deposit to open a leveraged CFD position, which is usually a fraction of the full trade size. It is the ‘deposit’ amount you need to maintain in your trading account in order to keep your leveraged position open.
What is leverage in forex trading?
Leverage involves using your broker’s money to enable you to control a larger position with a smaller amount of initial trading capital. It is like a temporary loan from your broker which amplifies both potential profits and losses.
What is spread in trading forex?
The spread is the difference between the bid (sell) and ask (buy) price of a currency pair, and represents the commission charged by your broker to make a trade. With a MarketMates’ subscription-based trading account, you get the same spread as institutional traders, with no additional markup on spread.
What is swing trading in forex?
Swing trading is a short-term trading strategy where traders hold a position for several days or weeks, aiming to profit from price swings or trends in the market. The aim is to benefit from larger price movements than can be achieved by day trading.
What is the best strategy for forex trading?
The best strategy depends on the trader’s goals and style, but popular approaches include trend following, swing trading, and day trading. You should decide on your trading strategy after completing a trading plan.
What is day trading in fx?
Day trading is a trading strategy which involves opening and closing forex positions on the same trading day, with all positions closed by the end of the day. This means there is no overnight exposure to market risk.
What is liquidity in forex trading?
Liquidity refers to how easily a currency pair can be bought or sold without significantly affecting its price. It is a measure of how big the overall market is, with major currency pairs being far more liquid than the exotic currency pairs, which have lower liquidity.
What is swap in forex trading?
A swap is the interest fee or credit charged for holding a forex position overnight, based on the interest rate difference between the two currencies in a pair. It is also known as an ‘overnight holding fee’ in CFD trading.
