Forex Trading for Beginners: Strategies and Methods You Need to Know

Trading Forex is a popular financial activity among investors worldwide over the past two decades. The foreign exchange market has enormous trading volume, averaging about $7.5 trillion USD daily, making it a market that deserves serious study for those interested in trading.

What is Forex and Why Is It Interesting for Traders?

Forex trading essentially involves buying and selling currencies of different countries in the global market. Each country’s currency does not have a fixed value on its own but depends on its comparison with other currencies, called “currency pairs” (Currency Pairs). For example, USD/THB or EUR/USD. In these pairs, the first currency is called the Base Currency, and the second is the Quote Currency.

When traders buy USD/THB at 35.00, it means they are purchasing 1 US dollar by paying 35 Thai baht. Similarly, buying USD/JPY at 160.00 means purchasing 1 dollar by paying 160 Japanese yen.

Some people confuse Forex with trading other CFDs like gold, individual stocks, or indices. But in reality, Forex specifically refers to trading currencies only. Although Forex can be traded in various ways, such as spot trading, futures contracts, or CFDs.

3 Different Ways to Trade Forex

Retail investors who are not institutional traders can trade Forex mainly in three ways, each with its own characteristics, advantages, and disadvantages.

Trading Actual Currencies on the Spot Market

This method involves straightforward trading of actual currencies. You exchange one currency for another, and when the exchange rate changes, you can convert back to realize profit or loss.

Advantages: Simple, no complicated steps.
Disadvantages: Requires full capital upfront, limited currency options, storage costs, and high exchange fees, making it unsuitable for short-term Forex trading.

Trading Currency Futures Contracts

Futures are standardized contracts traded on major markets, such as USD futures on the Thai TFEX or EUR/USD futures on CME in Chicago.

Advantages: High liquidity, easy to trade, almost 24-hour trading, leverage options for better profit potential.
Disadvantages: Futures contracts are often large and require significant capital, which can be a barrier for retail traders.

Trading CFDs on Currencies

Contracts for Difference (CFDs) are highly flexible derivative instruments. You trade contracts that give rights to profit from the difference between purchase and sale prices.

Advantages: Very high liquidity, nearly 24/5 trading, leverage benefits, low initial capital.
Disadvantages: High leverage increases risk from price volatility, and there is a risk of forced liquidation. Traders should have good risk management systems.

How to Choose Which Currency Pair to Trade

Choosing the right currency pair is crucial for beginners. Consider these main factors:

Liquidity: Popular pairs with high liquidity allow trading at desired prices, narrower spreads, and lower trading costs.
Volatility: Low volatility pairs are easier to time but may lack profit opportunities; high volatility pairs are riskier. Beginners should choose moderate volatility pairs.
Trading Hours: Although Forex markets are open 24/5, liquidity and volatility vary by time, e.g., EUR/USD moves most when Europe and US markets are open.
News Impact: Forex is highly affected by news. Traders following news can select pairs influenced by specific economic releases.

Top popular pairs for beginners include:

EUR/USD: Most liquid, moderate volatility, suitable for short- and medium-term trading. Moves most during European and US market hours.
USD/JPY: Also popular, good liquidity, low to moderate volatility, but can increase during Bank of Japan policy changes. Active during Tokyo and US market openings.
GBP/USD: Good liquidity, higher volatility than EUR/USD, influenced by UK-specific factors, especially monetary policy. Most active during European and US hours.

Basic Steps for Forex Trading for Beginners

Trading Forex may seem complex at first, but with proper education and consistent practice, you can start and develop effective strategies. Here are the basic steps:

Step 1: Choose Your Currency Pair

Start by selecting a pair that fits your trading criteria. Think about which pairs suit your investment style. For beginners, USD/JPY is a good choice due to high liquidity, narrow spreads, and low trading costs. The US dollar is the world’s reserve currency, and the Japanese yen is considered a safe-haven asset during economic uncertainty.

Step 2: Open a Trading Position

Once you’ve selected a pair, check current prices and analyze charts on your trading platform, which provides real-time data and analysis tools. Then, place your order:

Buy: If you expect the currency to strengthen. If the price moves as predicted, you profit; if not, you incur a loss.
Sell: If you expect the currency to weaken. Profits if correct; losses if wrong and the currency appreciates.

Step 3: Set Exit Conditions

Traders can set conditions for automatic closing of positions using Limit Orders to enter or exit trades at specified levels, and Stop Loss orders to automatically close positions if the price hits a loss threshold.

Step 4: Monitor Margin Levels and Wait for Closure

Track price movements and margin levels. Wait until the price moves in your favor to close the position and realize profits, or cut losses if the market moves against you, according to your plan.

Step 5: Review and Improve Your Trading Plan

After closing a trade, review what worked and what didn’t. Trading is a repetitive process. When you find a strategy that works, stick to it. As Charlie Munger, Berkshire Hathaway’s vice chairman, said: “We have enough good sense to keep doing what works very well repeatedly.”

Key Factors Affecting the Forex Market

The Forex market is influenced by many factors, causing exchange rate volatility. Traders should understand these factors to make better decisions:

Central Bank Monetary Policies: The most impactful, as they set interest rates and money supply, causing rapid and strong fluctuations, especially in major economies like the US, Japan, or the Eurozone.
Economic Data: Inflation rates, trade balances, employment figures indicate economic strength and currency value.
International Capital Flows: Political changes, trade policies, and economic conditions influence cross-border investments, directly affecting currencies.
Global Financial Markets: Movements in stock markets, bonds, and commodities impact currencies. For example, rising oil prices can influence USD/CAD.
Economic Crisis Risks: Safe-haven currencies like USD and JPY tend to appreciate during increased risk aversion.

Risks and How to Avoid Them in Forex Trading

Forex trading carries high risks, especially with leverage. Be cautious of:

Excessive Leverage: While leverage can amplify gains, it also increases the risk of significant losses and forced liquidation. Use appropriate leverage levels based on market volatility and your capital.
Unpreparedness for Volatility: High volatility, especially during central bank meetings or economic releases, can be dangerous without proper stop-loss placement.
Overtrading: Excessive trading can lead to unnecessary losses. Trade only according to your plan.

Summary

Forex trading is accessible to beginners with proper education and discipline. It offers opportunities for profit, testing new strategies, and diversifying your investment portfolio. The most popular method for beginners is trading CFDs on currencies, as it requires less capital and offers flexibility.

Remember, Forex trading involves high risk. Use funds you can afford to lose, and ensure you have sufficient knowledge and discipline to stick to your plan and avoid emotional decisions.