How to trade forex
Learn with us all about how to trade forex, as we translate the investment world through interactive chart stations, videos, snippets, visuals, infographics.

How to trade forex
table of contents
Chapter 1 – Educate yourself on the forex trading environment
The FX market
The FX market also known as foreign exchange, forex or currency market, is the largest by far market in the world, with the International Bank of Settlements recording a staggering $7.5 trillion daily volume / turnover.
The market facilitates transactions that involve the exchange of currencies, one against the other, and conducted in a decentralized manner across the globe via online brokers and banks. We will be focusing on how to trade forex through products such as CFDs.
Contracts for difference (CFDs), are derivative products. A trader, trades the price fluctuations without owning the underlying asset that can be shares, forex, commodities, indices, bonds, ETFs or cryptocurrencies.
CFDs are leveraged products and carry a significant risk of loss. They are more suitable for experienced traders.
Forex trading components
Take the EUR/USD pair as an example. Here the Euro is fighting against the US Dollar for a price. When EUR rises, USD falls and vice versa.
In the EUR/USD example, we have a major currency pair fight. There are 7 major currency pairs, and they get their name from being part of the elite currencies, that gather the majority of trading volume. These are EUR/USD, GBP/USD, USD/JPY, NZD/USD, USD/CAD, USD/CHF, AUD/USD.
You must have noticed that the all involve the USD. Other than majors, there are also other categories. The minors and the exotics.
Minors also known as crosses or cross pairs, can be defined by the fact that they still involve major currencies, but do not interact with the USD. Rather, they trade against one another. These are EUR/GBP, CHF/JPY, AUD/JPY, EUR/AUD etc.
Exotics are the most volatile type of currency pairs, since they get the least action. They involve a major currency although not always the case, trading against a less popular (low volume) currency, like the South African Rand, the Mexican Peso, the Hong Kong Dollar and many others.
Forex Trading hours
The forex market operates for 24 hours, from Monday to Friday. When one regional session opens, another closes due to the time difference. Some sessions overlap causing increased volatility for the currency pairs most traded in the regions. Here is a representation of forex trading hours.

Chapter 2 – Understand how forex pricing works
How to read a currency pair. The base currency, the quote currency, the pip and the spread
Continuing with the EUR/USD example above, we will now give it a hypothetical price:
- Symbol: EUR/USD
- Bid: 1.28000
- Ask: 1.28030
Firstly we have the currency pair, also referred to as Symbol on most trading platforms. The currency on the left (EUR) of the pair is known as the Base Currency. The currency on the right (USD), is called the Quote currency.
One unit of the base currency (in the example above, its 1 Euro) can be exchanged for the quote currency (USD), using one of the two prices (bid and ask).
If we choose to buy 1 Euro, we would use the ask price, also known as buy price at 1.28030. If we choose to sell 1 Euro, we would use the bid price, also known as sell price at 1.28000.
Note: When closing a transaction, we are reversing our initial position. If Euro was bought, on closing we would sell the Euro for the quoted price. If Euro was sold, on closing we would be buying it back.
Pip / fractional pips
In our example above, a price (either bid or ask) is quoted in multiple decimals. A pip, also known as percentage in point, denotes the 4th decimal in the price. In the past, a price was quoted in only 4 decimals, but over the years, a 5th decimal was added for more accuracy. This 5th decimal is known as a fractional pip, or point.
- Example of a pip move – In the price 1.28030, a move of the 4th decimal by 1 pip, would turn it to 1.28040.
- Example of a point move – In the price 1.28030, a move of the 5th decimal by 1 point, would turn it to 1.28031.
- Pip calculation formula: [Pip (0.00010)/current rate] x Contract size
- If the base currency is not USD, then we need to find the pip value in USD: Pip value in another currency x current USD rate
Spread
Spread is a term that describes the revenue of a broker, derived from the transactions of traders. It is calculated by identifying the difference between the bid and ask price. Depending on the model of the broker (STP, ECN, Market maker), the spread can be variable or fixed and tends to be different between brokers.
From the example above, the spread is 3 pips (or 30 points), since 1.28030 minus 1.28000 equals to 0.00030.
Long and short
Terminologies are used across the board when trading forex. Same goes for buying and selling. When a trader buys a pair, it is also known as placing a long position. When selling a pair, it is known as placing a short position.
Nothing changes regarding the direction of the trade, its just another way of referring to buying and selling.
Factors that affect price
Almost everything affects forex pricing which is one of the reasons that its highly looked at and traded in such large volumes. Various sources attempt to name some of the factors that affect forex prices, but a trader should always be vigilant and know what’s hot at any given moment.
The macro environment (macroeconomics) deals with economies as a whole. Indicators of each economy’s performance (by country) are released daily and can be viewed on economic calendars that list them, inform traders on previous data, give expectations/forecasts of analysts for what the new data will be, and finally release the actual result.
Such indicators include Gross Domestic Product (GDP), Consumer Price Index (CPI), jobless claims (in the US), manufacturing industrial, retail sales etc. Each of these can have a significant impact on the currency of the economy in question, they can have ripple effects on other economies closely linked, and move the currency pairs in any direction. Not all indicators affect equally, so every trader should do their due diligence and research accordingly.
Other factors include inflation, interest rates, politics and geopolitics, economic cycles, market sentiment, and correlations. Regarding correlations, some currencies move with other currencies or other assets, and some move against each other. If for example gold gets stronger for any given reason, we would expect to see a weakness in the USD since they are negatively correlated.
Chapter 3 – The logistics of forex trades
Margin: To trade forex, a transaction involves a collateral locked with a broker called margin. Margin requirements vary per broker, depending on their status of regulation (if regulated or not), and of course where they are regulated. These requirements are defined in the Key Information Document (KID) which a trader should go through and understand.
Margin call: Traders are notified that their account is reaching critical levels by what is known as a margin call. This is a very important tool that supports the risk management function we will explain later. If a margin call is triggered, traders must take immediate actions by either liquidating some positions to free funds and meet margin requirements, or deposit more funds into the account.
Stop-Out: If no action is taken on margin call, there is a serious danger of automatic liquidation by what is called stop-out. Stop-out level is almost never 0 (when there is 0 margin to be used). Instead, online forex trading brokers set it at a percentage level according to their policies. It could be 20%, 30% or more, of the account’s balance.
Leverage: Regulators enforce strict margin requirements on brokers to safeguard investors from leverage risks. Leverage acts as a multiplier to the margin, allowing entry to the forex market with a larger amount. A 1:100 leverage would mean that for every $1 used as margin, the trader enters with a $100 amount. Although the returns on this $1 trade are amplified 100 times, so is the risk. Trading with leverage is very risky and requires experience. Beginner traders should start with smaller size accounts.
With a leverage of 1:100, the contract specifications will be as follows:
Contract size: 100,000
Margin: 1,000 (contract / leverage)
Pip value: 10
Margin call at 50%: 500 (50% of 1,000)
Stop out at 30%: 300 (30% of 1,000)
With a leverage of 1:100, the contract specifications will be as follows:
Contract size: 10,000
Margin: 100 (contract / leverage)
Pip value: 1
Margin call at 50%: 50 (50% of 100)
Stop out at 30%: 30 (30% of 100)
With a leverage of 1:100, the contract specifications will be as follows:
Contract size: 1,000
Margin: 10 (contract / leverage)
Pip value: 0,10
Margin call at 50%: 5 (50% of 10)
Stop out at 30%: 3 (30% of 10)
(Trade size * interest rate of buying currency) / 365 days = long rate
(Trade size * interest rate of selling currency) / 365 days = short rate
Rollover fee = difference between long and short rates
Chapter 4 – Risk management
Online forex trading involves substantial risk of loss. To mitigate this risk, there are various tools and strategies that can be deployed by a forex trader. Everything described above, as well as what will follow aim to map out the environment and its elements which is the first step in minimizing any risk. Know your environment.
The next most important factor when learning how to trade forex is to utilize all the tools and techniques surrounding the actual trades, that will help traders manage their risk. Such tools include stop-loss and take-profit limits.
Stop loss: a limit a trader places on a position, that instructs the system to close the trade automatically in a loss. This is a predefined level, calculated by forex traders before-hand, and acknowledges the acceptable loss, should the market moves in the opposite direction.
Trailing stop: A variation of the stop-loss is the trailing stop, predefined at a percentage level below the current price. As the market moves, the trailing stop moves as well. Should the market move in the opposite direction, the position closes at the trailing stop. Should the position move in the correct direction, trailing stop continues to trace the price at the predefined percentage. In this case, the trailing stop, becomes a take profit since it can lock-in an amount of profit from the positive move.
Take-profit: a limit placed on the position that instructs the system to close the trade automatically in a profit. This is also predefined by forex traders and locks-in the desired profit.
Pending orders: There are 4 types of pending orders, that are queued in the system and only execute when specific conditions are met. These are buy/sell limit orders, and buy/sell stop orders.
- Buy/sell limit orders expect the price to change directions.
- Buy/sell stop orders expect the price to continue in the same direction.
Chapter 5 – Types of analysis
Fundamental analysis is the study of important financial and economic indicators. Depending on what is being studied, it can relate to a macro environment (economy) or a micro environment (company level). Fundamental analysis for forex trading, studies the macro environment unlike stock trading that studies both macro and micro. The goal of fundamental analysis is to find the real value of a security that will be derived from its sale on a future date.
Technical analysis is the study of charts (visual representations of price moves) through mathematical formulas known as technical indicators. Analysts in this category believe that the markets already took into consideration the fundamental aspects (markets discounted everything), and predicting the future is all about identifying the trend, the momentum strength, the volatility and the volume of transactions at a specified period.
Chapter 6 – Build a trading plan
Key takeaways of chapter 6
- Identify the trader type
- Apply risk management based on risk tolerance
- Analyze 3-5 major currencies. Majors get the majority of volume, therefore they are a good place to start
- Select the currency pairs to trade
- Pick the size and direction of the trade
- Test the strategy on a demo account
Identify the trader type
The Day Trader – Trades intraday. Positions are opened and closed within a day’s session and no positions are to be left open overnight.
The Swing Trader – Trades over a few days or weeks. The goal is short-to-medium term gains by taking advantage of swings and ranges (usually between support and resistance levels). Technical analysis might not be enough, so a broader fundamental outlook is required for the bigger picture.
The Technical Trader – trades based on technical analysis of price charts. Extensive use of chart patterns like head and shoulders, ascending/ descending triangles, as well as technical indicators from hundreds available to define a strategy.
The Fundamental Trader – Long term trading associated with buy and hold rather than short term profit from multiple transactions. A broader look into the economy or a company’s fundamentals in the case of stock trading. The aim is to quantify and qualify through financial ratios and economic indicators.
The Long Term trader (or position investor) can place trades that last from a few weeks to many years (think Warren Buffet). They hold onto a position over an extended period of time after identifying a trend that will take a while to materialize into profits.
If we were to become very specific, we could identify other categories like fixed income traders, arbitrageurs, scalpers, momentum traders, price action traders, contrarians, algorithmic traders, and the list goes on.
Apply risk management based on risk tolerance
Scalpers and day traders have a higher threshold for risk. They open multiple transactions and they do it using techniques that allow them to do so with small margin requirements. Long term investors usually have lower risk tolerance and apply different techniques to support their transactions.
Understanding and applying these techniques ensures that there are no surprises if the market moves in either direction. Any potential loss or profit is predefined by the calculated levels.
Analyze 3-5 major currencies.
This applies mostly for beginners. Not all markets and/or currencies need to be traded from the beginning. Major currencies and pairs accumulate the majority of trading volume, making them a good starting point to look into. Analysis can be fundamental, technical, historical, ready made from analysts of a broker or external.
Select the currency pairs to trade
The decision will be based on the day’s movers. Ready made analysis usually includes the day’s biggest movers and the ones that are expecting to hit target levels, known as support and resistance levels. All currency pairs move on a daily basis, but some more than others.
Pick the size and direction of the trade
By selecting the currency pairs to trade, forex traders also know the direction they will be taking. Whether the analysis was manually crafted, or conducted with the help of ready-made tools, the direction can either be long or short (or both in some strategies).
Test the strategy on a demo account
There is no need for a beginner trader to ride a live account immediately. Strategies can be tested on virtual accounts, also known as demo accounts using virtual money. Demo accounts allow forex traders to test the execution of brokers, the speed, the accuracy and the service. Bear in mind that they don’t always reflect exactly the live trading accounts. Demo accounts can be used in tandem with live accounts, or as stand-alone back testers. Irrespective of how they are used, they must always be part of the overall experience. They are free, so why not?
Chapter 7 – Choose an online broker
Selecting a broker might be the hardest task of all. A forex trader can choose the same broker used for the demo or another. There are thousands of brokers, so if forex traders followed all of the above chapters correctly, they will know which broker is the most suitable to their needs.
Open an account and follow the KYC requirements
Depending on the broker, Know Your Client (KYC) procedures can be extremely easy or extremely difficult. Choosing a heavily regulated broker, toughens their acceptance policy, requiring forex traders to supply added documentation. This can mean regular documentation might not be enough, maybe notarization of certain documents, maybe apostilled documents and even original documents in some cases. Lighter regulation (or no regulation) means looser acceptance policies but a riskier trading environment relative to funds and trading.
Fund your Real account
- Deploy the trading plan already in place.
- Open a transaction using the trading platform’s options and features. The most well-known platform in the market today is Metatrader from Metaquotes. Their latest version is MT5 but older versions of MT4 are still available to traditional traders.
- Monitor the transaction through the trading platform.
Close the transaction when ready to exit
Closing a transaction in a loss might be more profitable than leaving it open and risking further losses. This is why most traders prefer to automate the transaction closing, through the risk management tools mentioned above.

Chapter 8 – Keep learning
Part of the trading platforms is the journal or trading log. These allow forex traders to review their results at will and help them improve their skills. Many times, skills might not be enough to sustain a profitable account. Psychology plays a large role in how forex traders react to negative and./or positive live moves and the better they know themselves, the more resilient they become over the course of their trading careers.
Socializing with other traders and groups is very important since the shared knowledge and experience can go a long way. No one is alone in this, and $7.5 trillion worth of transactions is a testament to this. Whether through trading mentors, forums, blogs, social media platforms, trading academies, there are always ways to interact and discuss ideas and strategies. Evolving through these processes and exploring tools, technology, new strategies, automation and copy trading can make the all the difference while learning how to trade forex.
Chapter 9 – Trading example
RISK DISCLAIMER
All products available for trading by online brokers – and especially CFD products – must be considered complex financial instruments, they require extensive experience and involve a substantial risk of loss of part, or the entire investment amount.
We encourage all visitors of our website (including clients and partners) that are thinking of engaging in investments of any kind to carefully consider the risks involved as well as their financial standing, always seek independent advice, perform diligent research and never invest more than they can afford to lose
Chapter 10 – FAQs
Is forex trading profitable?
Forex trading is a very risky investment. Derivative products such as CFDs carry even more risk than traditional spot trading. This being said, there will always be losses and profits in all trading accounts irrespective of experience. Every forex trader must understand and accept this, and work differently to improve their potential for positive outcomes.
How to choose a forex broker?
Forex traders look for broker models, regulation, range of currencies, trading conditions, trading strategies allowed, testimonials and reviews, costs, banking and payment options. Forex traders also pay attention to how long the brokers have been established and overall reputation.
How much money is needed to trade forex?
Depending on the forex trader’s financial situation, goals, plan, risk tolerance, this may vary from case to case. A micro account can allow investments as small as $1-$2 and cents accounts even smaller. Demo accounts risk no money, so forex traders can actually learn to trade forex with minimum to no initial investment.
Is forex trading suitable for everyone?
Forex trading takes time and focus. Anyone interested to learn how to trade forex, must assign the necessary time, effort and resources to get where they want to go. Forex trading is not suitable for everyone since it can be complex and carry a substantial risk of loss. All brokers will advise due diligence, research and never investing more than a forex trader can afford to lose.
What is forex and how does it all work?
Forex is an abbreviation of foreign exchange. It involves currency transactions where one currency is exchanged for another. Online trading platform offered by forex brokers facilitate these transactions, amounting to $7.5 trillion.

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