How to trade forex
Summary: Abbreviated from foreign exchange trading, "forex" or "FX" trading is the exchange of one currency for another through buying and selling.
What is forex trading?
An array of currencies is traded every day, making the forex market the largest and most liquid market in the world. Daily trades amount to trillions of dollars. At any time, the demand for a particular currency will either increase or decrease its value relative to other currencies, and it is this changing demand that causes the exchange rate between currencies to fluctuate constantly.
In forex trading, retail traders aim to take advantage of these fluctuations in the forex market, and they participate in trading with the goal of turning a profit. Forex traders try to make market predictions with various tools and strategies, such as fundamental and technical analysis, to aid in their trading.
The forex market is open to anybody who has capital and wants to participate. For those who are new to the foreign exchange market and forex trading, our ‘What is Forex trading?’ introduction is a good place to start. It includes an overview of forex and an explanation of basic terminology that will be discussed on this page.
How to start forex trading
Successful forex trading requires dedication, skill, and tenacity. As with all market trading endeavours, it involves a certain amount of risk. We recommend that retail traders familiarise themselves with the characteristics of the forex market as well as forex trading methods and strategies before placing their first trade.
When to trade forex
The forex market is comprised of a global network of participants around the world, which means that it has no central location. An electronic marketplace, transactions take place online and are driven by four local sessions worldwide: Sydney, Tokyo, London, and New York. Each session follows local time and opens from morning to evening each weekday.
On weekends, the forex market is closed to retail traders, while central banks and other organisations can continue to make transactions. However, this interlude does not actually last the whole weekend. As each local session runs for eight to nine hours a day, market hours inevitably overlap. This means that the forex trading week for retail traders actually runs for 24 hours a day, for a little over five days a week.
Retail traders around the world can participate in any session they wish, and they can enter and exit the market any time it is open. Naturally, the majority of trades that take place during each local session will be from local participants.
Traders can hold open positions for as long as they want, across sessions and even across weeks or years, depending on their trading preferences.
In this case, an open position is the amount of a currency that is exposed to the price movements in the forex market. In forex trading, this amount can be fully or partially owned by the retail trader. To fully own a position means that the trader has contributed the full amount of money he is trading with in his trading account. To partially own a position, traders only contribute a percentage of the position’s value, known as a margin. This method is called leveraged trading.
Is the forex market regulated?
The forex market does not have a centralised location. Rather, it is driven by local sessions. Thus, forex regulations and standards are set by supervisory bodies around the world. All forex brokers must comply with their local regulatory jurisdiction.
Forex analysis methodologies
To make predictions of market prices in forex, traders employ two main analysis methodologies—fundamental analysis and technical analysis. They are evaluations of the different aspects of the forex market to help traders make informed decisions when buying and selling.
Fundamental analysis is the evaluation of the intrinsic value of an asset as well as the market sentiment. In the case of forex, where traders focus on trading a few specific currencies, this means that they evaluate the status of the currencies and the economic status of the countries that distribute those currencies.
This analysis involves looking at economic data, such as a country’s interest, inflation, and tax rates. Traders will also examine the country’s gross domestic product (GDP), trade balance, and outstanding debt. On top of that, they continually assess the global political and economic situation by keeping a close eye on news stories and evaluating national political landscapes and governmental policies.
Fundamental traders can employ an economic calendar to help them in their evaluation. The live calendar displays relevant data releases and scheduled events around the world. This includes information on national gross domestic product (GDP) growth rates, inflation rates, and forecasts of how the financial market will be affected.
Technical analysis can also be employed to aid decision-making in forex trading. This is the evaluation of historical price charts and current price movements. Technical analysts mainly work with numerical data, and they attempt to identify market trends and patterns and use them to determine potential price movement.
Fundamental analysts seek to make predictions of market behaviours based on external factors, while technical analysts stick to numerical data and seek to calculate the probabilities of prices increasing, decreasing, or staying the same. Ultimately, both methodologies, when applied correctly, aid forex traders in making smarter decisions regarding buying and selling.
How long does it take to make a trade?
Forex trading is available 24 hours a day and for a little over five days a week, which means that traders can open and close positions at any time in this window. Traders make short-, medium-, or long-term trades, depending on personal preferences.
Short-term trading is the execution of a trade under one week. Short-term traders aim to make profits by taking advantage of rapidly fluctuating market prices. Intraday trading is a form of short-term trading. The time period ranges from minutes to hours, and transactions always take place within a single session.
Ultra-short-term trades take place within a matter of seconds and minutes and are associated with a strategy called scalping. Scalpers enter and exit the market at intervals throughout the trading day with the aim to accumulate small profits, and they rely heavily on technical analysis to predict market trends in the short term.
Medium-term trading is the execution of a trade over a period between one week and several months. As medium-term traders hold positions for a longer duration, they aim to make profits with the help of both technical and fundamental analyses.
Medium-term traders may make use of trend trading or swing trading. Trend traders assess the market direction of a currency and identify trends, and they attempt to make a profit by taking advantage of the momentum of a trend. Swing traders focus on the end of each trend, just before the start of the next one. This is because the gap between trends is prone to volatility. Traders buy and sell during these volatile moments in an attempt to profit.
Long-term trading is the execution of a trade over a period from several months to several years. Long-term traders do not have to monitor the market as closely, as intraday ups and downs do not affect them greatly. Instead, they focus on the long-term trajectory of the currencies they trade. To do this, they rely heavily on fundamental analysis.
What are the best currency pairs to trade?
The best currency pairs to trade depend on each trader’s personal preferences and experience.
However, there are several popular currency pairs that are traded more frequently than the rest, and they are EURUSD, GBPUSD, and USDJPY. They share one characteristic—they are all major currency pairs.
Major currency pairs are made up of the US dollar paired with one other major currency.
Major currencies are currencies that are traded most in the forex market. There are eight major currencies in the world, and they belong to the United States, Great Britain, Japan, Australia, New Zealand, Canada, and the Eurozone.
Major currency pairs are a popular choice among forex traders due to their high liquidity and low volatility. This means that they are commonly traded in the forex market, and they have market prices that are less prone to vigorous changes caused by unexpected financial events.
Ultimately, the best currency pairs to trade for each person is subjective. The more familiar traders are with the forex market and the currencies they have chosen to trade, the better.
What are the ways to trade?
There are three main ways for retail traders to trade forex. They are spot trading, forex futures, and forex options.
In forex, spot trading is the immediate buying and selling of currencies, where they are physically exchanged following a specified spot date. Spot contracts involve the trading of currencies at their current market price, which is also known as the spot price.
Spot trading accounts for the majority of the daily volume of trades. Transactions are agreed upon by the two parties involved in the spot trade and they are made electronically. In the spot market, settlement of the trade usually takes place two business days after its execution, which is the time it takes for cash to be transferred from one bank to another.
Forex futures are legally binding contracts for trading currencies, and they obligate the buyer and the seller to a particular amount of money of a currency pair at a predetermined price. This price is derived from the currency pair’s spot rate when the contract is drawn up but can be changed as the spot rate changes. The transaction is set for a day in the future.
Forex options give traders the right to buy currencies at a specified market price. The trade can take place any time the options contract is in effect. Unlike futures, traders who trade with options are not obligated to buy the underlying currency before the contract expires.
Options trading is a way for retail traders to speculate on market price movements without being fully committed to making the transaction. However, there is still risk involved in forex options. The right to buy a currency requires a premium paid by the buyer to the seller. This premium varies, depending on the seller and the expiration date of the contract, and once a contract has been bought, it cannot be sold or re-traded.
What is long and short in trading?
In forex trading, traders can occupy long or short positions, and which one they take depends on their forecast of market price movements.
When a trader thinks that a currency will appreciate—meaning they think it will go up—they will take the long position. This is referred to as ‘going long’, and it describes the act of buying.
Conversely, when a trader thinks that a currency will depreciate—meaning they think it will go down—they will take the short position. This is referred to as ‘going short’, and it describes the act of selling.
In forex trading, currencies come in pairs and two currencies are bought and sold simultaneously. This means that when making a trade, traders are always going long for one currency and short for another at the same time.
For example, a trader goes long EURUSD when they predict that the euro will appreciate against the US dollar. In other words, they believe the euro will increase in value relative to the US dollar. Thus, they buy euros now, so they can be sold at a higher price later and generate a profit.
In the same transaction, the trader is also effectively ‘selling’ the US dollar. If their market predictions are indeed correct, the value of the US dollar will depreciate in the short term, and the trader can seek to purchase the US dollar again when its market price outlook trends positive later.
Types of forex orders
When a retail trader executes a trade with a forex broker, they place a forex order, which is a command they give to the broker. The most common types of orders that can be placed are market orders, limit orders, stop orders, trailing stop orders, stop-loss orders, stop-limit orders, take-profit orders and OCO orders.
- A market order executes a trade immediately at the best available market price, which is the displayed bid or ask price next to a currency pair. Market orders can be used for both the buying and selling of currencies, which means that you can either enter or exit a position. It is the most common order type.
- A limit order can also be used for both the buying and selling of currencies. It is used when traders have a specified price at which they wish to enter or exit a position. This price acts as the trigger signal for the execution of the order.
- A stop order sends out signals to buy when the trigger price rises above the current market price, and it sends out signals to sell when the trigger price falls below the current market price. In other words, stop orders are executed upon a currency pair reaching a specified market price.
- A trailing stop order is like a normal stop order, except that it automatically moves up with the position if it becomes increasingly profitable. It helps protect a position without the risk of exiting too early.
- A stop-loss order limits trading losses by automatically closing a trading position a trader is going long for, when the exchange rate begins to fall.
- A stop-limit order functions similarly to a stop-loss order. However, once triggered, rather than execute at the next available price, it converts to a limit order at a pre-agreed limit price.A take-profit order directs the broker to close a trade when it is profitable, so that the trader can secure their profits.
- An OCO order stands for One Cancels the Other. It allows a trader to place a stop-loss and a take-profit order at the same time. When one is triggered, the other order is automatically cancelled.
Understanding the different types of forex orders and how they work will allow traders to execute them correctly.
Placing your first trade
With a deeper understanding of the forex market and how to trade forex, traders can open an FX trading account with Saxo Markets. Our accounts come with a free demo on our platforms and a simulated USD 100,000 account with which to practise.
Forex trading can be challenging, especially for first-time traders. Below is an outline of the key steps traders generally take when placing a forex order with their broker.
First, they specify the currency they would like to buy or sell. This decision is made according to the currency pair that they are most familiar with, and the pair they choose always consists of one currency that is appreciating and one that is depreciating.
Then, they specify whether they are going long or short. Traders always aim to buy the currency with a rising market price and sell the currency with a falling market price.
For example, if a trader decides on the currency pair GBPUSD with the prediction that the pound will appreciate against the dollar, then they are going long GBPUSD.
Afterwards, they decide the amount of the currencies they would like to buy and sell, the price at which they will do so, and the price at which they will close the position and exit the market. This is the price point that will act as the trigger signal to execute their trade.
Before placing a trade, traders aim to always have an idea of their limits and a pre-set profit objective. Opening a position with clear intentions makes it easier to know when to exit.
Once they have placed their forex order, they may continue to observe market price fluctuations to see if their predictions were correct and note down the results of their trade after they have closed. This is a way for traders to refine their trade technique and build confidence to execute future trades.
Free forex resources
After making their first trade, traders can continue to learn how to trade currency with our free forex resources. Read up on forex strategies and experiment with different ones to find your preferences. To continue to learn forex trading techniques, clients of Saxo Markets can access forex market news and articles by industry professionals, as well as sign up for events and webinars to keep up with the latest FX developments.
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