Forex Trading Guide for Beginners

Forex trading used to be the domain of professional traders, but the development of online trading platforms has led to an increase in the number of amateur traders getting involved. It can be a lucrative hobby but there are some things to be aware of when starting out. Our guide will introduce you to some of the basics of forex trading. 

How Does Currency Trading (Forex trading) Work? 

Currency Trading, often known as Forex or Foreign Exchange Trading, is where one currency is transferred into another. The Foreign Exchange or Forex Market is where banks, investors, and financial institutions speculate on the value of national currencies. 

The market is open 24 hrs a day five days a week and all trading is done electronically via computer networks, so it is an OTC (Over-The-Counter) market. The Forex Market is the most liquid, i.e. the most highly traded market, with more than $6.5 trillion estimated to be traded daily. 

Understanding Currency Pairs 

Forex Trading is done using Currency Pairs. This is where the trader speculates on the future value of one currency compared to another. 

A trade is made on two currencies simultaneously, one being sold to buy the other, a ‘quote’ currency and a ‘base’ currency. The price of the pair is determined by the amount of the quote currency that is required to buy the base currency. The trader makes a profit by correctly predicting the price change of the Currency Pair. 

The ‘base’ currency is always on the left of the pair and is the currency used to buy the ‘quote’ currency. The ‘base’ currency value is always 1. 

Central Banks control monetary policy and therefore decide on issues such as money supply and interest rates, which can impact the value of a country’s currency. 

Similarly, government policy on taxation and spending to grow or slow the economy can impact exchange rates. 

News and economic data are also extremely important. Financial institutions and banks want to invest in strong economies that are likely to see increased investment and therefore growing demand for the currency. Any reports that highlight the strength of an economy will encourage more traders to buy that currency. 

What are PIPs? 

A PIP (Point in Percentage or Price interest Point) is the smallest unit of change traders use to measure fluctuations in currency valuations. For most currencies, a PIP is the 4th decimal place. The exception is the Japanese Yen, where the PIP is the 2nd decimal place. For example, if the price of EUR/USD moves from 1.1402 to 1.1403, this would be a move of one PIP. 

Trades on the Forex Market often run into millions so small bid-ask price differences of just a few PIPs can translate into significant profits – or significant losses. 

Beginner Trading Strategies 

The key to being successful in Forex Trading is to correctly predict the movements of the market. There are two main types of analysis that traders use to try to get their predictions right: Fundamental Analysis and Technical Analysis. 

Fundamental Analysis 

This type of analysis looks at why currencies are behaving as they are. There are a number of factors that affect the value of a currency, such as the strength of the country’s economy, political and social factors, and analyzing these can give an indication of the likely direction of travel for that currency. 

Fundamental Analysis uses economic data, such as inflation, GDP, and interest rates and it works best over a medium to long term basis. For example, an increase in central bank interest rates in a developing country will have a positive effect on that country’s currency, whereas an increase in interest rates in a developing country will have a negative effect on the value of the currency. This is because moderate inflation in a developing country is seen as a sign that the economy is growing. Conversely, rising interest rates in a developing country can be seen that the economy being out of control. 

Technical Analysis 

Some traders use Technical Analysis to look at the patterns of trading in the market and identify trends to indicate levels of supply and demand in the market. The idea is to identify the right time to enter and exit the market based on trends in the data. 

Technical Analysis is better for a short to medium-term strategy and it requires expertise in interpreting charts. It requires no knowledge of why currencies are behaving in the way they are, instead, the strategy relies on monitoring graphs and charts to identify the best entry and exit points, when to short when to go long, and more. 

Traders can, of course, combine both Fundamental and Technical Analysis. Read more on forex trading strategies. 

Ready to Start Trading? 

There are many platforms that allow traders to get involved in trading Currency Pairs and these are accessible from mobile phones, laptops, and desktop computers, making entry to the market easy and quick. 

In addition to a good trading platform, you need a way of transferring the money you wish to invest and the profits you will hopefully make. The e-wallet STICPAY provides customers with a secure, quick, and easy-to-use digital wallet that can hold your assets in a number of fiat currencies, as well as some cryptocurrencies.  

Transfers from your STICPAY wallet to your trading platform are almost instantaneous, which is vital in the fast-moving world of forex trading, and the associated costs are low. 

STICPAY is licensed by financial regulators across the world, including the FCA in the UK, and has enhanced KYC and AML checks to ensure your data and finances are secure. 

STICPAY’s Forex Cashback Offer: 

If your Forex broker is one of STICPAY’s partners, you can gain cashback on your Forex transactions. Find out more about STICPAY's forex cashback service.  

Set up your STICPAY digital wallet and start your forex trading career now!