How to Trade Currency

If you’re a novice trader, you may have some confusion about currency trading. You also may be thinking to yourself:

“What is the big deal with the so-called ‘forex’ market? What’s all the hype about?” 🤔

As the largest investment market in the world, trading currencies is a big deal. And if you have the desire to learn the currency trading ropes, you too can be your own version of a big deal.

But, if you don’t know what you are doing, trading within any type of market can be dangerous. There is no exception to this rule with forex trading. 

With currency trading, there is a lot to learn to play the markets. To understand forex, we need a full breakdown of currency trading. You need to understand why it’s so popular, profitable, and why it’s continually growing.

Rack your brain no further. We’re here to provide you a complete beginner’s guide to Forex trading. We’re covering a lot of ground today, so don’t worry if you get lost. You can find a restatement of all the most important terms at the bottom of the article.

What you’ll learn

• What is Currency Trading?
• Currency Trading vs. Forex
• What is the Forex Market?
• Forex vs. the Stock Market
• How the Forex Market Works
• Forex Trading Regulations
• How to Become a Currency Trader
• Risks of Forex Currency Trading
• How to Analyze Currencies
• Common Forex Terms Explained

Currency Trading Around the World 🌍

Money makes the world go round. The concept of exchanging currency for services and goods is the one thing that every single country in the world has in common.

Most countries have their own version of currency or use a central regional currency. Regardless of size, class, and economic status, all countries use their own currency. And at this time, there are a whopping 180 different types of currencies across the world.

Different currencies have different values, at almost any given time. This means that a currency in one country may be worth something completely different in another country when swapped out. 

What is Currency Trading? 💱

Have you ever traveled internationally? If you have, the chances are you likely have needed to exchange currency. Specifically, you’ve needed to exchange the currency of your home country to the currency of the country you are traveling to.

Are you an American who wants to road-trip around Europe? Or maybe you want to see the Great Wall of China? Travel if you wish, but know that you can’t use your United States Dollars to buy souvenirs in either place. Chances are, you will need to exchange currencies.

At the time of exchange, currencies have a set price. This is also known as the exchange rate. As with any economy or market, the rules of supply and demand determine currency value. If many people and companies want to trade a specific type of currency into another, the price will rise. Thus the exchange rate raises.

Here’s a really simple example.

Let’s say you’re an American and decide to take a well-deserved group trip to Italy. You decide to exchange your United States Dollars to Euros, the central currency for the majority of Europe. At this time, 1 Euro (€) equals 1.207 USD ($). This is the exchange rate, which the oxford dictionary defines as the value of one currency for the purpose of conversion to another.

You get to Italy, take your sweet tours of Rome, and ride that Gondola through Venice. One of your friends is feeling generous and uses his cash to cover the cash-only activities. You somehow manage to use none of the cash you exchanged. 🤯

You then return to the US two weeks later and decide to exchange your Euros back for USD. Because you can’t use Euros in the United States, you have no use for them. Let’s say the exchange rate changes and 1 Euro is now equivalent to 1.270 USD.

While an extreme example, this is the basic concept of currency trading. Currency trading is the act of simultaneously buying one currency while selling another. The intention is that in purchasing one currency, it strengthens against the other.

Currency Trading vs. Forex 💸

Now, let’s be honest. Exchanging physical cash for another country’s currency, holding on to it, and then trading it again when the exchange rate fluctuates is just impractical and not feasible. Plus, those bank exchange and shipping fees would be outrageous! 

Though not the exact same, that’s essentially the basics of trading in the Forex market. You buy a certain amount of a currency, hang on to it while the exchange rate moves then change it back, making money or losing money in the process.

So, what exactly is Forex? Though the word “Forex” may give you major luxury vehicle vibes, it actually is a combination of both of the words “Foreign” and “Exchange.” Ironically enough, you could be the proud owner of a luxury vehicle if you master trading the Forex market. But, we’ll get into how you can do that later.

So then that poses the next question: How does Forex differ from currency trading?

When you trade the Forex market, you buy and sell foreign currency through online brokers. You follow an electronic broker trading process instead of physically swapping currency.

What is the Forex Market? 🏦

The Forex (also known as FX) market is a pretty big deal. It should come as no surprise that successfully trading in the Forex market can be very profitable.

Due to technological advancements, forex has never been more accessible to trade than in the current times. And in the most recent years, there has been an even larger spike in forex trading.

Foreign exchange markets are the largest financial markets worldwide, by a significant margin. The Forex market currently trades over $6.6 trillion of various world currencies a day. This is up from $5.1 trillion just three years earlier. The large trading volume in the forex market leads to high liquidity.

Unlike the stock market, trading is pretty much around the clock. Because of the global nature of the economy, the forex market is open 24 hours a day, 5.5 days a week. The forex market opens every Sunday at 5 pm EST and closes each Friday at 5 pm EST with each trading day ending and beginning simultaneously at 5 pm EST.

The Forex market is fast and very volatile. You can either make a lot of money or lose a lot of money- in a matter of seconds. This is due to exchange rates constantly fluctuating. 

Trading the forex market is all about taking advantage of those fluctuations to make a profit. And the trickiest part is timing those fluctuations and knowing when to buy and when to sell.

Forex vs. the Stock Market 📈

You, as a beginner forex investor, likely have at least a basic idea of what the stock market is. Even if you don’t trade or participate actively, you know the gist of the markets.

But what is the difference between forex and the stock market?

The stock market is a collection of various markets and exchanges. These markets/collections host regular trades for publicly traded companies. Stocks are the value of the publicly traded companies. Forex, however, is the actual value of currency. The value of money itself. 🤑

The forex market offers large liquidity. This liquidity is much larger than the liquidity of the stock market. Liquidity equates to tighter spreads and overall lower transaction costs. Plus, you can sell your positions on command, at any time. This differs from the stock market as you have to wait for a buyer to buy your assets to fulfill your order. 

Also, the US stock market sleeps. A lot, to be honest. 💤

With market hours of 8:30 EST to 4:00 EST, It isn’t accessible to a lot of individuals. And international traders who wish to participate in the US markets have to manage their time very wisely.

Another big difference in the stock markets vs. the forex market is that currencies don’t generate dividends and returns like stocks. That’s okay in our book though considering the other advantages of the forex market.

While there are many differences, perhaps their most noticeable commonality is accessibility. Thanks to the many online brokers available, both stocks and forex are available through online trading platforms, and the top mobile apps for trading forex are just as handy and feature-rich as their desktop counterparts.

How the Forex Market Works ⚙️

The Foreign Exchange market appeals to a wide variety of people. The larger more aggressive investor and the smaller more conservative investor both have a spot in these markets.

There are many pluses to trading forex. The cost (fees and commissions) is overall lower with forex than with other trading markets. Additionally, the Forex market has light regulations and allows leverage. And the constantly fluctuating currency values allow for major profit potential.

But there’s a lot to break down about the operations of the forex market. 😳

The first thing to know is that in the forex market, trading occurs with all types of currencies. Euros, GBP, US Dollars, Japanese Yen, CAD, AUD are just a few examples.

Just as with any market, some currencies are more vital or widely traded, while others are a bit more minor. It shouldn’t come as a shock that the more traded currencies correspond with the global position of the countries that house them.

When you trade currencies, you are trading the currencies against each other. Thus, you buy in currency pairs. The quoted price for one currency defines the price relative to the other. And the pairs strengthen each other.

The most straightforward way to understand quotes is by reading left to right. This means the first currency listed is the one you project to go up in value, and the second you believe to go down.

If the popular EUR💶/USD💵 pair is trading at 1.30 that means 1 Euro is equal to 1.30 USD.

If another pair, USD/AUD is trading at 0.75, that means 1 USD is equal to 0.75 AUD.

With the two currencies themselves, the pair acts as a unit. If the price of the currency pair rises⬆️, you profit, if it falls⬇️, you see a loss.

Making money in a declining market is a lot easier with trading currencies than with other assets. This is because of buying in pairs. As when you buy one currency, you are always selling another.  

Trading Forex on Margin or Leverage

Margin trading in the Forex market isn’t quite like margin trading when it comes to trading stocks.

In the currency exchange markets, trading on margin entails putting up a percentage of the total investment to enter a position. We call this amount the margin requirement.

This differs from trading stocks as when you trade on margin with stocks, you are borrowing the funds to trade from your broker. To cover Forex trades, you must use funds already existing in your account. If funds are insufficient, you’ll have to complete a funds transfer. 

Currency pairs trade in a set number of quantities, known as lots. There are two common lot sizes, standard and mini. Standard lots consist of 100,000 units, whilst mini consists of 10,000. While Standard and Mini lots are the most common, some brokers will offer a third type of lot called micro-lots. Micro lots allow traders to trade in 1000 units.

Knowing how to trade on margin is a key aspect of many popular forex trading strategies. Margin requirements can vary based on both the currency pair and the quantity traded. These requirements can be as small as 2% or as large as upward of 20%. But, the average for most pairs tends to be between 3 to 5%.

Let’s see an example. Say you are trading one of the most common pairs, EUR/USD. Hypothetically, at the time of entering your trade, the pair is trading at 1.30 (1 Euro = 1.30 USD). You desire to buy a mini lot or 10,000 units. The total cost of the trade would then be $13,000. However, because of margin requirements, you don’t have to pay the full $13,000 to enter the trade.

You instead pay the margin requirement, which is between 3-5% on standard. On a 3% margin requirement, you would pay a total of $390 to place the trade.

This leads us to leverage, which is an advantageous factor of the forex market. Having leverage allows investors the ability to control a large investment with a significantly smaller amount of money. This is simultaneously one of the biggest advantages and risks of the forex market.

Leverage gives you the potential to make major profits, or see major losses. There are leverage ratios determined by a combination of regulations and individual brokers.

Financing and Rollover Rate

Financing, also known as a Rollover rate, is another must-know about trading the forex market. This is the computation of interest earned or owed on the currency pairs. This occurs when an investor holds their position past the close of a trading day. 

In the United States, The Federal Reserve sets an overnight lending rate which sets the price of borrowing money. Worldwide, each currency and each government has its own rate. 

When it comes to financing, you are lending the currency you are long and borrowing the currency you are short.  This happens at each overnight lending rate for each respective currency.  

Most of the time, you as the investor will receive a credit if the currency you are long has a higher interest rate than the short. Conversely, you will see a debit on your account if the currency you are short has a higher interest rate.

Financing is automatically performed by your brokerage firms. So you don’t really have to worry about keeping up with this. But it is super important to understand the process and to learn how exactly it affects your trade. 

Forex Trading Regulations

In some countries, there are regulations in the forex market. In general, these regulations are significantly lighter than most markets. This is another reason the forex market is as widely traded as it is.

The regulations vary from country to country. In the US things such as leverage amounts and security (protection from forex scams) are covered in these regulations.

Who Exactly Trades Forex?

What’s another reason Forex is so popular globally? Because foreign currency is not only traded by individual investors. Currency is also traded by corporations, companies, banks, governments, and other groups too.

This includes both commercial and investment banks as well as Central government banks. Additionally, investment managers, hedge funds, and portfolio managers trade forex too.

Lastly, multinational corporations and major businesses also participate in currency trading.

How to Become a Currency Trader 💪

By this point, a series of thoughts must be running through your mind.

“A cheap-to-trade market that has leverage, the potential for great returns, is more accessible and never sleeps?”

“Where do I sign up? How do I become a trader?”

Truthfully, anyone with a bit of money, the time to learn, and some personal restraint can become a forex trader. And a successful one at that.

The desire to research and keep up with global economies helps too. If you take the time to read helpful guides on forex trading to learn the basics, you’ll get a real leg up. Knowing strategies and tactics is key to playing the market.

Next, consider trading with a demo account right out of the gates. Using a demo account allows you to trade with fake money but in connection with the real live market. You will be able to place real-time trades and get a taste of true wins and losses. This is a great way to practice as a beginner without actually sacrificing some cash.

Finding an Online Broker

In the forex market, currency trades are handled through online forex brokers and market makers. As a beginner, not all brokers are equal. The forex broker plays a key role in facilitating trades — and each broker offers something a little different. Some brokers are better geared for the Forex market noobs. Usability, low-fees, and features like copy-trading are super vital for beginners.

When also selecting a broker, it’s important to do your research. You want to evaluate brokers on things like:

• Well rounded trading executions. Speed, consistency, and reliability are super important when it comes to executing trades. Your broker has to have this down pat.

• What are the fees and commission schedules? One of the advantages of trading forex is the generally low cost, especially when compared to stocks. However, there are still a variety of commissions associated with most brokers. It’s important to factor im per-trade commissions. You use these to evaluate your options when comparing them to spread-based commissions.

• How much leverage does the broker offer? Not to sound like a broken record, but leverage is a major advantage to trading the forex market. Leverage is also a major risk, as we will discuss very soon. You’ll want a broker that is within leverage regulations. In the United States, leverage is 50:1 or 2%. In some other countries, leverage can be 200:1. Any broker that doesn’t abide by your country’s regulations likely doesn’t have your best interest at heart. Or maybe they are a bit shady. Depending on the jurisdiction, there can certainly be unregulated brokers and forex scams to watch out for.

• Customer support and trading resources. Considering the forex market operates 24/5, having around the clock support is important. Also having education, tools, and resources is key to being the best trader you can be.

Ok, so now you’re probably wondering which brokers are the reliable and dependable. Luckily, there are several top forex brokers for beginners — and we’ve summarized a few of their popular features below:

1. eToro – Best for Copy-Trading

Copy-trading allows you to follow experts and mirror their trades. E-toro is the absolute best beginner-broker for this practice.

2. IG Group – Most Beginner-Friendly Platform

If an easy to access and understand platform is at the top of your priorities, we suggest IG Group.

3. Forex.com – Best Education

Forex.com has very low trading fees and also offers great educational resources.

4. TD Ameritrade – Best for Forex and Stocks

TD Ameritrade is a veteran in the brokerage business. They know what they are doing and because of their low prices and solid track-record, they make our list.

Risks of Forex Currency Trading ⚠️

We’ve determined that the forex market seems like a pretty sweet gig, right? Currency values that are always changing, light regulations, and leverage seem pretty cool.

With all types of trading and investing there are risks. But what exactly are the main risks involved in the Forex market?

Ironically, some of the very things that make the Forex market sweet can also turn the market sour for some investors. Current value fluctuations, light regulations, and leverage are major risks of trading Forex. And if you aren’t careful, you can get into some deep trouble.

The Fluctuation of Currency Value

Currency values change rapidly and often. Fluctuations tend to typically not be too drastic. But, you can get into trouble as a new trader if you aren’t careful. If you are unable to accurately forecast these fluctuations, you can experience some major losses.

For this reason, the constant fluctuation of currency values can be incredibly risky.

High Leverage Amounts

Due to the high amounts of leverage, you can invest in a large margin with a small amount of cash and control an insane amount of money. While an advantage, this is also a huge risk. If you aren’t risk adverse or careful, it can be easy to get ahead of yourself and lose quite a bit of money.

Lighter Regulations

The light regulations linked to the forex market increases the risk involved. Specific types of trades aren’t even regulated at all. This means the investor has significant control over the types of trades they make.

The lack of regulations and guidelines makes it easy to do your own thing. And also get yourself into trouble.

You can reduce your risk with some solid risk management practices, and a great amount of practice and trading conservatively.

How to Analyze Currencies 💭

The process of analyzing currencies is key to being a successful forex trader. Even if it may seem like a total guessing game, there are patterns to predict currency value trends.

When you analyze currencies, you learn how to study and examine them. By analyzing the forex market, you can make an effort to predict future profits.

It’s important to watch the changes in currency pair prices and figure out trends in movement. This helps you to predict where the values may go in the future. Which can affect your profit.

There are a lot of different ways to analyze currency. The most common ways are technical analysis, sentiment analysis, and fundamental analysis.

• Technical analysis focuses on past price movements to predict the future movements of currency pairs. Traders study prices of specific currencies over a set period of time. They learn to recognize repeat patterns and train themselves to predict the movement of the market. There is also an automated technical analysis through computer software that helps. This software analyzes the currency’s movement and history.

• Next, fundamental analysis focuses on measuring existing/current factors. This is done to predict future factors that will affect a country’s economy. Since the economy can affect currency price, this is an important form of analysis. Investors examine things like inflation and interest rates, GDP, public debt. and other economic factors.

• Sentiment analysis focuses on the number of people who are trading a particular currency. Also analyzed can be the general opinions of traders on the direction in which currency will go (up or down.) Sentiment analysis focuses on looking for a large number of investors purchasing a specific currency. You then use this to influence your trading decisions. Kind of like the hive mind mentality. 🧠

What Makes Currency Rates Fluctuate?💹

There is actually no concrete way to determine what a currency is actually worth. Currency is nothing more than a suggested value.

But, that suggested value is what we go by when trading currency.

So what causes the value of a currency to change? Well, pretty much anything. As briefly mentioned earlier, supply and demand most commonly determine the value of a currency. If more businesses, governments, and investors suddenly want to trade a specific currency, this affects the value.

But other factors also contribute to rate fluctuations.

Macroeconomic trends like inflation, interest rates and political climate can drastically affect rate fluctuations and the forex market. Other macro trends like unemployment rates, tourism, technological advancements and public debt also cause fluctuations.

To keep track of the fluctuations it’s important to follow the economies of the country the currency belongs to. Follow the news and do your research always.

Common Forex Terms Explained 📚

What is Foreign Exchange?

Foreign exchange is the process of exchanging one foreign currency for another. This is done in hopes that one currency will strengthen the other in value.

What are Pairs and Pips?

Pairs: Foreign exchange trades occur in pairs. A pair is the quote of both currencies. The quote price for one currency defines the price relative to the other. And the pairs strengthen each other. The first currency listed is the one you project to go up in value, and the second you believe to go down.

Pips: Pips is an acronym for “percentage in point” or “price interest point.” A Pip is the equivalent of 1/100 or 1% of one basis point, thus the smallest price movement an exchange rate can make. Typical currency pairs are priced out to four decimal places. Pip change is the last fourth decimal point. 

Main Forex Pairs

In the forex market, there are eight majorly traded currencies.

This includes: United States Dollar (USD, US$), Euro (EUR, €), Japanese Yen (JPY, ¥), British Pound Sterling (GBP, £), Swiss Franc (CHF) Candian Dollar (CAD, C$), Australian Dollar (AUD, A$) and New Zealand Dollar (NZD, NZ$).  

These eight currencies and their pairings make up the majority of trade volume. And that’s a lot easier to keep up with than hundreds to thousands of stocks.

Each of the main pairs includes USD. Also important to know is that EUR/USD is the most traded currency pair in the world.

Here is the list of the most common currency pairs and their nicknames.

• EUR/USD (Euro/U.S. dollar) or “fiber.”
• USD/JPY (U.S. Dollar/Japanese Yen) or “ninja” and “gopher.”
• GBP/USD (British Pound Sterling/U.S. Dollar) or “cable.”
• USD/CHF (U.S. Dollar/Swiss Franc) or “swissie”
• USD/CAD (U.S. Dollar/Canadian Dollar) or “loonie.”
• AUD/USD (Australian Dollar/U.S. dollar) or “aussie.”
• NZD/USD (New Zealand dollar/U.S. dollar) or “kiwi.”

What are Currency Futures?

Currency futures, AKA forex futures, is a contract to exchange currencies at a specified time. As the name suggests, you agree to trade currencies in the future. These currencies trade at a price that is fixed on a specific purchase date. 

These types of exchange-traded futures contracts are legally binding. All parties that hold the contract on the day of expiration must trade the currency at the originally specified price on the decided date.

Usually, one of the currency pairs is USD. Currency futures are usually used to hedge other trades. They are also used to predict price movements in currencies.

Futures are often considered one of the more complicated trading instruments but that shouldn’t be discouraging. Regardless of your trading skill level, the top brokers in the futures market have very user-friendly platforms with trading lessons and courses.

The Bottom Line 📃

If you’ve managed to get to this conclusion section, pat yourself on the back!

You just had a wild ride, and hopefully soaked up a lot of information about currency trading in the process.

The truth is currency trading is an art you can master with the correct tools, support and experience. Give yourself time to learn the market and trends and you will be a pro in due time.

Ready to join the largest trading market in the world? We say go for it! 🎉

Fees

Average spread EUR/USD standard

0.75

N/A

All-in cost EUR/USD - active

Variable fees

N/A

Minimum initial deposit

starts from $50

$0

General

Total currency pairs

47

105

Demo account?

Social / copy trading?

Rating

8.5/10 Visit eToro on eToro's website

8.0/10 Visit Interactive Brokers on Interactive Brokers' website

Fees

Average spread EUR/USD standard

N/A

0.9

All-in cost EUR/USD - active

N/A

0.363

Minimum initial deposit

$0

$250

General

Total currency pairs

105

93

Demo account?

Social / copy trading?

Rating

8.0/10 Visit Interactive Brokers on Interactive Brokers' website

9.0/10 Visit IG Group on IG Group's website

Fees

Average spread EUR/USD standard

0.75

N/A

0.9

All-in cost EUR/USD - active

Variable fees

N/A

0.363

Minimum initial deposit

starts from $50

$0

$250

General

Total currency pairs

47

105

93

Demo account?

Social / copy trading?

Rating

8.5/10 Visit eToro on eToro's website

8.0/10 Visit Interactive Brokers on Interactive Brokers' website

9.0/10 Visit IG Group on IG Group's website

About the author

Summer Nevins

LinkedIn Email

Summer is a banking professional and business school graduate turned expert finance writer. Raised in a small low-income town in the southern United States, Summer, like a lot of millennials, learned the ropes of personal finance the hard way. Both her work and life experiences led to discover her true passion for educating others about the complicated field of finance. Summer currently resides in the Greater Nashville Tennessee area with her husband. When she’s not writing, Summer enjoys exploring the beautiful world and hiking all of the challenging trails along the way.