How Does Forex Trading Work? 5 Tips for Beginners on Forex

Kelly Yeung

ATFX.com Representative
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Trading currencies is exchanging one currency for another by buying one currency while selling the other to make a profit. Trading physical currencies is done via currency exchanges, while trading currencies online is done via brokerages. Currency trading is also known as Foreign exchange or Forex trading. As a trader, you will be trading virtually via a Forex broker without exchanging actual currencies.

Let’s now dive into the details of how Forex trading and the Forex markets work.


How Does Forex Trading Work?
As a Forex trader, you make money by buying and selling currency pairs. For example, you can buy the USD/JPY currency pair expecting it to rise in value so that you can sell it later. By buying the currency pair, you bet that the US dollar will rise in value while the Japanese yen falls. The online Forex markets are connected to the real world values of the currencies traded.

The Forex markets are the largest financial markets globally, with daily transactions exceeding $5 trillion. Therefore, there are multiple trading opportunities available to you daily. The majority of the transactions in the Forex markets are done by international banks, hedge funds, investment banks, institutions and governments.

As a retail trader, you should always trade in line with the dominant trend, typically set by the larger institutions mentioned above.

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Thanks to most people having easy access to the internet worldwide, Forex trading is now easily accessible to almost everyone worldwide. You can easily buy and sell currencies on the internet to make a profit from the comfort of your home. Unlike the stock markets, the Forex markets are open 24 hours a day, five days a week.

Here are some crucial facts about the Forex markets:
  • The major or main currencies, which are also the most traded globally, are the US dollar, the euro, the Japanese yen, the British pound, the Swiss franc, the Canadian dollar, the Australian dollar and the New Zealand dollar.
  • The major currency pairs consist of the major currencies paired with the US dollar, such as the euro/ against the US dollar, the US dollar/ Canadian dollar, etc.
  • Minor currency pairs are made up of the major currencies paired against each other instead of against the dollar, such as the euro/ against the British pound (EUR/GBP) and the Swiss franc vs the Japanese yen (CHF/JPY), and so forth.
  • Non-traditional exotic) currencies are the currencies of countries with high economic growth but with some challenges such as low liquidity and lack of trading volume. Such currencies are regarded as being quite risky as it is difficult to predict their future price direction. They include the Norwegian krone, Hong Kong dollar, Thai baht, and South African rand.
  • Non-traditional currency pairs consist of one currency other than the conventional ones and a single major currency.
Forex trading works in pairs where the value of one currency is measured against the other to make a currency pair and the broader Forex market. Currency pairs are written in this format EUR/USD, with the left currency being the base currency and the right currency being the secondary currency. The exchange rate refers to the price paid in the secondary currency to buy one unit of the base currency.

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Profit from currency trading is made via the difference between the bid and ask price of currency pairs. When a trader buys a currency pair such as EUR / USD for a specific amount, the trader will profit if the price rises and will suffer a loss if the price falls.

If a trader sells a specific currency pair, he will profit if its price falls and book a loss if the currency pair’s price rises. The movements of a currency pair depend primarily on its liquidity, which is determined by the supply and demand for each currency in the global forex markets. The major currency pairs are the most liquid.


5 Beginners tips to get started in Forex trading
  • Choose a reliable and licensed Forex broker that will protect your funds and adhere to the best practices required by regulators.
  • Choose a broker regulated by a top-tier regulator, preferably one offering deposit compensation if the company declares bankruptcy.
  • Research the services offered by the trading broker to know their trading costs and the quality of their customer service.
  • Confirm that your preferred broker offers all the right trading tools suitable for beginners who may be unfamiliar with how the markets work.
  • Learn about forex trading, including proper risk management, technical analysis, and trading psychology.

Advantages of Forex Trading
There are several reasons people choose to start trading currencies, including making an extra income from anywhere without going to an office. The second reason is the significant income potential provided by the markets compared to a traditional job. The multitude of profit opportunities in the Forex markets also makes it very attractive since it is the most liquid financial market globally.

The forex market is also the largest financial market worldwide and can be traded 24 hours a day, five days a week, unlike other markets that are closed for several hours each day. Currency trading also has lower costs compared to other assets such as stocks that have higher transaction charges. The high liquidity of the Forex markets also makes it easy for traders to quickly open and close trades to minimise losses and maximise profits.

Set up a Metatrader 4 account or Demo Account to kick start your trading journey now!


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