Definition & explanation: 

Forex is the abbreviation for “Foreign Exchange”. Also, it is often called the “foreign exchange market“.  It is a term used to define the exchange rate between 2 currencies. The market redefines the current value of one currency against another every millisecond. As a trader or investor, you can invest in the rising and falling prices of a currency pair. The Forex market is the largest part of the world’s financial market.

Forex exchange rate example

Characteristics of the forex market: 

  • The biggest part of the financial markets
  • High liquid markets with low spreads
  • Trading 24 hours Monday – Friday
  • Investments are possible on rising or falling prices
  • Trade with small or big amounts of money

What exactly is Forex Trading? – Many people always talk about the “biggest market in the world” or a great opportunity to make money, but how exactly does this work with currency speculation? – On this page, we will give you valuable information that you need for a successful start in trading. Learn the first steps that every experienced and professional trader knows.

How is the exchange rate of forex created?

The forex rate (exchange rate) is determined by the interbank market and official stock exchanges by the futures contracts. However, the exchange rates may vary between banks in small amounts. The value of a currency is influenced by global traders (banks, governments, traders, algorithms) 24 hours per week. For example, if market participants believe that the Euro is a better investment than the USD, the Euro will rise in value against the USD. This results in a change in the exchange rate.

EUR/USD: The currency pair consists of the base (first) and the second currency. In our example is the Euro the first currency and the USD the second currency. The first currency (Euro) shows us how much of the second currency (USD) we get for the value of 1. With an exchange rate of 1.2412, we will get 1.2412 USD for one Euro. Also, it shows us if the value of the Euro is rising the value of the USD is dropping. So the exchange rate will rise, too.

Forex (currency pairs) pricing and exchange rate

Forex (currency pairs) pricing and exchange rate

What influences the currency exchange rate: 

  • Every buyer or seller of a currency can influence the exchange rate (big orders/money the most)
  • Supply and demand will show us the fair currency exchange rate
  • Political news
  • News of the central banks
  • Interest rates
  • Money supply

Example of how the exchange rate is effecting your real life: 

You go on holiday and change your money into another currency. At the end of the holiday, you want to exchange the same amount back again. Now you suddenly get back much less of the original currency. Why? – The exchange rate or value has changed over time on the stock market.

Why you should start Forex Trading:

The entry barriers for Forex trading are very low. It is in most cases a leveraged asset class, which requires a low margin (security deposit). Compared to futures (forward contracts), the margin is many times smaller with leverage of 1:100 or even up to 1:2000. With the most Forex Brokers, you can choose your leverage on your own. Also, the forex market is made for small and big transactions. You can start with a few dollars or trade with millions. Currency pairs are very liquid and the biggest part of the financial market.

Forex trading is offered by many online brokers worldwide. You can open a trading account with them in minutes. It is also very easy to bet on rising and falling prices. In stock trading, investing in falling prices is called a short sale. However, it cannot be compared with currency trading, because it does not lead to a direct short sale. There are always 2 currencies in a currency pair. When you open a position, you invest in either one or the other currency and when you close the position, you make a currency swap.

5 facts to start with Forex Trading:

  • The biggest and liquid part of the financial markets
  • Trade with small or big investments
  • Use leverage to gain more profit
  • Low trading costs
  • Easy access through a Forex Broker

Advantages and disadvantages of Forex Trading:

Every asset has advantages and disadvantages and we want to highlight this on Forex Trading. Every trader also has his own likes and dislikes. Some traders enjoy trading the forex market and some shy away from it. In order to get a very good feeling for the markets as a beginner, you should first use a demo account (more on this below).

In the following table, we have summarized the advantages and disadvantages for you transparently:

Advantages of Forex Trading: Disadvantages of Forex Trading:
Trade 24 hours from Monday till FridayYou can not trade it on the weekends
High liquid marketsHigh trading fees on illiquid currency pairs
Small trading fees
Benefit from interest rates of central banks of foreign currencies
Easy access to the markets

Market participants:

Before you start with Forex Trading it is important to know which market participants exist. This knowledge can later be used to develop appropriate strategies or methods. Banks, institutes, hedge funds, algorithms, and private traders are on the move at the stock exchange. Altogether, this area can be divided into institutional and private traders. The funds of institutional traders are so large that you can influence the markets. The private trader is usually not able to do this. From our many years of experience in the financial markets, you should never forget which people you have as opponents. In most cases, these are well-trained full-time traders.

Forex traders:

  • Retail and institutional traders
  • Companies
  • Countries
  • Algorithms
  • Hedge funds
  • Private equity funds
  • Banks

Forex market categories:

Currency pairs are often divided into “major”, “minor”, and “emerging markets”. The major markets are the most liquid currency pairs and belong to big industrial nations. Minor and emerging markets belong to small industry nations or countries with less power.

Currency pairs categories

Currency pairs categories

Major:

Main currency pairs, which are very liquid. These include the western industrialized nations (USD, EURO, GBP, AUD, etc.). These assets are characterized by smaller fluctuations and lower interest rates. Volatility is the lowest here.

Minor:

These include currency pairs of smaller industrial nations. These currencies are stable but have lower liquidity because they are not traded as much. Volatility can, therefore, be higher than in the majors.

Emerging Markets:

These currency pairs belong to emerging nations or crisis countries. The currency is extremely volatile, has a high-interest rate in most cases, which can also be interesting for own trades and investments. However, the risk is very high, because of political activities and the high fluctuation.

How to start Forex Trading – Basic tutorial

In the following steps, we will explain to you very precisely how Forex trading works and which software or tools are required for it. With more than 7 years of experience and social media presence in the investment field, we always receive the same questions from beginners, which we now answer in this comprehensive guide. It is best to follow the guide step by step to avoid mistakes.

Where can you trade forex?

Currency trading is offered by many different brokers. The Forex Broker is an intermediary between the trader and the stock exchange (market). To trade without a broker is not possible, because you need appropriate licenses and capital. Nowadays it is quite easy to open an account for trading currencies. Usually, a few personal details are enough and the account must be verified with an identity card and proof of residence. This process can only take a few minutes.

Typical infrastructure of a Forex Broker

The typical infrastructure of a Forex Broker

Security is also an important point to consider when trading online. A Forex Broker or ECN Forex Broker should have appropriate licenses and be certified. On this page, we recommend our best Forex Brokers, which we have checked independently. They offer the best conditions and the highest security for newcomers or advanced traders. In the following, we will show you the characteristics of a good provider.

Characteristics for a good forex broker

  • Regulated by an official finance authority
  • Free demo account
  • User-friendly trading platform
  • Small trading fees
  • Professional support in multi-languages
  • Fast execution of orders

Open your trading account with a reliable Forex Broker

It is especially difficult for beginners to find a suitable provider with good conditions. The density of information is very high and one is bombarded with offers from all sides. To find the best broker, we have made a comparison of the best Forex brokers. You can find this on the following page “Forex Broker Comparison” and “ECN Forex Broker Comparison“. A first impression of the top 3 providers for international traders can also be found in the table below. It is particularly important that you always choose a regulated provider.

Broker:Review:Spreads:Advantages:Open Account:
1. IQ Option
IQ Option logo
5 out of 5 stars (5 / 5)
➜ Read the review
Starting 1.0 pips+ FX & Options
+ Best platform
+ Start with $10

2. BDSwiss
BDSwiss logo
5 out of 5 stars (5 / 5)
➜ Read the review
Starting 0.0 pips + 5$ commission+ Individual offers
+ Trading signals
+ Personal service

3. XM
XM logo
5 out of 5 stars (5 / 5)
➜ Read the review
Starting 0.0 pips + 3.5$ commission per 1 lot (XM Zero account)+ Good conditions
+ 1,000 Assets
+ Personal service

How to open your trading account:

As mentioned above, opening an account with most providers is very simple and straightforward. The picture below shows a typical template for opening an account. However, before you can trade with real money, there are several steps to be taken. The Forex Broker will ask you various questions about Forex Trading. If you cannot answer them, the trading account will not be opened. On this page, you will, of course, get the knowledge for the questions so that opening an account will not cause any problems.

Account sign up form

Account sign up form

Next, you will verify the account with the appropriate documents. The broker must verify your person and address. To do this, simply upload a photo of an identity card and proof of residence (invoice, etc.). This can also be done via webcam. In less than 24 hours the trading account should be fully operational. Often it happens in a few hours.

Open your account step by step:

  • Register with your personal details
  • Follow the instructions of the broker
  • Verify your identity with the required documents
  • Deposit money
  • Start Forex Trading

Use a free demo account:

Beginners should first get to know the trading platform and the markets with a demo account. This is a virtual credit account that simulates real money trading. So you can trade without risking real money. This account is best suited for getting your first experience. A demo account can be created with any Forex Broker of your choice. In most cases, it is unlimited and completely free of charge.

Note:

The demo account is one of the most important tools for every trader.

(Risk warning: Your capital is at risk)

The right analysis is key in Forex Trading:

Now we would like to give you an understanding of the steps for a successful trade. Many beginners ask themselves how to anticipate market movements in order to make money. This requires knowledge and the will for further education. Without the desire to learn something new you will fail in Forex Trading very quickly. Knowledge and analysis is the key to success for a successful trader.

It is essential that you continue your education if you want to be successful in the long term. Many brokers even offer professional training material, which as a beginner should definitely be looked at before trading real money.

There are 2 types of analysis methods in Forex Trading:

Fundamental analysis:

You include business news into your trade decisions. Interesting are for example interest rate decisions. In most cases, investors always want to invest in the currency pair that offers higher interest rates (long-term). But short-term news, such as elections, also has a significant impact on the price.

Technical analysis:

The trading platforms of the shown Forex Brokers offer a wide range of analysis possibilities. Most traders use technical analysis with support levels and indicators. The possibilities are almost unlimited. Try it yourself in the demo account. The brokers also offer professional learning material for this.

How to open your first Forex trade:

The process of trade in the forex market always works the same way. If you have a good trading idea and want to implement it, you still have to determine a stop loss and a possible take profit. These are 2 marks in Forex Trading that limit the risk and possible profit. You should never do without a stop loss because sensible risk management is very important for the successful trader (more about this below). In addition, the position size for the trade must also be determined. This must be adjusted to the risk (stop loss) and the account size.

Order mask for Forex Trading

Order mask for Forex Trading

Order types:

There are direct market execution and a pending order in Forex Trading. In market execution, you open a position in the market directly by clicking Sell or Buy. The Pending Order allows you to automatically buy or sell only when a certain price is reached. These orders can be placed at different prices.

Position size (volume):

In Forex Trading, the positions are specified in lots. 1 lot means 100,000 units of the base (first) currency of the currency pair. This results in a certain pip value for the price scale. For example, a position of 1 lot in EUR/USD means a pip value of €8.64. So if the price runs 10 pips in your desired direction, you win €86.40. The same is also true if you lose. The position size must always be chosen in accordance with the stop loss so that you can determine the risk.

Stop Loss:

The price level at which the trade is automatically closed at a loss. Losses are thus limited.

Take Profit:

The price level at which the trade is automatically closed in profit. This is how you secure your profit.

How to trade step by step:

  1. Select a forex currency pair of over 100
  2. Plan your entry into the market with a wide range of analyses
  3. Choose the appropriate contract size (size of the trading position)
  4. Set the maximum loss by stop loss
  5. Set a possible profit target per take profit
  6. Start trading with a purchase or sale
Note:

The stop loss is the most important tool for Forex Trading.

Forex Trading platforms presented:

Overall, there are numerous different trading platforms for Forex Trading. Brokers either develop their own or buy a license for an already tested and secure trading platform. In this section, we would like to briefly discuss the most frequently used trading platform Metatrader. This is offered by about 90% of the Forex Brokers.

The Metatrader is so popular because it is very flexible and you can configure the software independently as a trader. A large portfolio of indicators and analysis tools is offered. Additionally, own tools can be inserted and also programmed. Even automatic trading works with little programming knowledge. The Metatrader is currently offered in version 4 or 5. There are only very few differences between the two versions. The software is available for the browser, desktop, and mobile devices. So you can access the markets from every device very simply.

Forex Trading platform MetaTrader 5 screenshot

Forex Trading platform MetaTrader 5 screenshot

Another popular platform is for example Tradingview.com. There you can use the search bar to find any market and analyze it with free tools. We personally like the handling and the structure of this platform very much and Tradingview is suitable for observing many markets for your portfolio.

For doing more professional trading we can recommend the software ATAS. It is an order flow trading software for using futures. You can analyze the order flow directly to see what other traders are doing. Trade on the order book or analyze the traded volume with different patterns. Everything is possible with this software. For forex futures contracts you need a lot more capital than doing normal forex trading.

Popular Forex Trading platforms: 

  • MetaTrader 4/5
  • Tradingview.com
  • ATAS (for futures)
  • WebTraders developed by brokers
  • Trading apps

What the most trading platforms are offering: 

  • Different chart types
  • Multi-charting
  • Free indicators
  • Analysis and drawing tools
  • News section

Trading fees for currency traders explained:

In general, Forex Trading is very cheap compared to other financial products. In total there can be 3 different fees, which vary from broker to broker. The spread is the difference between the buying and selling price (ask and bid). It can be different because the prices depend on the market situation (supply and demand). An ECN broker with direct interbank market access passes on the current market spreads to the trader. These then start at 0.0 pips and are hardly worth mentioning in the fee calculation. The ECN Broker is financed by a commission, which is charged at the opening and closing of the order.

Trading fees for Forex Trading (Order mask)

Trading fees for Forex Trading (Order mask)

Some brokers add an additional spread to the market spread and waive the payment of a commission. Both models are offered and can be selected before opening an account. An additional fee (financing fee) may also be charged in Forex Trading to your advantage. When you open a leveraged position, you are basically borrowing money from the broker. This amount must be financed overnight. Interest is therefore incurred. Here it depends on the currency pair. In some currencies, for example, there are high-interest rates set by the central bank. So if you invest in a currency with a high-interest rate and sell a currency with a low-interest rate at the same time, you will profit and receive an interest credit to your account every night.

These trading fees can occur in forex: 

  • Spread (the variable difference between selling and buying price)
  • Commission (fixed amount)
  • Swap (interest fee)

How risky is Forex Trading?

Profits without risk are not possible on the stock exchange. Those who do not want to take any risk should stay away from this place. This question cannot be answered in a generalized way, because the risk and dangerousness are determined by the trader himself. The trader has to decide how much money he is willing to invest and possibly lose. One can trade the market with small sums or also with large sums.

How risky is Forex Trading

How risky is Forex Trading

The forex market is the most traded market in the world. The volatility (movement strength) is very low in contrast to other markets, which is why the danger is not so high. The daily fluctuations are usually less than 1% of the asset. However, the risk can be very much increased by leverage. Overall, each trader must answer for himself whether currency trading is dangerous. There is no standard concept here.

Forex Trading tips & tricks: Limit your risk

Forex Trading sounds very simple at first glance. However, it is very important to learn a possible and good strategy for trading. 3 mistakes are committed again and again by traders. This can also be read in different forums. For the start, it is very important to have a fixed set of rules. Learn from mistakes already made to maximize your profit.

Time:

You should know the stock exchange opening hours. Although the Forex Market is open 24 hours a week, it makes very little sense to trade certain currency pairs at night, for example. At irregular times, the price is largely determined only by algorithms. This can cause many losing trades.

Risk:

As a trader, you should follow sensible risk management. Many traders change their risk daily. It is very helpful to make a plan and never risk too much from your account. The account should grow sustainably.

The right broker:

As a trader, you should choose a good forex broker. Many traders trade at far too high fees. This only makes the broker rich and you poor. Unnecessary costs should definitely be avoided. In the comparison below you will find a good choice.

Broker:Review:Spreads:Advantages:Open Account:
1. IQ Option
IQ Option logo
5 out of 5 stars (5 / 5)
➜ Read the review
Starting 1.0 pips+ FX & Options
+ Best platform
+ Start with $10

2. BDSwiss
BDSwiss logo
5 out of 5 stars (5 / 5)
➜ Read the review
Starting 0.0 pips + Individual offers
+ Trading signals
+ Personal service

3. XM
XM logo
5 out of 5 stars (5 / 5)
➜ Read the review
Starting 0.0 pips + 3.5$ commission per 1 lot+ Good conditions
+ 1,000 Assets
+ Personal service

Before starting Forex Trading you should ask the following questions: 

  • What do I want to achieve with Forex Trading?
  • How do I act after several losses?
  • How high should my risk per trade be?
  • Which prominent price points do I look for to open a position?
  • How many markets do I want to observe?
  • Which markets do I want to observe?
  • Are there correlations between currency pairs?
  • Which economic news is important for my market?

Conclusion: For Forex Trading you need professional knowledge

The foreign exchange market is the most popular market for private traders. It offers you many advantages, such as low fees and very high market liquidity. Furthermore, you can participate and profit even with a small stake. Through the leverage, it is possible to maximize the profit and to make targeted but meaningful speculations. This market is also particularly suitable for beginners, as there is low volatility.

On this page, we have given you a complete and detailed overview of the foreign exchange market, which is only available on a few pages on the Internet. In addition, you have the knowledge about the successful start in trading. You should now know how to open positions and also have basic knowledge of how to analyze the market.

From our experience, you can use any strategy for Forex Trading but test it before if it really works. The choice is almost limitless. In our opinion, the currency market is a “must” for every trader as it offers countless opportunities to invest. React to direct market news or just take advantage of the interest rates. You should continue to look into it.

Forex Trading can be like any investment very risky. Continuous training and education is the way to success.