What Is Forex Trading & How Can You Profit From It?

With over 80% of the world’s population being of the financial illiterate variety, it’s no surprise that there are so many people who want to learn about forex trading.

Foreign exchange trading is not as complicated as it may sound and is actually a very safe and profitable way to invest, with the right tools and knowledge.

 Forex trading is a global financial market that trades currencies.

With the right tools, you can learn to trade and potentially outperform other investment vehicles.

But before you get started, you need to understand how this market works.

I’ll explain the basic concepts, so you can understand the basics of currency trading and start trading the market yourself.

Let’s dive into one of the most misunderstood financial markets in the world. And by the way, it’s also one of the most lucrative.

What Is Forex Trading?

The foreign exchange market, or forex for short, is the world’s largest and most liquid financial market, handling $5.4 trillion in daily trading volume (link out to source here).

This is not just traders speculating, but people and businesses exchange currencies.

This includes:

  • Farmers hedging their prices
  • International exporting and importing
  • Speculation (what we do)
  • International business transactions

To put things into perspective of how much retail traders contribute to the $5 trillion dollars daily volume, retail traders volume is only worth 5-6%… Or around $250-300 billion dollars each day.

This is still larger than the stock market for sure.

There are hundreds of forex pairs available to speculate on.

This gives a broad opportunity for people who wish to make money.

Tip: Although there are hundreds of forex pairs to trade from, you can focus it down into majors and minor pairs.

Then on top of this – you have forex pairs that correlate too – which can make your job easier.

With that said, the forex markets are the most actively traded globally.

The best thing about is that it is open 24-hours a day 5 and a half days a week.

The forex markets open on Sunday evenings.

Which has the lowest liquidity and not much action occurs during the Sunday session.

Then finishes in the US session on Friday evenings which is around about 9 p.m. UK time.

This opens up a global opportunity and allows people to trade at any time of day.

Whether they want to trade either before work, after work, or during lunchtime.

If you are a retail trader that wants to trade part-time.

Most importantly, it allows traders to trade as often as they want.

The Basics of Currency Trading: How Does It Work?

Currency trading is an asset class that allows you to trade currency pairs such as the US dollar/euro or the euro/yen.

The aim of currency trading is to make a profit by buying one currency and selling another.

It can be done using forex, futures, or swaps. 

It can also be done using a combination of these instruments. Forex trading is the most popular form of currency trading.

The main difference between forex and futures trading is that forex involves the actual exchange of currencies, while futures involve the exchange of contracts for future delivery of a currency.

The most common way to profit from trading forex is by speculation.

This is where a forex trader speculates on the asset rising or falling below the price they entered the trade at.

Just like you would with a stock.

However, unlock a stock, you are buying one currency and selling the other currency.

So if you think the USD is going to rise because of a better economic outlook, then you would buy the USD and sell the other currency.

For example, if it was EUR/USD:

You would buy USD and sell EUR.

Now I know what you are thinking, how do I buy the USD and sell the EUR at the same time?

That is why they are in currency pairs.

Instead of doing it manually, you just take the trade you want against the EUR and it will automatically fulfil the action.

Again, an example:

If you think the US Dollar will rise due to its economic outlook being positive you would click the “Sell” EUR/USD button.

This simultaneously Sells EUR and Buys USD for you.

As they are paired together, if the chart is moving downwards you know that the USD is getting stronger against the EUR.

what is forex trading and how does it work - downward

If the chart is moving upwards, you know that the EUR is getting stronger than the USD.

what is forex trading and how does it work - upward

By predicting the move, you can make a profit which is the difference between your open price and closing price, which is calculated through pips. 

How You Can Profit From Any Market Condition

The whole point behind speculating in the markets is to grow your money.

By trading the currency market, you really do have an abundance of opportunities available to you each weekday.

The beauty of trading the markets is that you can trade in multiple directions.

Going Long in the Markets

-By going long (buying) earning the difference from the buy and sell price

You know about the most common way forex traders profit. When speculating in the forex market and that is to buy low & selling high.

Most people have visions of people on phones shouting:

“BUY BUY BUY” then…

“SELL SELL SELL”.

This is called going “Long” in the markets with the theory that the price will increase in value based on your analysis.

Forex trading - going long

Going Short in the Markets

However, more commonly in the forex market, you can go “Short” in the markets.

This is where you can make a profit from the price falling in value.

(You can do this in the stock market too).

Going short in the forex markets is what attracts forex traders to this arena in comparison to the stock markets.

Forex trading - going short

You Can Profit in Any Market Direction

As you can profit in any forex market direction.

It doesn’t matter if the foreign exchange markets are going up, down, or sideways.

The fundamental difference between trading and investing is this:

Forex traders never love or hate an asset – they see it as a vehicle to turn a profit.

Investing (investors) tend to do so much research behind their choices, they tend to fall in love with an asset – thus making it difficult to make… difficult choices such as taking a loss.

By becoming a forex trader – you will naturally eliminate this “loving an asset” mentality.

Which in turn, will make you a better forex trader over time and survive the forex market.

The Big Four Currencies

When you trade forex, you buy one currency and sell the other currency.

There are four key players that are paired with both major and minor currencies across the world.

This list is comprised of:

United States Dollar,

British Pound,

Euro and

Japanese Yen.

These four currencies are the most popular ones in use and they are the most valuable in the world.

Luckily for you, you don’t need to memorise all the pairs any more thanks to technology.

Everything is pre-printed and you can easily focus on the currency pairs you trade the most, avoiding all the random crosses you may not follow.

The most traded currency pair is the EUR/USD at roughly 24%* of the daily market volume.

This is followed by USD/JPY at 13.2%* and then GBP/USD at 9.6%*.

With the US Dollar involved with 88.3% of all forex transactions.

*(Source: https://www.bis.org/statistics/rpfx19_fx.pdf)

Is Forex Trading A Scam?

Forex is most certainly not a scam.

Scams come from individuals promising guaranteed returns through trading signals, or courses bought online that is essentially found on the Internet.

Forex is the largest and most liquid market in the world.

When people ask if forex trading is a scam, they don’t actually mean the investment vehicle.

They are talking about people promoting get rich quick schemes involving forex.

The Big Lie About Forex: It’s ‘Volatile’?

 9 out of 10 of you will have certainly been told how volatile the forex markets are.

Most definitely told that this is the reason why you should trade it:

Volatility creates opportunity.

Or that it’s too risky because of how volatile it is.

Well, if you’ve been told either of the above, they are wrong.

Forex (as a whole) is one of the least volatile markets available, due to its liquidity.

The average range of the majors is between 0.3% and 0.8% up or down per day.

Whereas with stocks, you are looking at 1.1% to 2% (or down).

Which is more volatile?

Now, what they should be telling you is this:

Trading forex is highly leveraged.

It is this phrase that makes trading forex “risky” vs. other assets because most beginners walk into a trading account with 100x leverage and wonder what took their money.

Leveraged basically means that you borrow X amount based on how much you put down as margin.

For example, a 10x leverage is if I put down £1, the broker would lend me £10 to trade with.

If the market goes up by £0.01p, I would make £0.10p. I would close the trade, give back the £10 and receive the £0.10p back as profit. Netting 10% ROI.

If the market goes down by £0.01p, I would lose £0.10p. I would close the trade, give back the £9.90 and receive the £0.90p back as a loss. Netting 10% loss.

Another example is a mortgage, the bank loans you the difference to purchase a house.

It is with this leverage comes “volatility”, at a personal and account level.

Not a forex market level.

How To Start Forex Trading

There is no straight path with forex trading.

You have to discover what aspects interest you and then develop your skill sets around that. You’ll find on this website we cover a broad spectrum of topics about trading (for free), so you should spend some time checking it out.

However, these 5 steps can give you a greater understanding of how to start forex trading and will give you a basic structure to follow.

Step 1: Learn the basics

Honestly, you can learn everything you need to trade forex online for free (and it won’t even take you forever to do so).

The best thing to do is load up Google or Youtube and find resources.

Not everything out there is amazing though, most are just copy and paste content from Babypips.

NOTE: Babypips is a fantastic resource if you want a really simple way to learn the absolute basics — You won’t learn HOW to trade through them though, this is also why most won’t learn HOW to trade from most courses online.

You can also learn from our free forex course too ;).

Alternatively, if you are a bit more old-fashioned (or want to use wisdom from the past):

Many successful traders have downloaded their knowledge to books in the past.

It would do you a disservice for you not to pick up a few books and follow their teachings.

There is not just one forex trading for beginners book, there are a few to help build your trading foundations.

You can find some of the best forex trading books here.

 Step 2: Is It For You?

After you’ve jumped around several resources, be honest with yourself and figure out if this is for you?

You have to be really interested in the markets to continue, otherwise, you’ll waste your time and money with it.

Step 3: Focus on these areas for success

You must learn about these daily price action opportunities you can use to uncover trading opportunities every day.

Learn about Supply and Demand trading:

Simply put, learning about supply and demand zones in the forex market will expose the way the market moves and you will find high-probability opportunities to trade with this skill.

Learn about Support and Resistance Levels

Like supply and demand, but focusing on other significant levels of interest. Great to learn about and monitor market movements.

Support and resistance levels will become part of your everyday tool to monitor market movements.

Learn about Chart Patterns

Chart patterns recur frequently and knowing how to trade them can be the difference between entering a trade at the right time, or missing the chart pattern and potentially getting slaughtered.

Learn about Candlestick Patterns

There are a lot of variations of these candlestick patterns, each shows the potential of a reversal or continuation in the markets.

Learning a handful of these patterns can seriously improve your edge when it comes to trading.

Step 4: Practice Trading on a Demo or Paper Account 

Okay, so you are still interested and you want to give it a go. Good!

Time to open up a free demo account.

You can use a broker for this, or if you want to avoid awkward phone calls from someone trying to get you to deposit money I’d suggest setting up a free account with TradingView (Read our TradingView Review) and using their Paper Trading tool.

(You can learn how by reading our review on them)

Step 5: Go Live

No one got rich trading on a demo account.

Once you’ve mastered your strategy using backtesting tools and a demo account, open a live account and get started.

Now you’ve placed a few trades, made a few losses (on paper) and a few wins you should be at a point where you are almost certain about your trading decisions.

Certain as in – you know what you are doing and that it works.

Not certain that you will be 100% accurate on your trades.

When you go live for the first time, make sure for the first week or month you trade with the lowest amount possible.

This way you trade with way less risk, but with real funds.

Then gradually scale it up until you are comfortable trading 10 lots at a time :).

There you go, if you loosely follow this on how to learn forex trading step by step – you should, by the end of it, become a competent trader and ready for the foreign exchange markets.

3 Main Charts Used in Forex Trading

Line Chart

The most basic type of chart available is the line chart, which plots the close price of the asset. The open price, low price and high price of the forex trading session are shown on the chart compared to the bar and candlestick.

The line chart will show you where the close price was and show you a quick idea of whether the asset is moving upwards or downwards.

The close price is important to know as this is the last “action” that takes place during a trading session. You can see the importance when drawing support and resistance levels.

Main charts used in forex trading - line chart

Candlestick Chart

The candlestick chart is by far the most popular chart across used by retail traders.

It is easy to identify key areas of the market by looking at them.

This is the most common way retail traders would use to find candlestick patterns and chart patterns.

Candlestick charts print the open, high, close and low of each forex trading session.

This is important as we can see how the previous session went.

It is easy to see whether the market is going up or down with the chart above, but it also shows us the key bits of information like the open, high, low, close.

All this information can be processed to build an idea about the current market price action, which is important for generating a trading idea.

Main charts used in forex trading - candlestick chart

OHLC/BAR CHART

The thin line of the bar chart is similar to the candlestick chart, but instead of filling in the body between the open and close price, it maintains it.

At a glance, the bar chart still identifies the important bits of information.

The bar chart shows the open, high, low and close just like the candlestick chart. That has a less distinctive body.

Main charts used in forex trading - bar chart

3 Main Types of Forex Trading Strategies

There are many ways people speculate on the markets, which is what attracts people to it in the first place.

However, you can bundle them into 3 different types.

Both comprise of technical indicators and/or price action cart patterns.

Scalping

Some forex traders only focus on taking tiny bites out of the market that is quick profits.

Think like piranha’s feasting.

The goal as a scalper is to be in and out of a trade within minutes to hours of a trade.

Anything longer, the trade is cut.

  • Scalping is ideal for beginners who want to take a very active role in trading.
  • Those that want to use technical analysis and take advantage of small forex market movements.

Scalpers tend to take advantage of small foreign exchange market movements and use leverage to elevate their profits into something meaningful.

The downside of scalping is their risk reward ratio is usually low – this is due to the nature of going for small, but frequent trades.

One really bad trade could reverse 2-3 trades worth of profits.

Scalping is generally by nature more difficult, to begin with.

This brings me on to another type of trading:

Swing Trading

Swing trading is the opposite, to a degree, of scalping.

Although it looks to take chunks out of the market (like a great white shark).

Swing trading can be done in any timeframe, so can overlap into scalping.

This is because swing trading revolves around capturing reversals in the market and riding the trend.

Swing trading is easier for most beginners because you can take your time more often than not.

Not only that, the risk:reward is naturally better due to trading market reversals.

Price Action

This is a popular approach to trading as it is seen as “naked trading”, therefore not relying on technical indicators.

The focus on this trading type is using different price action approaches, which can be:

  • Candlestick patterns
  • Chart patterns
  • Supply and demand
  • Support and resistance

Each of the above can be used to find quality trading opportunities.

Most traders prefer this approach.

Is forex trading good for beginners?

Yes, forex trading is good for beginners. With the right education and mentality, you can go from beginner to trader in no time.

It has a low barrier of entry and focusing on technical analysis can provide great results for the average trader.

Let’s breakdown the good and the bad of forex trading for beginners:

The Bad

I’m going to be straight with you if you are wondering why trade forex:

For most people, trading in the foreign exchange market is just too difficult for them.

There is a lot of info. To take in, but most of all – you have to be prepared for something.

And this is something most humans cannot psychologically get to terms with.

This something is:

You will LOSE money from time to time.

No one wants to lose money, but this is a game of risk and reward.

You can’t get the reward without the risk.

And if you cannot take the losses, you can close this guide right now.

Don’t worry, with the correct risk management and strategy, when a loss happens it’s already calculated for should the forex market turn against you.

When you first start out, losing a trade will make you feel a little upset.

By the time you’ve traded 1,000s of times, it becomes a minor inconvenience like stubbing your toe.

The Good

With that being said, beginners can truly thrive in the forex markets.

Again, education and discipline are needed.

But here’s the thing:

Trading (and investing) is NOT rocket science.

Everything can be learned, and transferred into the forex market.

There are a lot of free resources out there, but take them all with a pinch of salt.

Trading is a style that is your own.

Say, for example, you may learn about scalping because you think it would be fun trading all day.

But after 3 days, you’re pulling your hair out thinking it’s impossible to chase the pips.

This doesn’t mean scalping doesn’t work.

This is why as a beginner, you should try out different styles and forex trading strategies until one works for YOU.

Do forex traders make good money?

There are plenty of traders that do this full time all over the world. This isn’t a unique opportunity for the select few.

The thing is forex trading is not about income but capital growth. So if income is at the forefront of your mind, look at income-generating assets like dividend-yielding stocks, bonds and rental property.

Summing Up

Forex trading is a great investment vehicle for people who wish to be very active with their trading opportunities vs. using stocks.

But it’s not for everyone, that is why it is encouraged to read around the subject and ask yourself if it’s something you’d stick with.

After reading this you’ll have a better understanding of what is forex trading, but no doubt have more questions.

Feel free to take a look around the website to learn more about the intricacies of the markets.


Share on: