How to Start Trading on Forex - A Beginner's Guide

What is forex trading? Forex, also known as foreign exchange, can be described as a network of buyers and sellers, who transfer currency between each other at an agreed price. It is how individuals, companies and central banks convert one currency into another. 

Key Takeaways

●     Unlike shares or commodities, forex trading does not take place on exchanges but between two parties.

●     The forex market is run by a global network of banks, spread across four major forex trading centres in different time zones: London, New York, Sydney, and Tokyo. There’s no central location, therefore you can trade forex 24 hours a day.

●     The foreign exchange market is a global marketplace where traders exchange national currencies.

●     Forex works by simultaneously buying one currency while selling another.

What Is the Forex Market?

Many ask what is forex trading. The foreign exchange market is a global decentralised or over the counter (OTC) market for the trading of currencies. This market determines foreign exchange rates for every currency. It includes all aspects of buying, selling and exchanging currencies at current or determined prices. In terms of trading volume, it is by far the largest market in the world, followed by the credit market.

This market is open 24 hours, 5 and half days a week. There are various currencies traded around the world, within the biggest financial cities, which include London, Singapore, Zurich, New York City, Hong Kong, Sydney, Chicago, Tokyo, Frankfurt, Shanghai, and Paris. These cities are all in different time zones, meaning that trades are happening almost all the time.

How Does the Forex Market Work?

A trader buys one currency and sells another, and the exchange rate constantly fluctuates based on supply and demand.

Where Is It?

There is no dedicated physical location where trading takes place. Forex trading takes place in numerous locations around the world 24 hours a day.

Who Trades on It?

The forex market not only has many players but many types of players. Trading online forex can involve trades from Individual Investors, Commercial & Investment Banks, Central Banks, Investment Managers and Hedge Funds, Multinational Corporations.

What is a base and quote currency?

In forex, currencies are traded in pairs. The first currency is called the base currency and the second currency is called the quote currency. For example, AUD/USD, means that the base currency is the Australian dollar, and the quote currency is the US dollar. The quote currency is sometimes referred to as the counter currency.

The best way to understand base and quote currencies is in terms of exchange rates. An exchange rate of 1.14020, for example, would mean that 1 unit of base currency would cost 1.14020 units of quote currency. In this case, to own 1 AUD the equivalent of 1.14020 USD is needed. This means that the first currency in a pair is quoted against the second currency.

How Currencies Are Traded

Currencies are traded in pairs, so that in every trade one currency is exchanged for another at a given rate, determined by the market. These pairs look something like EUR/USD = 1.08. This means that one Euro buys USD at $1.08. The base currency appears first and the quote currency (or counter currency) second.

There are more than 170 currencies worldwide, and the U.S. dollar is involved in most of the forex trading. For a trader, it’s important to know its code: USD. The second most popular currency in the forex market is the euro, it’s accepted in 19 countries in the European Union (code: EUR).

Other main currencies, in order of popularity, are the Japanese yen (JPY), the British pound (GBP), the Australian dollar (AUD), the Canadian dollar (CAD), the Swiss franc (CHF) and the New Zealand dollar (NZD).

How Forex Trades Are Quoted

Understanding the quotation and pricing structure of currencies is essential for anyone wanting to trade in the forex market. Market makers tend to trade specific currency pairs in set ways, either direct or indirect, which means understanding the quote currency is paramount.

A currency pair's exchange rate reflects how much of the quote currency is needed to be sold/bought to buy/sell one unit of the base currency. As the rate in a currency pair increases, the value of the quote currency is falling, whether the pair is direct or indirect.

For example, the cross rate between the U.S. dollar and the Canadian dollar is denoted as USD/CAD and is a direct quote. This means that the CAD is the quote currency, while the USD is the base currency. The CAD is used as a reference to determine the value of one USD. From a U.S.-centric point of view, the CAD is the foreign currency.

On the other hand, the EUR/USD denotes the cross rate between the Euro and the U.S. dollar and is an indirect quote. This means that the EUR is the base currency, and the USD is the quote currency. Here, the USD is the domestic currency and determines the value of one EUR.

Types of Currency Pairs

Major, Minor and Exotic

There are many currency pairs for traders to choose from when placing a trade in the forex market. Major currency pairs are any pair that include the US dollar (USD), which currently holds the position of the largest economy in the world. Major pairs are the most widely traded currencies in the foreign exchange market. Here are the 7 major forex pairs that are considered to be the most popular across the world, all of which can be traded on using spread bets and CFDs:

●     The euro and US dollar: EUR/USD

●     The US dollar and Japanese yen: USD/JPY

●     The British pound sterling and US dollar: GBP/USD

●     The US dollar and Swiss franc: USD/CHF

●     The Australian dollar and US dollar: AUD/USD

●     The US dollar and Canadian dollar: USD/CAD

●     The New Zealand dollar and US dollar: NZD/USD

The major pairs make up 75% of all forex trades. The majors are the most liquid and widely traded in the forex market.

Minor trading pairs occur when a major currency is traded with another, such as the Swiss Franc and the Euro. Without the appearance of the US dollar, the currency pair in question is defined as a minor currency pair.

An exotic currency pair is a term used to describe the trading of a developing economy’s currency – as either the base/counter currency – with another major currency.

What affects the forex market?

Global activity in foreign exchange trading means that events happening worldwide significantly impact forex more than ever before.

Central banks

In its simplest context, Central Banks are responsible for overseeing the monetary system for a nation (or group of nations); however, central banks have a range of responsibilities, from overseeing monetary policy to implementing specific goals such as currency stability, low inflation, and full employment.

Central banks also generally issue currency, function as the bank of the government, regulate the credit system, oversee commercial banks, manage exchange reserves and act as a lender of last resort.

News reports

Forex traders are drawn to news releases for their ability to move forex markets. 'News' refers to economic data releases such as GDP and inflation, and forex traders tend to monitor such releases considered to be of 'high importance'.

Market sentiment

Essentially, market sentiment is the consensus among investors around the current state of the markets or a given security.

The general attitude among investors can cause fluctuations and price movements in the stock market. A common example of stock market sentiment is that prices rise when there’s a bullish market sentiment and fall when investors are feeling bearish.

Types of Markets

There are different markets within Foreign Exchange which include: Spot market (the largest), forwards and futures which are most popular with financial firms and companies.

Spot Market

Transactions demand quick payments at the prevailing exchange rates. It requires immediate currency delivery or exchange on the spot- often within 48 hours. Spot transactions are those in which currency exchange occurs two days following the contract date. The spot rate is the effective exchange rate for a spot transaction, and the spot market is the market for such transactions. When an increase or decrease in the commodity’s price occurs between the actual agreements and traded time, traders face uncertainty. Spot market traders are less prone to such uncertainties in the market.

Forwards and Futures Markets

The forward market involves transactions in which exchange takes place at a specified date in the future for a specific price. In other words, the forward currency market entails making a contract today to purchase or sell foreign currency in the future. Forward rates are similar to spot rates, except the delivery takes place much later. However, there may be differences between the spot and forward rates. The difference is the forwarding margin or swap points. In addition, traders can customise the period of delivery at their will. This exchange helps exporters and importers avoid the challenges of rate fluctuations by using relevant forward exchange contracts.

A futures contract is another version of a forward contract traded publicly on a futures exchange. It includes the price and the time in the future to buy or sell an asset, just like a forward contract. Unlike a forward contract, a futures contract has a fixed contract size and maturity date. Futures can only be exchanged on an organised exchange, and they undergo competitive trading. A forward contract does not require margins, unlike all players in the futures market. Furthermore, traders must pay an initial margin into a collateral account to create a future position.

Uses of the Forex Markets

Currencies are typically uncorrelated with other asset classes, meaning that their performance does not necessarily move in tandem with the stock or bond market.

2 standout features of currencies as an asset class:

●     Individuals can earn an interest rate differential between two currencies.

●     Individuals can profit from change in the exchange rate.

Forex for Hedging

Forex hedging is the act of strategically opening additional positions to protect against adverse movements in the foreign exchange market.

Hedging itself is the process of buying or selling financial instruments to offset or balance your current positions, and in doing so reduce the risk of your exposure. Most traders and investors will seek to find ways to limit the potential risk attached to the exposure, and hedging is just one strategy that they can use.

Forex for Speculation

This form of trading is where traders look to profit from market price movements - whether the market goes up or down. It stands in contrast to traditional investing, which looks deeply at the fundamental values of investment.

The art of speculation is not fixed in a single direction. This means that speculation can allow us to buy an asset (if we expect its price to increase) or sell an asset (if we expect its price to decrease).

Is Forex Trading Safe for Beginners - Risks to be aware of

One of the reasons more and more traders flock to the Forex markets is that the barriers to entry to trading currencies are so low. All you need to start trading is a computer, a small amount of capital, internet connection to access your online trading platforms, and (most importantly) trading knowledge.

Below are risks you should be cognisant of:

Leverage Risk

Leverage is, in general, a powerful and useful feature of forex trading. It gives you the flexibility to take significant positions on key currency pairs without tying up excessive amounts of capital and magnifies the size of any profits you might make. However, leverage can be dangerous. If you are wrong about a trade, it acts to magnify your losses.

Interest Rate Risk

The interest rate risk is the possibility that the value of an investment (for example, of a bank) will decline because of an unexpected change in interest rate.

Generally, this risk arises on investment in a fixed-rate bond. When the interest rate rises, the market value of the bond declines, since the rate being paid on the bond is now lower than the current market rate. Therefore, the investor will be less inclined to buy the bond as the market price of the bond goes down with a demand decline in the market. The loss is only realised once the bond is sold or reaches its maturity date.

Higher interest rate risk is associated with long-term bonds, as there may be many years within which an adverse interest rate fluctuation can occur.

Interest rate risk can be minimised either by diversifying the investment across a broad mix of security types or by hedging. In case of hedging, an investor can enter an interest rate swap.

Transaction Risk

Transaction risk refers to the adverse effect that foreign exchange rate fluctuations can have on a completed transaction prior to settlement.

●     Transaction risk is the chance that currency exchange rate fluctuations will change the value of a foreign transaction after it has been completed but not yet settled.

●     It is a form of currency exchange risk.

●     Transaction risk will be greater when there exists a longer interval between entering a contract or trade and ultimately settling it.

How to Start Trading Forex - The Basics

When you learn how to trade forex, it's not hard to see why it is such a popular market among traders. Learn forex trading for beginners by understanding the basics of how does forex trading work in South Africa.

Decide how you’d like to trade forex

A lot of trading takes place between major banks and financial institutions, which buy and sell massive amounts of currency every single day. For individual traders who don’t have the means to make billion-dollar forex trades, there are two main ways to get involved: forex CFDs or trading fx via a broker.

Learn how the forex market works

The meaning of forex? One of the first things to learn when you want to trade currencies is how the forex market operates, which is very different to exchange-based systems such as shares or futures.

Instead of buying and selling currencies on a centralised exchange, forex is bought and sold via a network of banks. This is called an over-the-counter, or OTC market. It works because those banks act as market makers – offering a bid price to buy a particular currency pair, and a quote price to sell a forex pair.

Open an account

If you want to trade forex via CFDs, you’ll need an account with a reputable trading provider.

Build a trading plan

Building a trading plan is particularly important if you’re new to the markets. A trading plan helps take the emotion out of your decision making, as well as providing some structure for when you open and close your positions. You might also want to consider employing a forex trading strategy, which governs how you find opportunity in the market.

Once you have chosen a particular forex trading strategy, it’s time to apply it. Use your favoured technical analysis tools on the markets you want to trade and decide what your first trade should be.

Even if you want to be a purely technical trader, you should also pay attention to any developments that look likely to cause volatility. Upcoming economic announcements, may echo across the forex markets – something your technical analysis might not consider.

Choose your forex trading platform

Choosing a forex trading platform that works for you is imperative. Look for one that can be personalised to suit your trading style and preferences, with personalised alerts, interactive charts and risk management tools.

Those are the basics of forex trading.

How much do you need to start FX trading

Overall, the minimum amount of money you need to trade successfully or do a forex investment on the South African forex market is on average R1800 ZAR or $100 USD.

That’s how much money to start forex trading in South Africa. The majority of brokers have a minimum deposit requirement for opening a live trading account with them, and the size of this deposit will vary depending on the broker, their offering, and their targeted trading market.https://sashares.co.za/best-forex-brokers-south-africa/

While there are some forex brokers who don’t have a minimum deposit requirement, most brokers won’t allow you to start trading without having first deposited into your live trading account.

Generally, the minimum deposit requirement across the broad range of brokers starts at $100, while with those brokers who don’t have a minimum requirement you could technically begin trading with as little as $1 (R15).

Forex Terminology to Know

Every industry has its own jargon and Forex is not different, here are a few terms that you should be familiar with.

Forex account

Forex accounts give investors and traders the ability to trade all major currency pairs and some emerging market pairs.

Micro forex accounts

A forex micro account allows beginners and retail traders to engage in foreign exchange trading using smaller trading sizes.

Mini forex accounts

●     A forex mini account allows beginners to engage in foreign exchange trading account using smaller trading sizes, known as mini lots.

●     Mini lots are one-tenth the size of a standard lot, meaning they represent 10,000 currency units instead of 100,000 units.

Standard forex accounts

The most common is a standard account with 100:1 leverage and standard lots up to $100,000 in notional value.

Ask

Refers to the lowest price at which a seller will sell the stock.

Bid

The price at which the forex broker is willing to buy (from you).

Contract for difference

Refers to a contract that enables two parties to enter into an agreement to trade on financial instruments based on the price difference between the entry prices and closing prices.

Leverage

Similar to a “loan” that the broker gives the trader so that the trader has more capital to trade with than what he or she initially deposited.

Spot Forex

The purchase or sale of forex 'on the spot', which means the exchange takes place at the exact point that the trade is settled.

Pip

The unit of measurement to express the change in value between two currencies.

Spread

The difference between the bid (sell) price and the ask (buy) price of a currency pair.

Margin

Margin is the collateral (or security) that a trader has to deposit with their broker to cover some of the risks that the trader generates for the broker.

Bear Market

A bear market is defined by a prolonged drop in investment prices — generally, a bear market happens when a broad market index falls by 20% or more from its most recent high.

Bull Market

A bull market is an extended period when stock prices rise, and investors are optimistic.

Broker

What is forex broker? A broker is an individual or firm that acts as an intermediary between an investor and a securities exchange.

Exchange

A marketplace where the trade of financial instruments such as commodities and securities occurs.

Close

A trade that is no longer active and has been closed by a trader.

Day Trading

The buying and selling of stocks, foreign exchange, commodities and other assets or financial derivatives during a single trading session.

Choosing the Best Forex Trading Platforms for Beginners

If you are interested in Forex trading for beginners, you can look up a list of forex brokers in South Africa. The best forex brokers for beginners all share three essential qualities:

The first and most important quality is the broker's status as a well-regulated and highly trusted brand. Second, is the provision of a user-friendly web-based platform with a balanced variety of educational resources. Third is access to quality and actionable market research.

Trust

Trusting your trading platform is essential. You need to be sure about the accuracy of quoted prices, speed of data transfer and the fast execution of orders.

You should be able to get information in real time, the platform should always be available so that you can rest assured that it’s the best forex trading platform in South Africa.

Security

It’s impossible to separate trading and data security. In an era where information is digital and global, keeping sensitive data safe is the first concern of businesses and individuals.

Ensure that your broker is reputable and that you’re using a reputable trading platform, this will help decrease the risk of funds or personal information being tampered with.

Independent account management

A forex trading platform must enable you to manage your trades and account independently without the assistance of a broker. This assists in keeping you agile, you can act as soon as a market moves.

Analysis

A vital part of a trader's success, especially those who trade frequently, is the ability to evaluate patterns in trading data.

Therefore, it's important to know whether the platform you choose already has an embedded analysis tool, or there’s an external tool that you can use which requires that you exit the platform. Most traders prefer technical analysis tools within the same platform that gives them information in real time.

Automated Trading Functionality

Auto trading enables you to carry out many trades in a small amount of time, with the added benefit of taking the emotion out of your trading decisions. That’s because all the rules of the trade are already built into the parameters you set. With some algorithms, you can even use your pre-determined strategies to follow trends and trade accordingly.

Basic Forex Trading Strategies

In this quick guide, we’ll give you a rundown of 7 simple forex trading strategies as a forex trading guide for beginners. Each one is easy to understand and ideal for anyone who’s building up their skills.

By taking the time to master these fundamentals, you’ll be able to make simple trades with confidence. Better yet, you set yourself up to try more advanced trading techniques down the line.

Breakout

A “breakout” is any price movement outside a defined support or resistance area. Breakouts can occur when prices increase above resistance areas, known as “bullish” breakout patterns.

Moving Average Cross

A simple technical analysis tool that smooths out price data by creating a constantly updated average price. That average can be taken over different periods of time – anything from 20 minutes, to three days, to 30 weeks or any other time period a trader chooses.

Donchian Channels

Has 3 parts to it:

●     Upper band – the 20-day high

●     Middle band – the average of the Upper and Lower band

●     Lower band – the 20-day low

The Donchian Channel uses a default setting of 20-period, but you can adjust it to your preference (like 30-day, 50-day, etc.).

Scalp trading

In this trading method, traders buy and sell stocks multiple times within a day for a small profit.

Day trading

Involves actively buying and selling securities within the same day, trying to capitalise on short-term changes in price.

Swing trading

Refers to the medium-term trading style that is used by forex traders who try to profit from price swings.

Position trading

Buys an investment for the long term with the expectation that it will appreciate in value.

Charts Used in Forex Trading

If you want to understand how to trade forex in South Africa you need to familiarise yourself with the below. There are numerous charts out there, these are the 3 most popular in the trading world.

Line Charts

The simplest type of forex chart, it connects a series of selected price data points. The end product is a single line that moves from left to right, illustrating the peaks and troughs of price action. Common price points are opening and closing prices.

Bar Charts

A type of chart that depicts the periodic behaviour of a currency pair. In contrast to line charts, the bar chart includes four price points: the opening price (O), high (H), low (L), and closing price (C). Given this information, bar charts are often referred to as OHLC charts.

Candlestick Charts

Shows everything that a bar chart shows: a currency pair’s trading range as well as the bullish or bearish sentiment. This is done by noting the opening price, closing price, high, and low.

Forex Trading Example

Let’s have a look at a forex trading example, assume a trader believes that the EUR will appreciate against the USD. Another way of thinking of it is that the USD will fall relative to the EUR.

The trader buys the EUR/USD at 1.2500 and purchases $5,000 worth of currency. Later that day the price increased to 1.2550. The trader is up $25 (5000 * 0.0050). If the price dropped to 1.2430, the trader would be losing $35 (5000 * 0.0070).

Pros and Cons of Trading Forex

Pros Explained

Cons Explained

10 Tips for Beginner Forex Traders

If you’ve ever asked yourself this question, how to be a forex trader? Simply have a look at the below.

Know Your Markets

We cannot overstate the importance of educating oneself on the forex market. Take the time to study currency pairs and what affects them before risking your own capital; it’s an investment in time that could save you a good amount of money.

Stick to Your Plan

Creating a trading plan is a critical component of successful trading. It should include your profit goals, risk tolerance level, methodology and evaluation criteria. Once you have a plan in place, make sure each trade you consider falls within your plan’s parameters. Remember: you’re likely most rational before you place a trade and most irrational after your trade is placed.

Practice

Put your trading plan to the test in real market conditions. You’ll get a chance to see what it’s like to trade currency pairs while taking your trading plan for a test drive without risking any of your own capital.

Forecast the Market Conditions

Fundamental traders prefer to trade based on news and other financial and political data; technical traders prefer technical analysis tools such as Fibonacci retracements and other indicators to forecast market movements. Most traders use a combination of the two. No matter what your style, it is important you use the tools at your disposal to find potential trading opportunities in moving markets.

Know Your Limits

This is simple yet critical to your future success. This includes knowing how much you’re willing to risk on each trade, setting your leverage ratio in accordance with your needs, and never risking more than you can afford to lose.

Know When to Stop

You don’t have time to sit and watch the markets every minute of every day. You can better manage your risk and protect potential profits through stop and limit orders, getting you out of the market at the price you set. Trailing stops are especially helpful; they trail your position at a specific distance as the market moves, helping to protect profits should the market reverse. Placing contingent orders may not necessarily limit your risk for losses.

Leave Your Emotions Outside the Door

You have an open position and the market’s not going your way. Maybe you could make it up with a trade or two that don’t fit with your trading plan.

“Revenge trading” rarely ends well. Don’t let emotion get in the way of your plan for successful trading. When you have a losing trade, don’t go all-in to try to make it back in one shot; it’s smarter to stick with your plan and make the loss back a little at a time than to suddenly find yourself with two crippling losses.

Stay Slow and Steady

One key to trading is consistency. There’s lots of talk about is trading forex really worth it?  All traders have lost money, but if you maintain a positive edge, you have a better chance of coming out on top. Educating yourself and creating a trading plan is good, but the real test is sticking to that plan through patience and discipline.

Don't Fear Growth

While consistency is important, don’t be afraid to re-evaluate your trading plan if things aren’t working like you thought. As your experience grows, your needs may change; your plan should always reflect your goals. If your goals or financial situation changes, so should your plan.

Choose the Right Broker for You

It’s critical to choose the right trading partner as you engage the forex market. Pricing, execution, and the quality of customer service can all make a difference in your trading experience.

The Bottom Line

Traders with limited budgets may want to consider day trading or swing trading in smaller amounts. This is simpler in the forex market than in other markets. Those who have longer-term plans and more funds should consider longer-term fundamentals-based trading or a carry trade can yield profitability. Traders should focus on macroeconomic fundamentals that influence currency values, experience with technical analysis can be beneficial in assisting new forex traders be more profitable.

FAQ

Which Currencies Can I Trade in?