The only thing absolute beginners will have to do after reading this brief but comprehensive guide is to exercise maximum discipline and be consistent. All other steps and key knowledge points will be addressed in this text. This guide could also be suitable for experienced traders who want to revisit the main topics in Forex trading and remember any forgotten knowledge. There will also be practical steps every beginner should follow and we will touch on all important things. Think of this guide as a zero-to-hero guide for beginners. With these said this could be the Forex 101 for dummies you need to read very carefully.
Forex 101 Guide Syllabus
1. Introduction to Forex Trading
- Understanding the basics and dynamics of the Forex market
- Importance of discipline and consistency
2. What is Forex?
- Overview of the Forex market
- Forex market participants
- Decentralization and the Role of Brokers
3. Why Trade Forex?
- Potential profitability and financial freedom
- Flexibility of trading hours
4. Basic Forex terminology and important concepts
- Forex currency pairs, base currency, and the quoted currency
- Bid and ask prices, Spread
- Pips, lot size, leverage, margin, and margin call
- Understanding the essential concepts in Forex
5. Fundamental analysis and technical analysis
- The fundamental analysis explored, macroeconomic indicators
- Macroeconomic indicators impact the Forex market
6. Technical analysis
- Chart Types and Timeframes
- Technical indicators, moving averages, and MACD
- Support and Resistance levels
7. Trading platforms, demo account, and broker selection
- Trading platforms and their importance in Forex trading
- Demo account quick overview
8. Forex trading strategy
- What is Forex’s trading strategy
- Forex trading strategy template
9. Trading Journal Template
- Trading journal template
- Why is keeping a trading journal essential
Introduction to Forex trading course for beginners
As in any field or business, in Forex trading, too, understanding the basics of your industry and learning the rules of the game is a critical step before any success can be achieved. Forex is a complex market and understanding its dynamics and basics will help you properly prepare yourself for success.
What is Forex?
Forex or foreign exchange is an international currency market that operates 24/5 and trillions of dollars are traded on a daily basis. This characteristic makes Forex the biggest financial market in the world. It dwarves other markets including stock markets, cryptocurrencies, or any other financial market in the world. Around 7 trillion dollars are traded daily which is a huge number. To put it in perspective the total value of the US economy is around 27 trillion dollars and on the Forex market, 27 trillion dollars are traded in just one week. Let’s switch from mind-blowing facts to the actual participants which is key in decoding the Forex market dynamics. The Forex market is decentralized and consists of large international commercial banks, big hedge funds, prime and retail brokers, professional and retail traders, and many more small players that have a lesser impact on the Forex markets. Decentralization means there is no central authority or regulator which makes Forex difficult to predict or to know exact numbers. This lack of central governing authority makes Forex decentralized and it becomes critical to select a reliable broker that acts as an intermediary and lets all client’s transactions access the exchanges in reputable locations. To learn Forex Trading 101 it is critical to know these concepts. Since there is no central authority, the Forex consists of different trading sessions meaning at different hours of the day different financial centers are active and trading and exchanging currencies in the market.
Why Trade Forex?
Forex trading can be very challenging as the market is not centralized and it is difficult to predict the next move of the market. Despite this traders have come out with multiple methods for coping with this unpredictability and their main goal remains to understand what is going on in the markets and react to it till the current wave ends. Forex trading can be super profitable and numerous traders have achieved financial freedom trading Forex markets and some of them even managed to become millionaires. With the proper approach and knowledge base discussed in this guide, it is possible to become profitable in Forex trading and achieve financial freedom. Since the Forex markets are active 24/5 the market can be traded anytime and from anywhere giving Forex traders superior flexibility. In other markets like the stock market for example there are trading sessions and after this trading session the trading ends which may be disadvantageous for traders from different time zones. This is not the case in the Forex market and it gives the ability to trade during the day on the hour of your choice. In this guide on Forex Trading 101, there are also exact steps for developing your first trading strategy, and the template in the end will provide a helping hand to beginner FX traders.
Basic Forex Terminology
Before we can continue with some main concepts and further deepen our Forex knowledge, let’s first define some of the terminologies you will face as a beginner trader when learning about the markets. Without this terminology, it will be much harder to make sense of Forex markets and their slang.
Currency pair, base currency, and quoted currency
As we mentioned on the Forex market, currencies are traded. These currencies are traded in the form of currency pairs where each currency is pegged against other currencies, forming what’s called Forex currency pairs. For example, the most popular currency pair is EURUSD. EURUSD reflects how much you have to pay in order to buy 1 EUR. The EUR is called the base currency and the USD is quoted currency respectively. Forex pair price shows how much quoted currency a trader has to pay in order to buy 1 unit of the base currency. Understanding Forex 101 course starts with understanding what each of these pairs represents and how they move. So let’s continue our journey with other important terminology.
Bid and Ask prices
When trading Forex markets there are always two prices given for each currency pair called the bid and ask prices. In general terms, the bid price is the maximum price the buyer is ready to pay for an asset while the ask price is the lowest price the seller is willing to sell the asset. The bid price is usually lower than the asking price.
Spread
The spread is the difference between the bid and ask price and is the amount a trader has to pay whenever he opens or closes the trading position. For example, when a trader buys a EURUSD he has to buy it with the currency price plus the spread. This way the broker is always making a profit with spreads. One key aspect to memorize here is that the trader pays the spread twice whenever they open and close the position. Since the trader pays the spread twice it is important to select a broker with low spreads that also offer good trading tools and other services.
Pips
The fourth decimal point in the price of Forex currency pairs is called the pip. In the EURUSD case, let’s say the price was 1.1012 and became 1.1013 the difference between these two prices gives us the amount by which the price changed. We can say that the price increased by 1 pip or 0.0001.
Lot
A lot refers to the volume of the trade or the size of a transaction. 1 standard lot is accepted to be 100 000 USD. The lot size is important because it can affect the potential profits and losses. More lot size in trading means the potential profit is much more, but we do not always have such huge amounts of money to trade Forex. This is why the brokers introduced leverage, a debt that is taken during opening the position and amplifies trading account buying power several times.
Leverage
Leverage is the ability to control a much higher trading position than your trading account. Forex gives traders an advantage over other markets as the leverage can be 1:30 and even 1:500 in some cases. If you have 100 USD in your trading account and got a leverage of 1:100 it means you can open the position meaning buy or sell the EURUSD for 100 * 100 = 10 000 USD. Leverage is a double-edged sword and has the potential to blow up the trading account very quickly when approached with less responsibility. We will address leverage in the risk management section of this trading Forex 101 guide.
Margin
The margin is the portion of a trader’s account balance that is set aside as collateral to open and maintain positions. This is especially the case when trading with leverage. Brokers always block some part of the trading account when opening a trading position. It is important to know how much margin the broker is requiring to define exactly what your trading capital should be to trade with certain lot sizes.
Margin call and stop out
when a trader’s account balance falls below the required margin level margin call occurs. This means the broker notifies the trader to add more funds in order to maintain the opened trading positions in the account. If a trader does not add funds and the account balance continues to decline and reaches a specified level a stop-out is triggered, meaning all the opened trading positions are liquidated and closed. Stop-out is a good measure to stop further trading losses.
Stop loss (SL)
A stop loss order is an order type to close the opened trading position when the price reaches a certain price level to limit losses. Example: you opened a EURUSD sell order at 1.1010, if the price goes in the opposite direction you would lose money, and stop loss can save you from large losses. You set the stop loss at 1.1012, when the price reaches this price the position is closed automatically and you incur the loss of 2 pips amount (1.1012-1.1010). If you had not set the stop loss order, the price could go even above 1.1012 and you would have lost more money.
Take profit (TP)
Take profit is the opposite of stop loss order and closes trade when trade is in profit and reaches a certain price level. To continue with the previous example if the price went lower from 1.1010 to 1.1005 you would be in profit of 5 pips. In this case, to make sure you get the profits to take profit could be set at 1.1005 to exit the position in profit.
Liquidity
The speed at which the currency pair can be bought and sold is called liquidity in Forex. Most of the time the liquidity is enough in Forex to get into a trading position right away. But sometimes when the trading week is ending there may be low liquidity and it could complicate the cloning speed of the trade. The most liquid currencies are EURUSD and other major pairs such as GBPUSD, USDJPY, and USDCHF.
Market order, stop order, and limit order
Market order means buying or selling the currency pair at the current market price. The market order is the fastest way to get into a trading position. Stop orders are set to initiate a trading position when the price hits a certain price. Stop loss and take profit are both stop orders as they close the trade when the price hits a predetermined level. Limit orders are more complex and they track the price and execute orders when the price reaches a certain level and then exceed to get triggered.
Essential Concepts in Forex Trading
In order to start trading we have to understand the essential concepts and then trading platforms. Let’s start with the concepts every beginner trader has to understand.
Currency Pairs and Exchange Rates
In the Forex or FX market, the main trading instruments are currency pairs that are traded 24/5. The price of currency pairs is also called exchange rates. Understanding the currency pairs means understanding major, minor, and exotic pairs. Major pairs consist of well-established developed countries’ currencies. Major pairs are EURUSD, GBPUSD, USDJPY, and USDCHF and they are the most liquid and have lower spreads than other currency pairs. This makes them very popular instruments among traders as they can be traded cheaply and offer very fast trade execution speeds. Minor pairs are simply currency pairs that do not include USD and are major currencies, popular minor pairs include EURGBP (EUR vs the Great Britain Pound), AUDCAD (Australian Dollar vs Canadian Dollar), NZDJPY(New Zealand Dollar vs Japanese Yen), GBPJPY, and others. Exotic pairs are currency pairs consisting of developing countries’ currencies as quoted currency. Exotics such as USDTRY (US Dollar vs Turkish Lira), EURTRY (Euro vs Turkish Lira), USDZAR (US Dollar vs South African Rand), USDPLN (US Dollar vs Polish Zloty), and others. Exotic currencies are known for their lower liquidity and abnormal price fluctuations making them riskier than major and minor pairs. Because of this, it is not recommended for beginners to trade exotics unless they have accumulated substantial experience in currency markets.
Understanding Pips, Lots, and Leverage
Leverage is a very useful tool in the hands of wise traders who can use it to their advantage. Leverage must be combined with wise margin and can be used to open large trading positions with low account balances. The lot size is essential in trading risk management and is closely related to leverage. For example, with the 1:100 leverage, it is possible to open a trading position with 1 lot ( which is 100 000 USD) with just 100 000/100 = 1 000 USD trading account. To incorporate the pips in this equation let’s create a table of pips vs lot sizing. When trading with 1 lot the 1 pip is usually around 10 dollars. This means if your trade is going in your direction and it moves for 1 pip you have made a profit of 10 dollars (0.0001 * 100 000). This is important because selecting a proper lot size and knowing how much you are losing or winning for every 1 pip movement can define how risky the trade may be. With 1000 dollars opening a position with 1 lot size is very risky as consecutive losses of 2 trades with 10 pips each can lose you 200 USD in a very short period. Which is 20% of your trading account. We will outline the best risk management approaches using stop loss, take profit and position sizing in later chapters, just know that it is super important to understand these concepts and use them wisely to your advantage.
Spreads and Commissions
When trading Forex we always pay spreads twice when opening and closing our trading positions. This makes it super important to find brokers with lower spreads not to get our profits eaten by the spreads. The industry standard spread is around 1 pip for major pairs like EURUSD. Meaning for every trade with 1 lot you have to pay 1 pip at the opening and 1 pip at the closing of the trade. Each trade with 1 pip spread and with 1 lot trading volume will cost you around 20 bucks. If you are trading Forex to make a 2 pip profit it means you are going to lose money as soon as losing trades occur. Knowing this, many brokers offer trading accounts with spreads starting from 0 pips but have a commission for each lot traded. The standard commission acceptable is 7 USD round turn, meaning you pay a maximum of 7 USD for each 100 000 traded. Some brokers have 3.5 USD per side per lot meaning the trader pays 3.5 USD twice for each trade.
Fundamental Analysis in Forex Trading
In order to buy or sell the currency pair it is essential to know which direction the market is going. The basic premise of Forex trading is the same as in any business we want to buy cheap and sell high. There are two analysis methods used by traders around the world to predict what markets are going to do and act accordingly. Fundamental analysis focuses on macroeconomic trends and fundamental market forces analysis and their potential impact on currency prices. Fundamental macroeconomic forces such as inflation rates, employment rates, interest rates, and central bank policies can directly affect a currency’s strength and define if its price will go up or down.
Exploring Forex market fundamental analysis
Tracking the fundamental indicators can be achieved by using an economic calendar. Many websites offer free economic calendars and allow traders to know the schedule of all upcoming indicators. Traders try to predict how each of these indicators will affect the medium to long-term price trends and capitalize on this analysis.
Key Economic Indicators and Their Impact on the Forex Market
Inflation is affecting currency prices directly, higher inflation weakens the currency while lower inflation makes currency stronger than other currencies. In the EURUSD case when the Fed increased interest rates it lowered inflation and made USD stronger. When the dollar is weak we need more dollars to buy EUR, meaning the EURUSD is going to trend up and when USD gets stronger the EURUSD is going to get into a downtrend. Uptrend is
Interest Rates and Central Bank Policies
Interest rates affect inflation rates and finally, inflation rates directly change the currency’s strengths. Higher-than-expected inflation makes the currency weaken against other currencies. If USD inflation rises EURUSD is going to trend up as there is more USD necessary to buy 1 EUR and vice versa. Central banks have a major word in deciding how inflation will change as they can control the money supply and set important monetary policies for the country. Fundamental factors tend to affect prices in the medium and long term and fundamental traders generally prefer to hold open positions for longer periods. Besides macroeconomic indicators, geopolitical events such as wars and pandemics also have a major impact on the currencies. Wars tend to make the economic situation worse.
Technical Analysis in Forex Trading
You found out that the Fed increased interest rates and this is going to make USD stronger but the trend is still moving upwards. So, how can you find the best price level to open a sell position and capitalize on the stronger dollar? The answer is to analyze price charts with various mathematical formulas and technical analysis is the method for doing so.
Chart Types and Timeframes
Charts can be seen in various forms including candles, bars, and line charts. The most popular form is candle charts. They show the open, close, highest, and lowest prices for a specified period also called time frames. For a 5-minute time frame, each candle shows open, close, highest, and lowest prices for 5 minutes.
Indicators and Oscillators
Moving averages are the most popular technical indicators that traders love to use. They show if the current price is above or below the average price for certain periods. Technical indicators are mathematical formulas that are applied to price charts to provide traders with insight into price dynamics. Another popular indicator that can be seen in the illustration above is called Moving Average Convergence Divergence (MACD) and shows when the price is oversold or overbought. Combining multiple indicators can increase accuracy and profitability as indicators are known to be lagging.
Support and Resistance Levels
The support zone is the price level at which the price was not able to go lower and it can be used to anticipate important levels the price might have trouble going beyond. The resistance level is the price that reached during an upswing and wasn’t able to move past. If the price touched any of these levels and turned back it may indicate that the price had not had enough power to break the level and is going to move in the other direction until it finds the opposite level.
Trading Platforms, demo accounts, and broker selection
Before we jump onto trading strategy development and template let’s explain the prerequisites.
Trading Platforms
Familiarize yourself with one of the popular trading platforms. MetaTrader 4 (MT4), MetaTrader 5 (MT5), cTrader, and TradingView are among the most popular platforms in Forex nowadays. The MT4 software is offered by the majority of Forex brokers and beginners are strongly advised to learn the basics of MT4 and use it in their trading practice.
The demo account and its importance
A demo account refers to a trading account that offers real market trading but the money on the account is fake. This allows traders to exercise trading skills like it was a real account. The importance of demo account trading can not be underestimated.
Selecting the proper broker
Make sure the broker is regulated and has a track record of allowing traders to withdraw their funds. After that, find the proper training account type. If you are going to use scalping strategies then you will need to choose the account with the lowest spreads, if you are trying to day trade or swing trade then lower commissions are a priority. We will explain each of these trading styles in detail below. At any rate, the broker should be reputable and well-regulated and offer attractive spreads and commissions.
Developing a Forex Trading Strategy – A cornerstone of Forex trading
A trading strategy is a set of rules that address the trading process from opening the position to closing it. It defines the rules for entering the trade and rules for exiting the trade. Trading strategy has a risk management system embedded to protect traders from unexpected losses.
Types of Trading Strategies
There are several types of trading strategies called scalping strategies, swing trading strategies, or day trading strategies. Scalping strategies focus on opening many trades during the day and making small profits from these trades. Because of their nature, scalping strategies require super-low spreads. Swing trading targets price swings to capitalize on market movements and trades may be opened for even days. Swing trading requires low commissions and spreads are less important. Traders should select trading accounts depending on their reading strategy.
Risk Management and Position Sizing
It is better to always use stop loss and take profit to have predetermined rules and avoid large losses. Try not to risk more than 1-2% of your trading account balance on any one trade. In a 1000 USD case, it would be 10-20 USD per trade. With this method, it is possible to maintain a trading account in the long term and stay in the business which should be the primary goal of every Forex trader. With this Forex trading basics 101 course we have a trading strategy template also included to make it easier to develop one.
Forex trading strategy template
Entry rules
Identify the trend and wait for a pullback from the major support or resistance zone.
Indicators to use for trend filtering: 100-day simple moving average (SMA). If the price is below the SMA then I will look for only sales and vice versa.
Exit rules
Set stop loss at no more than 10 pips and take profit at 20 pips to win 2 times the risk if the trade is successful.
Risk management rules
Set the risk-to-reward ratio at 1:2 as we are risking 10 USD to make 20 USD. With this Risk-reward ratio (R: R) 1 profitable trade will equal 2 losing trades.
Position Sizing
Calculate position size based on risk per trade. If we can not risk more than 20 USD per trade make sure you trade with 0.1 lots (10 000 USD) to set the stop loss at a maximum of 20 pips.
Trade Management
It is possible to set the stop loss in a breakeven once the trade is in profit to trade risk-free. This can be achieved by managing open trades and monitoring each position closely.
I do not trade when
When important fundamental indicators are released it may result in increased price volatility and trigger stop loss so let’s avoid trading during these events.
Forex Trading Journal
Write down every single trade taken to analyze them later and deduct if the strategy needs further tweaks. The best time to analyze the trading performance is when 25-30 trades have been made. This will give enough trading sample size to analyze if a strategy is working or not.
Trading Journal Template
Below is the most basic trading journal template that can be tweaked and improved. But the basic premise is the same, make sure to track your trading activities to improve yourself.
Trade Date: __________
Currency Pair: __________
Entry Price: __________
Exit Price: __________
Position Size: __________
Trade Duration: __________
Outcome:
Comment:
Emotional State:
These tricks of having a basic trading strategy and trading journal are essential in becoming a profitable FX trader. With these Forex 101 tips and tricks, it will become much easier to become a profitable trader and achieve financial freedom.
FAQs on Forex Trading 101: The Ultimate Guide
How to start Forex trading as a beginner?
It is best to start with the above Forex 101 lessons that provide a basic overview of Forex trading and trading strategy and journal templates. It is best to understand the terminology, then concepts, and then put them into practice by using the above templates.
What are the best Forex Trading 101 tips?
Educate yourself about Forex market topics, learn about fundamental and technical analysis, develop a trading strategy, use a demo account, and conduct a trading journal, could few tips from the trading course 101.
What to know before trading Forex?
Forex market basics such as participants, and other details. Fundamental forces that affect exchange rates. Familiarizing with trading platforms and selecting the broker.
