Understanding Forex Trading for Beginners: A Starting Guide 2025

The foreign exchange market is one of the largest trading markets in the world, with an average daily trading volume of about $7.5 trillion USD. For those seeking profit opportunities, Forex trading has become an attractive option for many investors. This article will help you understand the steps and methods to start trading Forex correctly.

What is Forex and Why Is It Popular?

Forex trading refers to the buying and selling of foreign currencies (Foreign Exchange Trading), which differs from other assets with fixed prices because each country’s currency is constantly compared to others. This system is called currency pairs, such as EUR/USD or USD/JPY.

In each currency pair, the first currency is called the Base Currency, and the second is the Quote Currency. When investors buy the EUR/USD pair at an exchange rate of 1.10, it means they are buying 1 Euro and selling 1.10 US dollars simultaneously.

A key feature that makes Forex trading popular is high liquidity, nearly 24/5 trading hours, and a wide variety of trading tools. Additionally, it can be used for speculation or hedging purposes within diverse investment portfolios.

Liquidity and Volatility: What You Need to Know Before Trading

One of the main advantages of Forex trading is high liquidity, which allows investors to buy and sell in the desired amounts and prices at all times. High liquidity also means narrower spreads (the difference between bid and ask prices), reducing trading costs.

Another factor is volatility, which greatly affects profit potential. Currency pairs with too low volatility may cause traders to miss good entry points, while very high volatility makes risk management difficult. Beginners should choose currency pairs with moderate volatility.

How Many Ways Are There to Start Trading Forex?

Investing in the foreign exchange market offers several methods suitable for different needs. For retail investors (not institutions), there are three main ways:

First Method: Buying and Selling Real Currencies on the Spot Market

This straightforward method involves purchasing one currency to exchange for another, then waiting for exchange rates to change before converting back to realize profits. However, this method has limitations: it requires full capital upfront, offers limited currency options, and involves high storage costs.

Second Method: Trading Currency Futures Contracts

Futures contracts are standardized instruments traded on official markets, such as USD futures on the Thai TFEX or EUR/USD futures on the Chicago Mercantile Exchange (CME). They offer high liquidity, leverage options, and can be traded almost all day. However, futures contracts are usually large and require significant capital.

Third Method: Trading CFDs (Contracts for Difference)

CFDs are highly flexible instruments that give traders rights to profit from price differences. They offer high liquidity, nearly 24/5 trading, leverage, and require less initial capital, making them suitable for short-term profit-seekers with limited funds. Due to the high leverage, the risk of loss is also increased.

Which Currency Pairs Are Suitable for First-Time Forex Traders?

Choosing the right currency pair is a crucial decision. Consider the following factors:

Liquidity is the primary factor. High-volume pairs provide better prices, narrower spreads, and lower costs.

Volatility is also important. Trading times affect liquidity and volatility; for example, EUR/USD moves most during European and US market hours.

Fundamental factors and news. Forex markets react quickly to economic news and central bank policy statements. Traders interested in news-based trading should select pairs affected by such events.

For beginners, recommended pairs are:

• EUR/USD: Highest liquidity, moderate volatility, suitable for short- and medium-term trading.
• USD/JPY: Good liquidity, low to moderate volatility, can be highly volatile due to Japanese monetary policy changes.
• GBP/USD: Good liquidity, high volatility, influenced by UK-specific factors.

Proper Steps for Forex Trading for Beginners

Step 1: Set goals and choose currency pairs

Decide which currency pairs to trade based on your investment style and market conditions. Look for pairs with good liquidity and appropriate volatility.

Step 2: Analyze and open positions

Check current prices and use technical analysis tools to make decisions.

• Place buy orders if you expect the currency to strengthen.
• Place sell orders if you expect it to weaken.

Step 3: Set protective conditions

Use Stop Loss orders to automatically close positions if the market moves against your expectations. Use Limit Orders to sell at your target price.

Step 4: Monitor and manage

Keep track of margin levels to ensure sufficient funds. Wait for the right moment to close positions and realize profits, or cut losses if the plan is not working.

Step 5: Review and improve

After trading, review what went well and what didn’t. Use this information to improve future trades. As famous investor Charlie Munger said, “We’ve had enough good sense when something is working very well to keep doing it. I’d say we’re demonstrating what might be called the fundamental algorithm of life — repeat what works.”

Risks and Precautions: What Beginner Traders Need to Know

Forex trading carries high risks, especially when using leverage. Key points include:

Risks from high leverage. Using appropriate leverage relative to volatility and capital is crucial. High leverage can amplify gains but also increases the risk of forced liquidation.

Unexpected volatility. Currency prices can be highly volatile during central bank policy announcements, economic data releases, or major economic events. Not preparing for this volatility can lead to significant losses.

Overtrading. Trading without a plan and too frequently can expose traders to unnecessary risks. Only trade setups that have been carefully planned.

Summary

Forex trading has become a popular investment method worldwide, especially CFDs, which require less initial capital, offer high flexibility, and support various strategies. It allows investors to profit, test new strategies, and hedge their portfolios effectively. The key to success lies in continuous education, proper risk management, and strategy adjustment based on trading experience.