What is Forex Trading and How Does It Work?

Forex trading works by buying one currency and selling another. That’s the simplified version – but the finer details can be confusing. We take a look at these details here in our ultimate forex trading guide, so you can find out everything you need to know – whether you’re a budding trader or totally new to forex. So: what exactly is forex trading?

We’ll cover:

Forex Trading Guide: The Basics
● What is forex trading? This covers the basics such as pips, leverage, margin, spread and making money.

Forex Trading Guide: The Market
● What’s the market like? An introduction to the forex market, trading hours and the industry.

Forex Trading Guide: Beginners
● A beginner’s guide to forex trading. You’ll discover how to spot forex trading patterns on charts, a glossary of forex terms – and a practical step-by-step guide on placing your first trade.

Forex Trading Guide: Opening a Forex Account
● How do I choose a forex trading platform? This covers your options for opening a live forex account.

Forex Trading Guide: The Basics

What is forex trading and how does it work?

Forex trading is the simultaneous buying of one currency and selling another. When you trade in the forex market, you buy or sell in currency pairs. For example, the euro and the U.S. dollar (EUR/USD) or the British pound and the Japanese yen (GBP/JPY).

Imagine every currency pair constantly in a "tug of war" with each currency on its side of the rope. Exchange rates fluctuate based on which currency is stronger at that time. Major currencies include the U.S. dollar (USD), Canadian dollar (CAD), euro (EUR), British pound (GBP), Swiss franc (CHF), New Zealand dollar (NZD), and Australian dollar (AUD). Major currency pairs tend to be the most liquid, with the EUR/USD currency pair moving by as much as 90-120 pips on a good day.

The U.S. dollar is by far the most popular base currency for conversion and trade, as it's used all over the world for transactions large and small. For example, when you buy something online from an international retailer that doesn't accept your local currency, this will usually be in dollars. Its long-standing role as a top global reserve currency makes the USD a very important currency pair to watch — but it isn't always easy to predict.

What is pips in forex trading?

A pip is the smallest price move that an exchange rate can make based on forex market convention. Most currency pairs are priced out to four decimal places, and the pip change is the last (fourth) decimal point. A pip is thus equivalent to 1/100 of 1% or one basis point.

Since most major currency pairs are priced to four decimal places, the smallest change is that of the last decimal point, equivalent to 1/100 of 1%, or one basis point. For yen pairs stated in two decimal points, one pip is equivalent to 0.01%. Pips may be represented as basis points (bps) or percentage in points (percentage).

For example:
● If USD/JPY moves from 109.69 to 109.70, it has increased by one pip
● If EUR/USD moves from 1.1234 to 1.1235, it has increased by one pip

What is leverage in forex trading?

In forex trading, leverage is defined as a loan given by the forex firm to the investor. It allows you to hold a larger position than your account balance.

For example, if you have $1,000 in your account and use a leverage ratio of 1:100, you can trade up to $100,000. Put simply; it enables you to gain a larger exposure to the market that you would not otherwise be able to achieve on your own!

What is margin in forex trading?

The term margin in forex trading refers to the amount of money a broker requires from a trader to open a trade or position. This is also known as the minimum margin. Margin can be either "free" or "used".

Free margin is the difference between your account equity and your open positions. In other words, it is the amount of money available to open new positions, whereas used margin is the amount of money that has been invested in existing trades.

Margin is usually expressed as a percentage of the full amount of the position. For example, most forex brokers say they require 2%, 1%, .5% or .25% margin. Based on the margin required by your broker, you can calculate the maximum leverage you can wield with your trading account. If your broker requires a 2% margin, you have a leverage of 50:1.

What is spread in forex trading?

The difference between a currency pair's buying and selling price is called the spread. A position is opened by purchasing one currency if you believe its value will increase – and selling another if you believe its value will decrease.

A spread is defined as the difference between the bid and the ask price of a security or asset. This term refers to the difference between the prices quoted for immediate sale and an immediate purchase for a security or asset in financial markets.

A spread can apply to various instruments, including stocks, options, bonds, futures, and currencies. In forex trading terms, this means that if you were to buy Euros at 1.1300 and then sell them at 1.1350, your profit would be 50 pips (1 pip = 0.0001).

Can you make money trading forex?

Yes, you can definitely make money trading forex. To make money in currency trading, you should buy low and sell high — or sell high and buy low. For example, if you get EUR/USD long at 1.1550 and the rate goes up to 1.1620, you make 70 pips, and your trade is in profit. If it went down to 1.1470, then you make a loss of 80 pips.

The pips calculation is used to calculate your profits and losses. For example, if you bought one lot of EUR/USD at 1.1550 and sold it at 1.1620, this means that you made 70 pips (1.1620-1.1550=0.0070).

Each pip is worth $10 when trading one standard lot (100k units of the base currency) on the EUR/USD pair with leverage of 1:100. The value of each pip is calculated by dividing the value of one pip by the exchange rate:

● Lot size x 0.0001 / Exchange Rate = Pip Value per Lot
● 100k x 0.0001 / 1.1620 = $0.086 = $8.60 per pip
● $8.60 x 10 = $86 per standard lot. If you want to make money trading forex, this is – put simply – what you need to do:
● Understand how the currency pairs work and how they correlate with each other.
● Understand the difference between technical analysis and fundamental analysis.
● Create a trading plan that helps you maximize your profits while minimizing your losses in the market.
● Backtest your trading strategies to ensure they work properly before risking real money in the foreign exchange market.
● If you’re trading with BluFX, here’s how to trade profitably on your BluFX account

Wondering how much money traders really make? Take a look at the average trader salary here>>

Forex Trading Guide: The Market

What’s the forex market like?

The forex market is massive in size. It generates billions of dollars in revenue each day, and it's only getting bigger. That's great for traders because it means that we have a lot of liquidity and volume, which makes it easier to get into and out of trades. There are several reasons why the size of this market has continued to grow year after year, but it is the ease and speed with which traders can access the market that is perhaps most important.

The vast majority of trades in forex markets are speculative. As currencies tend to move only in small increments every day, huge trading volumes are needed to make any significant profit. So while traders can hope to make money in a rising or falling market, they can also make money when there are small movements due to the ability to trade with leverage. The market isn't the only thing that can be leveraged to make money. The ability to move currencies is the biggest advantage for traders, and forex trading hours give you a prime opportunity.

Most people think of forex trading as being about the market's open, close and bid-ask spread (the difference between what dealers are willing to pay for a currency pair and what you can buy it for). This is important, but it's not the whole story. Forex trading hours give you an advantage over other traders. It's all about opportunity cost.

The best time to trade forex is when there's relative liquidity — when lots of buyers and sellers are looking to move the currency pair simultaneously. This means the spread between what dealers want to buy and sell is tightest, which gives you an edge. If you're trading during normal trading hours, you'll be competing with many other traders who are also trying to trade during those hours, each of them hoping they get in first.

The lack of a physical exchange enables the forex market to operate on a 24-hour basis, moving from one time zone to another across the world's major financial centers. The major centers for forex trading are London, New York, Tokyo, Zurich, Frankfurt, Hong Kong, Singapore, and Paris. Forex trading hours are based on when trading is open in every participating country.

Because the forex market operates in multiple time zones, it can be accessed at any time except for the weekend break. From the London trading session open, going through Asia and New York, markets open and close at different hours. The peak time for trading is when the U.S. and London markets overlap between 1 pm GMT – 4 pm GMT. The main sessions of the day are the London, US, and Asian markets.

Forex Trading Guide: Beginners

A Beginner’s Guide to Forex Trading

So – you like the sound of what you’ve heard so far, and you’re interested in trading forex for yourself. Where do you start? In our beginner’s guide to forex trading, you’ll discover how to spot patterns on your charts, a glossary of forex terms – and a practical step-by-step guide on placing your first trade.

What are forex trading chart patterns?

First, you’ll need to understand what the patterns on your chart mean. This is the same method that technical analysis uses to predict any market's future price movements. Patterns can be split into two key categories:

Reversal chart patterns which indicate a trend change (i.e., from bearish to bullish or vice versa).
Continuation chart patterns which indicate that a current trend will continue.
Some popular reversal patterns include: Double top double bottom chart patterns

Double top/bottom: A double top occurs when the price hits a high, then falls back to the previous high (or just below), then rises again to the first high (or just above), and then falls again, breaking the initial low point. A double bottom is the same but in reverse. The pattern is considered complete when the price breaks above (for a double top) or breaks below (for a double bottom) that initial low/high point. Triple top triple bottom chart patterns

Triple bottom/top: These formations are composed of three valleys (bottom) or three peaks (top), and they can be seen as an extension of the double bottom or top formation, respectively. They also signal a trend reversal, but they take longer to form, so their predictive value is higher. Head and shoulders chart patterns

Head and shoulders: This pattern consists of three peaks — one middle peak flanked by two lower peaks on either side. The middle peak is called the head; the two lower peaks are the shoulders. It's considered complete when the price breaks below (for an inverted head-and-shoulders pattern) or above (for a standard head-and-shoulders pattern) the line connecting the two shoulders. Ascending triangle chart patterns

Ascending triangle: The ascending triangle is a bullish continuation pattern that signals a resumption of an uptrend. This pattern forms when there is resistance below prices and support above them, creating a triangle shape on the chart. A breakout above resistance should be accompanied by high volume for confirmation, signaling that buyers are in control. Decending triangle chart patterns

Descending triangle: The descending triangle is a bearish continuation pattern that forms when there is support below prices and resistance above them. Prices consolidate into a symmetrical triangle and then break down below support with high volume, signaling further price declines ahead. Before entering short positions, traders should watch for heavy selling volume after the breakdown to confirm that sellers are in control.
Some popular continuation patterns include: Flag chart patterns

Flags: A small rectangle shape formed by two parallel trend lines. Sharp movements in price and volume usually precede flags. Pennant & rising wedge chart patterns

Pennants: similar to flags but with trend lines converging towards each other. Both pennants and flags have converging trend lines as they move into their apex, where they are expected to break out in the direction of their previous trend.

Rising wedge: This pattern looks like an upside-down triangle and usually signals an upcoming downtrend (when the price falls). It's complete when the price breaks below support. Falling wedge chart patterns

Falling wedge: This is the opposite of a rising wedge and signals an uptrend. It's complete when the price breaks above resistance. Symmetrical triangle chart patterns

Symmetrical triangle: The symmetrical triangle has two trend lines that converge at an equal rate. Both trend lines are sloping at about 45 degrees, giving this triangle a symmetric appearance. Cup and handle chart patterns

Cup and handle: The cup and handle is a bullish continuation pattern that marks a pause before the previous uptrend resumes. The cup with the handle should take the shape of a "U" and last approximately one to three months. The handle should retrace less than one-third of the prior advance, and volume should diminish during the pause. To confirm the presence of this pattern, you should see an increase in volume on the breakout from the handle.

Once you’ve got to grips with the basics of reading charts, here are the secrets for success we've seen in profitable traders:

● Take your time learning the ropes before investing your hard-earned cash in the financial market.
● Invest your time in learning with the best forex trading books, forex podcasts, mentors, forex trader YouTube channels and forex education.
● Understand that trading is risky, and prepare yourself accordingly, both financially and emotionally, through excellent risk management skills and trading psychology.
● Make sure you perfect your trading strategy. Not sure what that is? Take the quiz.

How do I place a trade?

Step 1: What do I need to start trading?
In order to trade forex, you need a live account. This will give you access to the forex market via your chosen broker's trading platform. The most common type is known as MetaTrader 4 (MT4). Don’t have the capital to start your own account? Take a look at BluFX’s funded forex accounts.

Step 2: What do I need to look at when reading charts?
Ok, so now you understand what a chart is and what it looks like. You need to look at four key things when reading a chart.

1. Time frame: The time frame is the amount of time that each candlestick covers. It can be set at 1 minute, 5 minutes, 15 minutes, 30 minutes, 1 hour, 4 hours, or daily (1 day).
2. Support and resistance levels: Support and resistance levels are areas where price has moved in the past. They are likely to act as a ceiling or floor for prices during future trading sessions.
3. Trend lines: Trend lines are lines drawn across the price levels in its up-trend or down-trend. The trend lines mark the point of pullback or reversal in a currency price. Trend lines can be drawn on charts using either highs or lows, and they tend to act as support during uptrends and resistance during downtrends.
4. Candlestick patterns: Candlestick patterns are used by traders to determine market direction and help predict potential reversals or continuation. There are hundreds of candlestick patterns, but not all of them are worth noting. You can see the opening and closing prices and the highest and lowest prices during a period (usually one day).

Step 3: How do I place a trade?
Find the currency pair you want to trade
Okay, so we have our foundation set, and we have learned about the different aspects of currency pairs. We are now ready to place our first trade. You can find it by searching by clicking on 'Find Instrument' or by scrolling through the list of instruments in 'Market Watch'.

You can also click on your instrument of choice in the Market Overview table at the top right of your screen. The corresponding information window will be shown with all-important currency prices, bid and ask prices, and spread size.

Find your entry, stop, and profit levels on the chart

Next, enter your entry level (at which price you want to open a trade), stop loss (at which price you want to close your trade at a loss if it goes against you), and take profit (at which price you want to close your trade for profit if it goes in your favor).
For example:
● A resistance level at 1.2550.
● A support level at 1.2450.
● Our entry-level will be above resistance, so 1.2575 (25 pips above the 1.2550 level).
● Our stop loss level will be below support, so 1.2425 (25 pips below the 1.2450 level).
● This gives us a risk of 25 pips and a reward of 30 pips (1.2600 – 1.2575 = 25 pips, 1.2600 – 1.2450 = 150 pips).

Place your trade following your plan
You can place your trade by clicking on either 'Ask' or 'Bid' prices, depending on whether you are buying or selling the currency pair. Placing a trade can be done through your forex trading platform in three ways:

Order Ticket: The order ticket is where the magic happens. This is where you will determine how much money you want to invest, how much leverage you want to use, and how long you want your trade to remain open.
Watch list: The watch list is a list of potential trades you are keeping an eye on. For example, maybe there is a currency pair you have been analyzing for a while and are waiting for a good entry point. You can add this currency pair to your watch list and use it as an indicator of when to place a trade on the currency pair.
Charts: Having an active chart open is important because it will allow you to see what has happened to the price action over time. How much the price has moved over a while will give you clues as to what might happen next, so make sure that you always have an active chart open to stay on top of current market movements.

Use price action analysis to exit at a good price
Congratulations, you've opened a trade! Hopefully, it is going well for you, and you've made money on the trade. If not, don't panic: remember to keep an eye on your forex trades and if things don't work out as planned, don't hesitate to close open positions at any time. If you’re trading with BluFX, here are the secrets to how to trade profitably on your BluFX account.

Forex Trading Guide: Funded Forex Accounts

How do I choose a forex trading platform?

There are many different forex platforms available to you as a trader. There are two main options:

● Using your own capital to fund your account: in this option, you need to open an account with a forex broker and make the minimum deposit. You can trade forex with just $1 or $10 – but you’ll need (at the very least!) a few hundred dollars in order to gain any significant profits. This option suits those who have savings to invest in their own account. All profits and all losses are your liability.
● Using a funded account: with this option, you’ll pay a monthly cost in order to gain access to a funded account, usually in the thousands of dollars. This option suits those who want to trade but don’t have the capacity to invest their savings. All profits are usually split with the provider you use, but you often do not assume liability for your losses.

Looking for a fully funded forex account option? This is where BluFX can help. Unlike our competitors, we do not screen our traders beforehand – there are no demo challenges, complicated multi-step training programs or hidden rules. Instead, we offer instant forex funding – in just a few hours. Here’s how it works:

Traders do not need to fund their accounts
We provide live, fully funded accounts of $25,000 or $50,000. This means that traders do not need to fund their accounts themselves.

Traders are not liable for their losses
If traders lose money, we absorb the loss – never the trader. This significantly erases your personal risk.

Traders do not need to invest large amounts of their own capital
We operate on a monthly subscription cost only. This means all traders need to pay is a fixed cost – £99 or £249 – per month.

Traders keep a split of their profits
We operate a 50:50 profit split. This enables traders to focus on developing their strategy to enjoy their profits – all without risking their own savings.

Want to know more about how it works? Here’s how to trade profitably on your BluFX account.

Explore fully funded forex accounts

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