Forex trading explained in simple terms

If you ended up on this page, it means that you are interested in Forex trading, at the same time you pretty much do not know anything about it. Do not worry, everyone starts from something and this article will be a starting point for you too. Everything seems very complicated at the beginning, and Forex trading is no exception, there are many terms involved and generally, it is hard to get a sense of it right away. I have seen a lot of people who were interested to know how Forex works but stepped down once they found out it was a complicated concept to grasp. However, once you understand the Forex basics, you will get to know that actually, it is not hard to understand..

I will make sure to explain all the details in this beginners guide for Forex Trading that you need to know when starting. Examples and cases studies are enough for you to get a good grasp of it.

Forex definitionWhat is Forex

Let’s start from the very basics, Forex definition is the Foreign Exchange. It is where the foreign currencies of the world are traded. Forex trading is accessible exclusively to those who are involved in it as a trader. Seems already complicated, doesn’t it? In reality, we all have done it in our way. Let’s see an example. Kaya from South Africa went to the UK for the first time and took ZAR 20.000 cash with her. When she landed in London, she was not able to use ZAR for buying things and had to get GBP (UK currency)  instead. She went to exchange the money and for her ZAR 20.000 got GBP 1100. However, while wandering in the streets of London she found a long time friend Annika who happened to live there and suggested her to spend the week with her. As Annika was hosting, Kaya did not have to spend any money and brought it back to South Africa. Now she had to exchange the money back to ZAR. She exchanged it but instead of ZAR 20.000, she got ZAR 20.100. What happened? While Kaya was in the UK, ZAR value was decreased. Therefore, Kaya got more money in ZAR than she had from the beginning.

This is the idea of Forex trading in general. You as a trader are exchanging money for other currencies in order to profit from the currency exchange rate which is continuously changing.

 how does Forex trading workHow does Forex trading work

The biggest advantage of Forex trading is that anyone can do it, and all you need to start it is a computer and an internet connection. Forex trading is something done online and you can trade anywhere and anytime when the market is open. So how does Forex trading work? A person who is trading is referred to as a trader. A trader needs to choose the broker he or she wants to trade with and open an account. The brokers are responsible for providing trading platforms. The trading platforms and brokers themselves can be different, there are several types of them actually, I will discuss those types and differences a bit later. Now let us go back to the trading account. Once the trader has an account with a particular broker and chooses the platform, he needs to choose the currency he wants to have his account with. Brokers usually offer the major currencies for it, such as GBP, USD or EUR, however, some brokers can have other currencies for accounts depending on the country. Once the trader chooses the currency, the next step will be to make a deposit and start the trading process. He is able to choose the currency pairs he wants to trade with among the pairs that the broker offers.

Currency pairs in Forex

The exchange rate is always shuffling, hence you need to choose the right time to exchange your money to get profit from it. So if you want to know how to learn Forex trading you need to understand the currency pairs.

There are a lot of different currencies that are used across countries all over the world, and they all have different values. You know it already. You can think of any product that can be bought, let’s take a car as an example. For someone living in the UK, the amount of the money he needs to buy a car will be different from what one has to pay for the same car in South Africa if he will be paying in ZAR and not in GBP. It means that the same thing has a different value simply because the value of each currency is different from the other.

In Forex, there are two main types of currency pairs – the major and minor currency pairs. You can also come across currency pairs called – Exotic.

  • Major currency pairs: These are the currencies that have the highest value and less volatility, In Forex industry the major currencies are: USD, EUR, GBP, AUD, CHF, JPY, CAD. If you pair USD with any of these currencies you will get a major currency pair, for example, EUR/USD or GBP/USD and so on.
  • Minor currency pairs: These are the pairs that involve the above-mentioned currencies but do not involve USD. For example EUR/AUD, or GBP/CAD.
  • Exotic currency pairs: Exotic pairs usually include one of the major currencies and currency of a developing country. GBP/ZAR is a good example.

As you already know, there are a lot of currencies around the world, and just pairing them up to the USD will give you tremendous variations. The brokers cannot offer all the currency pairs that exist in the world, unfortunately. Usually, most of the brokers offer the major currency pairs and some of the minors. The major currency pairs are often offered by the brokers that are focusing on international business, exotic pairs can be traded with the brokers that are based in a single country. Sometimes when the brokers are entering a new country they start offering its currency as well. Therefore, when you start trading Forex online you will need to choose the broker considering what currencies you want to trade as not all of the brokers offer the same pairs.

Parties involved in Forex trading

Now as I have mentioned brokers and platform, let’s see what are the parties involved in Forex trading. Before we get there let’s mention the types of Forex for more clarity. There are two kinds of Forex, Institutional, and retail. Institutional Forex is done by the largest players on the market such as banks and mutual funds. Institutional Forex involves a large amount of money. Retail Forex is done by the individuals just like you and me, who are sitting at their computers and are speculating with the exchange rates. Therefore I will be more concentrated on retail Forex. When I am explaining what is Forex and how works, I’m mostly focusing on the Retail segment.

There are two parties involved in the Forex trading process – traders and brokers. You already know what a trader is, now let us take a look at what a broker is.

The brokers make it possible for individuals like you and me to trade on the Forex market. They are offering trading instruments – currency pairs that a user can trade. Brokers come in all shapes and sizes and you can choose which kind suits you best. Unfortunately, not many traders pay enough attention to this and end up regretting it afterward. Therefore when you start Trading Forex online make sure you understand the difference. There are three main kinds of brokers.

trading Forex online Market maker

The majority of the online Forex brokers you can deal with are market makers. This means that they have their own trading desk. If you are dealing with the market maker broker, it is taking the other side of the open trade. The idea is simple if you lose money on the trade – the broker gains it. If you gain money – the broker still gets some money with the bid and sell spreads. Dealing with market maker brokers is always a good idea as it comes with some advantages. These brokers have their own desk, there is no middle party involved, therefore they offer the best spreads and the execution time is short – meaning that trades are processed faster.

what is ForexNo dealing desk brokers

No dealing desk brokers are the opposite of the market makers. As the name suggests they do now own their dealing desks, therefore, they have a middle party. The system operates this way – when you are opening a trade the broker is finding quotes from several different providers and offers the best one among them. The providers can be market maker brokers, banks and other financial institutions. These brokers are getting their money via the commissions that they are charging the trader per trade.

Trading Forex onlineElectronic communication network brokers

Instead of having the dealing desk or providing quotes from other providers like market maker and no dealing desk brokers do, electronic communication network brokers provide the software. This software connects buyers to sellers.  The platform that these brokers provide, enables makers to enter bids and connect with each other. The electronic platform is usually for users that are trading with large amounts, or simply for institutions. It comes with the tightest spreads and the fastest execution. Another great advantage of it is that it comes with some degree of anonymity, meaning that one can enter your trade so that people will not know what side of the trade are you on.

Forex trading platformsThe trading platforms

There is one more important thing when learning Forex trading for beginners – the trading platforms. The trading platform is your space as a trader, it is where all of your trades happen, therefore it is not surprising that choosing the right one is very important as well. The good thing is that since the world is getting more and more digitized and many young people are getting interested in Forex trading, the trading platforms are getting more modern, user-friendly and intuitive.

Brokers usually offer two or more trading platforms that you can choose from. They can be categorized as downloadable and web-based ones.

Downloadable platforms

Downloadable platforms are the ones that need to be downloaded and installed. Some of the best platforms offered by the large brokerages are downloadable – for example MetaTrader 4 or MetaTrader 5. While choosing the platform you need to consider that the difference between them is not only an interface, there is a difference between the trading instruments as well, however, all of the trading platforms give access to Forex trading. These platforms are good when you are trading with only one device and do not need to change it. You can read more about the platforms in the guide to choosing the best platform.

Web-based platforms

Many of us have active lives, therefore there is a need for trading platforms that are easier to access than the ones that require downloading and installation. Therefore web-trading platforms exist and are very popular. Some brokers have their own custom web-based platforms. Since the demand on it is large, many downloadable platform providers have web-based platforms as well, for example, you can get MetaTrader web platform.

Many traders want to have access to their trades whenever and however they want, therefore there are app versions of trading platforms that are available for IOS and Android users. It is up to the trader to choose the broker and the trading platform based on their needs, skills, and capabilities.

How much does Forex trading cost

Digitalization really brought us closer to Forex trading as it is almost one step away from us. We can just have our Smartphone and still be able to learn and trade on it. At the same time, many young people are getting into Forex trading for two reasons, they see it as one of the best ways to earn money and the second reason is that many people in developing countries such as South Africa sometimes do not have the career opportunities they would like to have. Therefore, they are turning to Forex trading. Young people who want to start trading have one more thing in common, they do not have much money to start trading with. Whenever I am explaining Forex Trading for beginners, they mostly ask me the same question – how much money does it cost to trade Forex? And I am delighted to say – it takes as much as you want, or as much as you allow it to do so.  It is another great advantage of Forex trading.

This is how it works, the brokers have different types of accounts, generally, the broker would offer two or more accounts designed according to the traders. There are minimum deposits that you need to fund when you are creating an account with the broker. The minimum deposits are different for each firm. For example, there can be an account for beginners or low budget traders that starts from $5, while the same broker can have an account with a minimum deposit of $500 and more. As a beginner, you can choose the account that has a very low minimum deposit. You can deposit as much as you want as long as it is more than the required minimum.

You can choose how much money you want to spend on Forex trading weekly or monthly depending on your budget. You can also decide how active you will be with your trades. However, the profit you will be making depends on the amount you will spend on your trades.

what is ForexHow to make profits with Forex trading

As we have already explained Forex, the last and maybe the most important question that bothers beginner traders needs to be answered. How to make profits with Forex trading. First of all, you need to understand that trading is not gambling, you cannot depend on luck. If you open a trading position randomly, close your eyes and cross your fingers nothing will happen – well more precisely, nothing good will happen, you will simply lose your money. Trading requires knowledge and skills that come from learning and practice.

  • In order to profit, you will need to make sure that you are ready to devote enough time to trading. There are a lot of guides and learning materials available online that you can use as your source for information and learning.
  • Once you know enough to start trading you need to choose a broker as it is a crucial part of your trading career. You can see the tips and tricks of choosing the best brokers here.
  • When you start trading it is always a good idea to have a recording of your trades, it will help you see how your trades have been fluctuating and how much you’ve been improving.
  • Last but not least, you need to be consistent with your trades and never stop learning.

It might sound much altogether but the time you spend on learning, observing and implementing the new strategies will eventually pay off and you will become an experienced with much greater potential of “hitting the jackpot trade”.

Trading Forex online Bottom line

As you can see the information you need to know to fully understand Forex trading is quite overwhelming and let me tell you we have barely scratched the surface of it. On the bright side, however, despite the vast quantity of content, it can be learned extremely fast if you approach it correctly. Now you know what Forex trading is, how it works and what it involves. Forex trading really is for everyone, it is an international business and everyone can get into it as a trader. It definitely does not require to have a fat wallet to start trading and if done right, it can be profitable for anyone, anywhere in the world. If you are not scared of the challenge of learning Forex and starting trading in the near future, make sure to check other guides as well as it will teach you how to start Forex trading in South Africa and even how to trade with zero money on your bank account and many other articles specially designed for beginner traders.

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