Forex trading for beginners: a practical guide

What is forex trading?

Forex trading is the buying of one currency while selling another, with the aim of profiting from changes in their exchange rate. Every trade is a pair: you hold a view on whether the euro will rise or fall against the US dollar, for example, and act on it.

The forex market is the global network of banks, funds, companies and individuals that exchange currencies. It has no single exchange building. Trading runs through electronic networks, which is why it is open around the clock on weekdays. Most retail traders do not take delivery of currency. They trade contracts for difference (CFDs) that track the exchange rate, so they can profit or lose from the price move without moving real money between currencies.

Traders come to forex for its liquidity, its long trading hours and the ability to trade price moves in either direction. None of that makes it easy. Most beginners lose money at first, so this guide spends as much time on risk as on opportunity.

What are currency pairs?

A currency pair shows the price of one currency in terms of another. In EUR/USD, the first currency (EUR) is the base currency and the second (USD) is the quote currency. A price of 1.0850 means one euro costs 1.0850 US dollars.

When you buy EUR/USD, you are buying the base and selling the quote. If the euro strengthens against the dollar, the price rises and your position gains. If it weakens, the price falls and your position loses. Selling the pair works the other way round.

Pairs fall into three broad groups.

Beginners usually start with one or two majors. They move in a more orderly way, and costs are easier to predict. You can browse the pairs we offer on the forex markets page.

How are forex prices quoted?

Every forex price has two sides. The bid is the price at which you can sell the base currency. The ask (or offer) is the price at which you can buy it. The ask is always higher than the bid, and the gap between them is the spread.

The spread is the main trading cost for most forex trades. You buy at the higher price and sell at the lower one, so a new position starts slightly under water by the size of the spread. The price has to move that far in your favour before you break even.

What are pips and lots?

A pip is the standard unit used to measure a price move. For most pairs it is the fourth decimal place, 0.0001. For pairs that include the Japanese yen, it is the second decimal place, 0.01. Our full guide to pips covers the maths in detail.

A lot is the size of a trade. One standard lot is 100,000 units of the base currency. Smaller sizes let you trade with less money at stake. The size you choose, together with the pip move, decides how much you win or lose.

Available lot sizes depend on the account and platform, so check the minimum trade size before you plan a trade. You can run the numbers with our pip calculator.

How do leverage and margin work?

Leverage lets you control a position that is larger than the money you put up. The money you set aside to open and hold that position is called margin. A leverage ratio of 20:1 means a position can be worth up to 20 times its margin, so the margin is 5% of the position size.

Leverage magnifies results in both directions. A small price move can produce a gain or loss that is large compared with your margin. Our guide to leverage goes further, and the margin calculator shows the margin for a given trade.

What is a margin call?

A margin call is a warning that your account equity has fallen too close to the margin your open positions need. Your platform or broker may ask you to add funds or reduce positions. If losses keep growing and equity falls below a set level, positions can be closed automatically. That step is the stop-out. The exact levels differ between brokers and account types, so read them before you trade.

What is the difference between going long and going short?

Going long means buying a pair because you expect the base currency to rise against the quote currency. Going short means selling a pair because you expect the base currency to fall. Because you always trade one currency against another, you can seek profit in a rising or falling market.

A long position profits when the price rises and loses when it falls. A short position does the opposite. Both can lose money quickly if the market moves against you, which is why every trade needs a plan for where you will get out if you are wrong.

What moves currency prices?

Currency prices move when traders change their view of an economy's strength, its interest rates or the risks facing it. Several forces matter, and they often act together.

• ✓ Interest rates. Currencies tend to attract demand when their central bank raises rates or signals that it will. Expectations matter as much as the decision itself.
• ✓ Economic data. Inflation, employment, growth and retail sales reports shift expectations. Check the economic calendar for scheduled releases.
• ✓ Political events. Elections, trade disputes and policy changes can move a currency within minutes.
• ✓ Risk sentiment. In stressed markets, traders often move toward currencies they see as stable and away from higher-yielding or emerging-market ones.
• ✓ Trade and capital flows. Companies and funds buying and selling currencies to pay for goods or move investments add steady pressure to prices.

Traders study these drivers through fundamental analysis. Others read price charts and patterns, known as technical analysis. Many mix the two.

When is the forex market open?

The forex market is open 24 hours a day from Monday to Friday and closed at the weekend. Activity follows the sun through the Sydney, Tokyo, London and New York sessions. Exact open and close times for each instrument are on our market hours page.

Liquidity is not even across the day. It is usually highest when the London and New York sessions overlap, which is when spreads tend to be tightest. It thins out late in the New York day and during the Asian session for pairs that do not involve Asian currencies. Wide spreads and sudden jumps are more common then, and around major news releases.

What does forex trading cost?

The main costs of forex trading are the spread, any commission and the overnight financing charge. Add them up before you trade, because they come out of your result whether or not the trade works.

• ✓ Spread. The difference between bid and ask, paid on entry.
• ✓ Commission. A fee some accounts charge per trade. Check the account terms on our account types page.
• ✓ Swap (overnight financing). A charge or credit applied when you hold a position past the daily cut-off. It reflects the interest rate gap between the two currencies and varies by pair and direction.
• ✓ Slippage. A trade can fill at a slightly different price than the one you saw, especially in fast markets.

Current conditions are listed on the trading conditions page.

How do you place your first demo trade?

The lowest-cost way to learn the mechanics is a demo account, which uses virtual money. You see real market prices, but nothing you win or lose is real. Treat it as practice for the process, not proof that you can make money.

1. Open a demo account. Start a demo and log in to the platform.
2. Pick one pair. Choose a major such as EUR/USD and add it to your market watch list.
3. Decide direction and reason. Write one sentence on why you expect the price to rise or fall. Without a reason, the trade is a guess.
4. Choose the smallest size. Use a micro or minimum lot so you can see how the numbers behave.
5. Set a stop-loss. Place it at the price where your idea is wrong, before you place the order.
6. Set a take-profit (optional). Pick a target that is larger than your risk.
7. Place the order. Click buy or sell. A market order fills at the current price.
8. Review the result. Whether the trade wins or loses, record the entry, exit, reason and outcome in a journal.

Repeat this over several weeks. Only think about live trading when you follow your rules consistently and understand why you win or lose.

How do you manage risk in forex trading?

Risk management means deciding in advance how much you can lose on a trade and sizing the trade to match. It matters more than finding good entries, because one oversized loss can undo many small wins.

Use a stop-loss

A stop-loss is an order that closes your position if the price reaches a level you set. It limits the loss you take if the market moves against you. In fast markets or over gaps, a stop can fill at a worse price than the one you set, so it reduces risk but does not remove it.

Size positions by risk, not by hope

Many traders limit the risk on each trade to a small share of the account, often 1% to 2%. Work out the position size from your stop distance, not the other way round. The position size calculator does the arithmetic for you.

Check the reward against the risk

If you risk 25 pips to make 50, your reward-to-risk ratio is 2:1. A higher ratio means you can be wrong more often and still do well, but a distant target is also less likely to be reached. Keep the ratio realistic and test it on a demo account.

What mistakes do new forex traders make?

The same few errors account for most beginner losses. Knowing them in advance helps you avoid them.

• ✓ Over-leveraging. Opening positions that are too large for the account, so a normal move wipes out a big share of it.
• ✓ Trading without a stop-loss. Hoping a losing trade will come back turns a small loss into a large one.
• ✓ Chasing losses. Doubling up after a loss to win it back is one of the quickest ways to empty an account.
• ✓ Trading around news without a plan. Spreads widen and prices jump during major releases.
• ✓ Ignoring costs. Frequent short trades pay the spread many times over.
• ✓ Skipping the demo stage. Learning the platform with real money turns small slips into real losses.
• ✓ Trading money you cannot afford to lose. Fear and pressure make every decision worse. Use only spare funds.

What should you do next?

Build your knowledge in small steps and test each one on a demo account before you use real money. A sensible order is below.

1. Learn the vocabulary in our trading glossary.
2. Read how pips, leverage and CFDs work in more depth.
3. Compare the trading platforms and practise on a demo account.
4. Write a simple trading plan covering pairs, times, risk per trade and when you stop.
5. Keep a journal and review it every week.

More lessons and tools are in the Education centre.