How to Trade Forex

Trading foreign currencies on the money market, also known as forex trading, can be an enjoyable hobby for many people and also a great source of income. Currently, the stock market trades about 22.4 billion USD/day; The foreign exchange market trades about 5 trillion USD/day. You can do online forex trading in many ways.

Table of Contents

Introduction to Forex trading

{“smallUrl”:”https://www.wikihow.com/images_en/thumb/a/aa/Trade-Forex-Step-1.jpg/v4-460px-Trade-Forex-Step-1.jpg”,” bigUrl”:”https://www.wikihow.com/images/thumb/a/aa/Trade-Forex-Step-1.jpg/v4-728px-Trade-Forex-Step-1.jpg”,”smallWidth” :460,”smallHeight”:345,”bigWidth”:728,”bigHeight”:546,”licensing”:”<div class=”mw-parser-output”></div>”}

Learn basic forex terms.

The currency you are using, or selling, is the base currency. The currency that you are buying is called the quote currency. In forex trading, you will sell one currency to buy another.
The exchange rate tells you how much you have to spend in the quote currency to buy one unit of the base currency.
A long position means you want to buy the base currency and sell the quote currency. In our example above, you want to sell dollars to buy pounds.
A short position means you want to buy the quote currency and sell the base currency. In other words, you sell British pounds and buy US dollars.
The bid price is the price the broker is willing to buy the base currency for in exchange for the quote currency. The bid price is the best price at which you want to sell your quote currency in the market.
The ask price, or ask price, is the price at which the broker sells the base currency in exchange for the quote currency. The asking price is the best you are willing to buy from the market.
Spread is the difference between the bid price and the ask price. ^{[1] X Research Source}

{“smallUrl”:”https://www.wikihow.com/images_en/thumb/8/86/Trade-Forex-Step-2.jpg/v4-460px-Trade-Forex-Step-2.jpg”,” bigUrl”:”https://www.wikihow.com/images/thumb/8/86/Trade-Forex-Step-2.jpg/v4-728px-Trade-Forex-Step-2.jpg”,”smallWidth” :460,”smallHeight”:345,”bigWidth”:728,”bigHeight”:546,”licensing”:”<div class=”mw-parser-output”></div>”}

Read forex quotes. In the forex quotes table there will be two types of data: the bid price on the left and the ask price on the right.

{“smallUrl”:”https://www.wikihow.com/images_en/thumb/9/91/Trade-Forex-Step-3.jpg/v4-460px-Trade-Forex-Step-3.jpg”,” bigUrl”:”https://www.wikihow.com/images/thumb/9/91/Trade-Forex-Step-3.jpg/v4-728px-Trade-Forex-Step-3.jpg”,”smallWidth” :460,”smallHeight”:345,”bigWidth”:728,”bigHeight”:546,”licensing”:”<div class=”mw-parser-output”></div>”}

Specify the currency you want to buy and sell in.

Forecasting the economy. For example, if you believe that the US economy will continue to weaken, and this is not good for the US dollar, you may therefore want to sell dollars in exchange for currency from a country with a strong economy. .
View a country’s trading position. If a country has a lot of popular goods, it is likely to export goods to make a profit. This trade advantage will boost the economy, thereby helping to boost the value of this country’s currency.
Political review. If a country is holding an election, its currency will appreciate if the winner of the election has a fiscally biased agenda. Also, if a country’s government loosens regulations on economic growth, this will push up the value of the currency.
Read economic reports. Reporting on GDP, or on other economic factors such as employment and inflation, of a country will have an effect on the value of that country’s currency. ^{[2] X Research Source}

{“smallUrl”:”https://www.wikihow.com/images_en/thumb/6/6a/Trade-Forex-Step-4.jpg/v4-460px-Trade-Forex-Step-4.jpg”,” bigUrl”:”https://www.wikihow.com/images/thumb/6/6a/Trade-Forex-Step-4.jpg/v4-728px-Trade-Forex-Step-4.jpg”,”smallWidth” :460,”smallHeight”:345,”bigWidth”:728,”bigHeight”:546,”licensing”:”<div class=”mw-parser-output”></div>”}

Learn how profit is calculated.

Use the unit “pip” to measure the change in value between two currencies. Usually, one pip equals 0.0001 change in value. For example, if the EUR/USD rate increased from 1.546 to 1.547, your currency value has increased by 10 pips.
Multiply the number of pips your account changes by the exchange rate to find out how much your account value has increased or decreased. ^{[3] X Research Sources}

Open an online Forex brokerage account

{“smallUrl”:”https://www.wikihow.com/images_en/thumb/8/89/Trade-Forex-Step-5.jpg/v4-460px-Trade-Forex-Step-5.jpg”,” bigUrl”:”https://www.wikihow.com/images/thumb/8/89/Trade-Forex-Step-5.jpg/v4-728px-Trade-Forex-Step-5.jpg”,”smallWidth” :460,”smallHeight”:345,”bigWidth”:728,”bigHeight”:546,”licensing”:”<div class=”mw-parser-output”></div>”}

Consider many different brokers. When choosing a broker, you must keep the following factors in mind:

Find a broker with 10 or more years of experience working in this field. With such experience, surely that company knows what they are doing and knows how to take care of the customers.
Check to see if the broker is under any major watchdog. If the broker voluntarily submits to government supervision, you can be assured of the broker’s level of honesty and transparency. Some of the watchdogs include:
- In the US: American Futures Association (NFA) and US Commodity Futures Trading Commission (CFTC)
- In the UK: Financial Conduct Authority (FCA)
- In Australia: Australian Securities and Investments Commission (ASIC)
- In Switzerland: Swiss Federal Banking Commission (SFBC)
- In Germany: Bundesanstalt für Finanzdienstleistungsaufsicht (BaFIN)
- France: Autorité des Marches Financiers (AMF)
Review the product the brokerage company offers. For example, if a brokerage firm both trades stocks and trades commodities, then that company has a rich customer base and a wide range of businesses.
See online reviews but be careful. Sometimes some brokers go to review sites to write reviews to improve their reputation. Based on the reviews you can get a rough understanding of the broker, but you should not trust it completely.
Visit the broker’s website. The brokerage firm’s website must look professional, and the affiliate links must work. If the site says something like “Coming soon!” or the website looks unprofessional, then you should stay away from that broker.
Check transaction costs for each transaction. You should also check the fees for transferring money from your bank account to your forex account.
Focus on the essentials. You need attentive customer support, easy and transparent transactions. You should also pay attention to brokers with a good reputation. ^{[4] X Research Sources}

Start trading

{“smallUrl”:”https://www.wikihow.com/images_en/thumb/b/b2/Trade-Forex-Step-9.jpg/v4-460px-Trade-Forex-Step-9.jpg”,” bigUrl”:”https://www.wikihow.com/images/thumb/b/b2/Trade-Forex-Step-9.jpg/v4-728px-Trade-Forex-Step-9.jpg”,”smallWidth” :460,”smallHeight”:345,”bigWidth”:728,”bigHeight”:546,”licensing”:”<div class=”mw-parser-output”></div>”}

Market analysis. You can try several different methods such as:

Technical Analysis: Technical analysis is looking at charts or previous data to predict the direction of currency movement based on past events. The broker will usually provide you with a chart, or else you can use a popular platform like Metatrader 4.
Fundamental Analysis: This analysis involves looking at the economic background and character of the country and based on this information to make trading decisions.
Psychoanalysis: This type of analysis is largely subjective. You’re basically trying to analyze market sentiment to figure out if the market is trending “bearish” or “bullish.” While market sentiment cannot always be certain, you can still make some guesses, and this will positively impact your trading. ^{[6] X Research Sources}

{“smallUrl”:”https://www.wikihow.com/images_en/thumb/7/73/Trade-Forex-Step-10.jpg/v4-460px-Trade-Forex-Step-10.jpg”,” bigUrl”:”https://www.wikihow.com/images/thumb/7/73/Trade-Forex-Step-10.jpg/v4-728px-Trade-Forex-Step-10.jpg”,”smallWidth” :460,”smallHeight”:345,”bigWidth”:728,”bigHeight”:546,”licensing”:”<div class=”mw-parser-output”></div>”}

Define margin trading. Depending on your broker’s policies, you may be able to invest little money and still make big trades.

For example, if you want to trade 100,000 units with a margin of 1%, the broker will ask you to put $1,000 in cash in your account for safety.
Both profit and loss will be added or deducted from the account. For this reason, the best general rule is to only invest 2% of your cash in a particular currency pair.

{“smallUrl”:”https://www.wikihow.com/images_en/thumb/1/14/Trade-Forex-Step-11.jpg/v4-460px-Trade-Forex-Step-11.jpg”,” bigUrl”:”https://www.wikihow.com/images/thumb/1/14/Trade-Forex-Step-11.jpg/v4-728px-Trade-Forex-Step-11.jpg”,”smallWidth” :460,”smallHeight”:345,”bigWidth”:728,”bigHeight”:546,”licensing”:”<div class=”mw-parser-output”></div>”}

Place trading orders. You can set different commands like:

Market order: With a market order, you allow your broker to execute your buy/sell at the current market rate.
Limit order: This type of order allows the broker to execute a trade at a specified price. For example, you can buy a currency when it reaches a certain price, or sell it if the currency drops to a specific price.
Stop Order: A stop order is an order that allows you to buy a currency above the current market price (in anticipation that the currency’s value will increase) or sell it below the current market price to cut a loss. ^{[7] X Research Sources}

{“smallUrl”:”https://www.wikihow.com/images_en/thumb/a/ab/Trade-Forex-Step-12.jpg/v4-460px-Trade-Forex-Step-12.jpg”,” bigUrl”:”https://www.wikihow.com/images/thumb/a/ab/Trade-Forex-Step-12.jpg/v4-728px-Trade-Forex-Step-12.jpg”,”smallWidth” :460,”smallHeight”:345,”bigWidth”:728,”bigHeight”:546,”licensing”:”<div class=”mw-parser-output”></div>”}

See profit and loss. Above all, don’t rely on emotions. The forex market is volatile, and you will see a lot of ups and downs. It is important that you continue to research and stick with your strategy. In the end, you will make a profit.

Advice

Try to use only about 2% of your total cash. For example, if you decide to invest $1,000, try using only $20 to invest in a currency pair. Prices in Forex are very volatile, and you have to make sure you have enough money to spend when the currency pair price drops.
Try using a demo account to make forex trades before investing real capital. That way you can be sure of the process and definitely should you join forex trading. After you always make the right trading decisions with a demo account, you can start doing it with a real forex account.
Limit losses. Let’s say you have invested 20 USD for the EUR/USD currency pair, and today you have lost 5 USD. But you haven’t lost your money yet. It’s important that you only use about 2% of your cash back per trade, plus a stop loss with that 2%. You still have enough capital to cover this period so you can keep the position from closing and make a profit.
Remember a loss is not a loss unless your position is closed. If your position is still open, your loss will only be calculated if you choose to close the position and take the loss.
If the currency pair moves against your will, and you do not have enough funds to cover it during this time, your order will be automatically cancelled. Therefore, you must make sure not to make this mistake.

Warning

More than 90% of day traders fail. If you want to learn the common pitfalls that cause you to make bad trading decisions, consult a trusted fund manager.
Check to make sure that the brokerage firm has a specific address. If the broker does not provide an address then you better find someone else to avoid being scammed.

Things you need

Brokerage account
Cash to invest.

Steps