What is Forex Trading and How Does It Work? Beginner Guide

Sometimes it happens that you are sitting with your friends and they start talking about current affairs and life in general. Then suddenly, one friend mentions what is forex trading and you have heard this term a lot but don’t know exactly what it means.

Trading Forex is the future of the world.

Here we will tell you about forex trading at a beginner level so that you get an idea about the market and if it piques your interest, then you can delve into the realm of forex trading.

What is forex trading

In simple words, forex trading refers to the “exchange of currencies.” You simply trade currencies of different countries and make a profit with them.

However, it may sound simple but forex trading is a lot more complicated than this simple definition.

Trading Forex is a whole science that involves careful examination and analysis of market trends, trade flows, brokerage, trading platforms, forex charts, and so many more technicalities.

But we will not scare you because this is a beginner-friendly guide to make you familiar with what is forex trading.

Also, do you know that the daily trading volume for forex trading is more than $6 trillion? Sounds fascinating right? Well, it is and that’s why we are here to guide you through this market.

What is Forex Market?

As we said forex trading is about exchanging currencies. For instance, you are from America and you want to travel the world and you choose Saudi Arabia as your destination. Let’s say you want to buy something in Arab, so what will you do?

The answer is simple; you pay for it not in American dollars but in Saudi Riyal. You will have to trade dollars for Saudi Riyal to transact in locally acceptable currency.

A similar transaction takes place in forex trading but that doesn’t happen in person. Rather all forex trading happens online electronically through computer networks in a decentralized manner.

A forex market is a place where people trade currencies and it is an online market that works 24 hours a day, five days and a half in a week.

Previously, only large banks and multinational corporations invested in forex markets because it required immense capital but due to the retail market, now individuals can easily invest in the forex market through brokers.

Are forex trading and FX trading the same thing?

Forex trading and another word in the market which is “fx trading” basically they all are same thing. The term “forex” basically comes from forex exchange to make it cool. You might see the following terms on the internet and social media.

• Forex
• Forex trading
• Fx Trading
• Fx

All these names mean the same and they all are part of foreign currencies buying and selling.

How to start forex trading

Forex trading requires you to pay close attention to all the details in the market about interest rates, economic trends, news, transactions, volume, and liquidity.

But don’t worry, we will guide you in simple steps on how to get into the forex trading business.

1: Learn Forex Trading

As we said earlier, you have to get to know some basic details about forex trading before you start trading because that can get complicated.

2: Make an Account

There are many different brokerage and trading platforms for forex trading. You can start by making an account on those platforms.

You can easily make a demo account to understand the forex market and make deals using demo money. This will give you exposure and real experience.

3: Forex trading strategy

Now you will ask what is forex trading strategy. Well Forex traders requires careful planning and strategies to predict the market’s trend and movement. It can be difficult for beginners but with patience, time, and practice, we know you can pull this off.

4: Be Patient, Take Risks

Forex currency trading is not an easy field. It involves immense emotional upheavals. We advise you to be patient but don’t be scared to take risks.

Trading is a science but when striking a deal, you will have to take a risk. But stay patient. Invest that portion of the money that you can bare to lose.

However, keep yourself positive because trade can go either way especially if you are just starting out in the market.

What is a pip in forex?

A pip stands for “percentage in point”, it is the smallest price move an exchange rate (currency) can make based on market convention. For most currency pairs, it’s the fourth decimal place (0.0001).

Through my own experiences, I have come to realize that understanding the exact formula for a pip is not that important.

Modern trading platforms like TradingView can handle all the calculations for you. They display pip values clearly, so you can focus on your trades without getting confused by the math involved.

Main Points

• Pip: Smallest price move in forex pairs
• Common Value: 0.0001, for most pairs, it is the fourth number
• Platform Help: Modern platforms show pip values with their built-in tools

Don’t stress over the details regarding pips. A basic understanding of pips is enough to navigate your forex trades confidently.

What is leverage in forex?

Leverage is like borrowing money from your broker to trade with more cash than you have. It is like getting extra money to trade bigger position sizes. 

For Example:

If you have $1000 but want to trade with more. A Leverage of 100:1 lets you trade with $100,000. (1000×100)

Good thing: If the EUR/USD price increases by 20 pips,
you could make $2000 (100,000 units x 0.0020).

Bad thing: If the price decreases by 20 pips,
you would lose $2000 (100,000 units x 0.0020).

High leverage is like playing with fire. It can burn you badly. I’ve seen it happen – I lost almost the whole account in one trade because I didn’t know back then how it would affect my account.

My advice would be to use it responsibly, observe how it works in demo trading environment first before risking your real money.

What Currencies Can You Trade?

Forex trading is done in pairs of currencies. For instance; a pair of US dollars and Japanese Yen (USD/JPY), US dollars and Euros (USD/EURO), or US dollars and British pounds (USD/GBP).

Currencies that have high liquidity are considered to be stable, predictable, and less risky. The US dollar is the most traded currency that forms pair with almost every currency.

However, there are currency pairs from developing countries and they have low liquidity which makes their trade complicated and risky.

People usually start with obvious pairs such as USD/Euro or USD/GBP because they have high liquidity.

Conclusion

Forex trade refers to the idea of people exchanging or trading different currencies through an electronic computer networking system.

Anyone starting their journey in forex needs to understand the nature of the forex market, interest rates, lot size, the economic and political situation of countries, and forex trading strategies.

Trading requires immense practice and patience because of its risky and volatile nature, but with time and practice, people can make great profits.