How To Trade Forex?

Ready to master the art of Forex trading? Join us as we unveil the strategies, tools, and techniques to navigate the global currency markets successfully.

Currencies are exchanged around the clock throughout the globe. With an estimated $6 trillion in daily turnover, this alone is an indication of the immense opportunities available in the Forex market.

Thanks to technology, it has made it easier for any trader to pursue the lucrative opportunities available in the Forex markets. But where there is potential reward, there is also risk. This article provides a step-by-step guide to help you get started with your Forex journey the right way.  In addition, we’ll also present popular forex trading strategies and tips.

Open an account with an award-winning, regulated Forex broker for a world of trading opportunities!

Preparing for Your First Forex Trade

Trading Forex can be highly rewarding, but there are risks involved. Therefore, it is essential not to just jump into the market without the right knowledge. The better prepared a trader is, the greater their chances for success.

Key steps before you make your first trade in the Forex market:

Step 1: Learn About the Forex Market

The first logical step is to learn about the Forex market, including:

  • Forex market structure
  • Forex market participants
  • Important terminology
  • Factors that influence and move the market
  • And more…

A solid grasp of the basics of Forex trading will help you understand the available risks and rewards, build your trading skills and assist you in using important trading tools and resources.

To get started on the basics of Forex trading, read our article: ‘What is Forex’.

Step 2: Choose How You Want to Trade Forex

Forex trading is all about buying and selling (exchanging) currencies. The most common Forex trading products retail traders use are spot Forex CFDs and FX options. With AvaTrade, you have the choice of both CFDs and FX options.

Forex CFDs

A CFD (Contracts for Difference) is a derivative product that allows traders to speculate on the price changes of underlying Forex assets without actually owning them.

Learn more: What are CFDs?

FX Options

FX options are derivative contracts that give you the right (but not the obligation) to buy or sell a Forex contract at a specific price on a specified date.

Both CFDs & Options profits and losses depend on the size of the trade position as well as how far the price moves between the trade’s entry and exit points.

Learn more: Options Trading Guide.

Step 3: Choose a Broker

A broker provides access to the Forex market. This is a decision every trader must make with great consideration as the broker is your trading partner.

Some of the factors to consider when selecting a Forex broker include:

  1. Regulation - The number of licenses and jurisdictions the broker is legally allowed to operate in, the safety of funds, transparent services, and other criteria.
  2. Trading Platforms – The types of trading platforms offered, reliability, tradable assets, automated strategies, cross-device functionality, ease of use, trading costs, and more.
  3. Trading Resources – The broker should supply you with an Economic Calendar, educational materials, a demo account, trading calculators, risk control tools, and more.
  4. Payment Methods – There must be safe and convenient payment options, quick deposits, and, most importantly, hassle-free withdrawals.
  5. Customer Service – The broker should be professional and responsive and provide exceptional support.

AvaTrade boasts all of the above features and more. As a highly reputable brokerage firm, you are guaranteed an exceptional trading experience at AvaTrade.

Step 4: Open a Trading Account

After choosing a broker, you should open a trading account to trade your preferred Forex assets. Be sure to check what account options are offered and select the appropriate one for your needs.

For all traders, especially beginners, it is advisable to start with a demo account to practice trading without risking any real money in the markets. When you are ready to trade for real profits, you can switch to your real money trading account.

Open a Demo account to practice what you've learned or a Real account to start trading today!

Step 5: Prepare a Trading Plan

how to build a forex trading plan

A trading plan is a clear and detailed plan of how you intend to trade. It helps you stay the course by sticking to clearly defined goals, and not just randomly trading. A trading plan details aspects such as your:

  • Trading strategy
  • Trading goals and ambitions
  • Risk management
  • Trading log
  • Overall trading rules
  • Trading psychology

A trading plan will help you make trading decisions efficiently as well as build the trading discipline required to achieve consistent success in the Forex market.

Step 6: Choose a Forex Pair to Trade

In the Forex market, you can trade numerous currency pairs that fall into broad categories of majors, minors, and exotics.

The pairs differ in the level of liquidity and volatility, which consequently impacts their spreads and overall risk exposure.

For beginners, it is preferable to choose a pair that is highly liquid and has low spreads. It is also advisable to trade assets that have large media coverage so that there is readily available information to help you make quality and comprehensive analyses.

Some of the most popular fx pairs you can trade with AvaTrade include EURUSD, GBPUSD, USDJPY, USDCHF, and many more…

Step 7: Analyse the Market

When trading Forex, your profits or losses will be determined by your entry and exit prices in the market. You must perform an analysis of your preferred assets to identify the best opportunities in the market as well as the most optimal price points to take advantage of the prevailing opportunity.

Traders basically utilize 3 analysis types in the Forex market:

  • Technical Analysis - utilizes formations on the price charts, graphical objects and mathematical functions to predict future price dynamics.
  • Fundamental Analysis - relies on assessing economic factors affecting the asset’s price, in order to define its fair market value.
  • Sentimental Analysis - is based on examining prevalent market sentiment expressed in open Buy/Sell positions and in COT (Commitment of Traders) reports.

Ultimately, there is no right or wrong strategy, neither is there a superior strategy. Ideally, every trader should have a solid understanding of all types of analysis. Using more than one type of analysis can help reveal new opportunities and expose potential risks. With experience, you will customize a strategy to suit your personality and risk appetite.

Step 8: Buy or Sell

Having completed your analysis of the chosen currency pair, you will then be able to decide whether to buy or sell.

In Forex, you buy (go long) when you expect the price of an underlying asset to rise. Similarly, you sell (go short) when you expect the price of an underlying asset to fall.

For instance, while doing analysis, you identify a signal to buy the EURUSD pair, that can be triggered when the price is falling to a support area. If the current price is 1.1750 and falling, a trader may wait to buy at 1.1700 in anticipation that the price will be unable to breach that support area.

Alternatively, the trader may also consider the price of 1.1800 as a strong resistance area and look to sell EURUSD if it climbs to that level.

possible position outcomes

Step 9: Risk Management

Forex is a market full of opportunities, but risks are also present. To have a chance at achieving and sustaining success, you must have a solid risk management plan.

Some of the risks that traders are exposed to in the markets include:

  • volatility risk
  • liquidity risk
  • leverage risk
  • market risk

risk mitigation techniques

Step 10: Monitor Your Positions

The Forex market is highly dynamic and volatile, which presents many opportunities and risks. This is why it is so important to actively monitor your trade positions to ensure that they are in tandem with the prevailing market situation.

Do not neglect to monitor your positions as a good trade can easily turn bad and vice versa. Keeping your finger on the pulse will help you to minimize losses or boost trading profits.

Some strategies to adequately monitor your trade position include:

  • Staying on top of emerging news and events
  • Setting up alerts
  • Subscribing to trading signals
  • Following top traders and others through social media
  • Take advantage of monitoring and reporting features available through the trading platform and apps

Step 11: Close Your Trade

After opening a position and monitoring it, the next vital decision is when to close it. Closing your trade is what determines whether you earn a profit or incur a loss. A good exit strategy will ensure that you do not maintain unnecessary risk exposure in the markets and that you also do not leave good profits on the table.

You can close your trade when:

  • It hits the stop loss or take profit levels that you defined
  • A trading session/week has ended and there will be unforeseen risks in the new session/week
  • You need to avoid a margin call
  • A new lucrative opportunity has arisen, and you want to free up capital
  • The market situation has changed, and your initial analysis is no longer valid

A Sample Forex Trade

One of the most significant dates in the history of the Forex market is January 15th, 2015. On this day, the SNB (Swiss National Bank) abandoned the Euro-peg it had set on the Swiss franc.

Since September 2011, the SNB set a floor price of 1.2000 on the EURCHF rate. This meant that the exchange rate of the pair could not go any lower than the set floor. There was only room for the exchange rate to go higher.

On that fateful day when the SNB abandoned the set peg, the EURCHF pair tumbled to below parity (1.0000), with the Swiss franc gaining over 30% in a single day. To put that into context, the pair traded in a tight range of between 1.2000 and 1.2360 in the entirety of 2014. However, on 15 January alone, EURCHF traded as low as 0.8050, representing a loss of about 4000 pips.

Most pairs experience average price changes of about 100-200 pips during volatile days. The sheer scale of this particular day illustrates the potential risks and rewards that traders are exposed to in the Forex markets.

Like in any market, prices of Forex assets are influenced by forces of demand and supply. Some of the factors that trigger price changes in Forex markets include Central Bank Decisions and Interventions, Economic/Political News and Events, and Market Sentiment.

To learn more about these and other factors influencing the Forex markets, please visit our “What is forex” page.

Some Of The Best Forex Trading Strategies

There are numerous trading strategies that traders can use to identify and exploit high-quality trading opportunities in the market. For any trader that seeks to achieve consistent trading success, it is important to be equipped with flexible strategies that will help you make the most of opportunities available in diverse Forex market conditions.

Here are some good strategies to consider:

Price Action Trading

Price action is considered the purest form of technical analysis, and it typically involves interpreting the behaviour of market participants using raw prices. Most price action strategies involve the use of ‘naked’ charts and candlesticks.

The most common types of Forex charts for analysing prices:

  • Line Charts – These are plotted using only closing prices, thus smoothing out price action and making it easy to clearly identify trends as well as major support and resistance areas.
  • Bar and Candlestick Charts – These provide more detailed price information during specific time periods. In addition to closing prices, a single price bar or candlestick also shows open, high, and low prices achieved during every time period.

Price movements in the market lead to the formation of different types of candles and candlestick patterns. Reading these patterns can give clues as to what market sentiment is developing or prevailing in the market.

There are numerous popular candlestick patterns such as head and shoulders, double bottoms, and bullish/bearish engulfing formations that provide various price action clues such as trend continuation, trend reversal, and trend neutrality in the markets.

Trend-Following Strategies

An age-old wisdom in the markets is that the ‘trend is your friend.’ The idea is that you do not need to ‘fight’ with the markets, you simply need to ‘flow’ with it. There are 3 types of trends: Bullish (uptrend), Bearish (downtrend), and Neutral (sideways).

When trading directional trends (uptrends or downtrends), it is important to gauge their momentum, speed, and duration. Sideway trends are characterized by prices oscillating between areas of support and resistance. Markets generally range more than they trend. It is, therefore, important to have strategies to take advantage of opportunities that are present in range-bound markets.

Breakout Trading

Markets never range indefinitely. Eventually, the defined levels of support and resistance are breached and new trends emerge. Every trader should always look out for breakout opportunities so as to ride new trends from the very beginning.

Forex Trading Tips

forex trading tips for beginners and pro's

Here are some tips to become a better and consistent Forex trader:

  • Utilize a demo trading account - Always utilize a demo account even if you no longer consider yourself a beginner. A demo account will ensure that you continuously refine your trading skills, try out new strategies, adjust new leverage levels, and explore new markets risk-free. As they say, ‘practice makes perfect.’
  • Keep learning - Markets are dynamic. Keep your desire to learn about the markets to continually improve your trading ability and competence.
  • Always use stop losses - Forex markets are highly risky. Always ensure that you protect yourself at all times.
  • Control your emotions - With all types of trading, the trader is his/her own biggest enemy. Keep your emotions in check and maintain objectivity throughout your trading activity.
  • Keep a trading log - As mentioned earlier, maintain an active diary of your trading activity. This will keep you accountable and you will also be able to identify effective strategies and areas that need improvement in your trading activity.

Are you ready to open your first Forex trade?

How to Trade Forex FAQs

Can anyone trade Forex?

Yes, anyone can trade Forex, provided they invest time to understand the market's workings and develop a thoughtful strategy.

What do I need to start trading Forex?

You need a computer or a smartphone, a reliable internet connection, a Forex trading account with a reputable broker, and a foundational knowledge of the Forex market.

How much money do I need to start trading Forex?

At AvaTrade, you can get started with as low as $/€/£ 100. Nonetheless, the amount you decide to start trading Forex with depends on your financial situation, trading skills, and experience, risk appetite, as well as your trading goals.

How to trade Forex for beginners?

Beginners should start with learning the basics of Forex trading, then practice on a demo account before transitioning to live trading, always adhering to a carefully thought-out strategy.

What currencies move the most?

The currencies that tend to move the most are often those of major economies, such as the USD, EUR, and JPY. However, the specific volatility of a currency can vary based on economic events and news.