What forex trading is and how the market works
Forex (foreign exchange) is the marketplace where currencies are bought and sold. Trades always involve a pair of currencies — for example EUR/USD — which shows how many US dollars are needed to buy one euro. Prices move in small increments called pips; the size of a pip depends on the pair and the decimal convention used. The market is decentralised and runs across time zones, which means liquidity and volatility change as trading sessions open and close.
Retail traders normally access forex through a broker or trading platform rather than trading directly with banks. Brokers quote a bid (what they’ll buy from you) and an ask (what they’ll sell to you); the difference between the two is the spread and is one of the main costs of trading.
Getting ready: accounts, platforms and demo practice
Before you place real trades, set up a trading account with a regulated broker and download a charting/trading platform such as MetaTrader or a broker’s web/mobile app. Open a demo account first and use it to practice under realistic market conditions. Treat the demo account like a real account: use the size you would in real trading, follow the same rules, and practise entering and exiting trades so execution and platform mechanics become second nature.
When choosing a broker, look for clear information about fees, spreads, order execution speed and how the broker handles margin calls. A low spread is attractive, but also check stability, client support and whether the broker offers the instruments and leverage you need. Remember that demo performance will not perfectly predict live results: psychology and slippage can differ when real money is on the line.
How a single trade works: examples and terminology
A typical forex trade involves deciding whether the base currency (the left one) will strengthen or weaken against the quote currency (the right one). If you think EUR/USD will rise, you buy (go long); if you expect it to fall, you sell (go short).
Position size is measured in lots. A standard lot equals 100,000 units of the base currency, a mini lot 10,000, and a micro lot 1,000. Pip value depends on lot size: on many USD-quoted pairs a standard lot moves about $10 per pip, a mini lot about $1, and a micro lot about $0.10.
Example: if EUR/USD is 1.1200 and you buy one standard lot (€100,000), each pip move equals roughly $10. If margin is 2% (leverage 50:1), you would need about $2,000 in your account to open that position. If the pair moves from 1.1200 to 1.1225 (25 pips), your notional gain would be about $250 (25 pips × $10). If it moves the other way by 25 pips, you would lose $250.
Orders you will use every day
When trading you’ll use several order types to control entry and exit:
- Market orders execute immediately at the current price.
- Limit and stop orders open a position when price reaches a set level.
- Stop-loss orders close a trade automatically to limit loss.
- Take-profit orders close a trade automatically at a target profit.
- Trailing stops follow the price to lock in profits while allowing the trade to run.
Always think about where to place a stop-loss and a take-profit before you enter a trade. These are core risk-management tools and reduce the need for emotional decision-making.
Risk management and position sizing
Risk control is the single most important part of trading. A common approach is to risk a small, fixed percentage of your account on each trade — many traders choose 1% or less per trade. To turn that risk percentage into a position size, calculate the dollar amount you are willing to lose and then set a stop-loss distance; a position-sizing calculator will tell you the lot size that matches your risk limit.
Example: you have $5,000 and decide to risk 1% ($50). If your chart shows a sensible stop-loss 25 pips away, with a pip value of $1 per mini lot, you would size the trade for about 2 mini lots (because 25 pips × $1 × 2 lots = $50). If you used higher leverage and a larger lot size without adjusting risk, a small adverse move could wipe out much more than you intended.
Also use risk-reward ratios. Many traders plan trades with ratios such as 1:2 or 1:3 (risk $1 to make $2 or $3). Over time this helps surviving losing streaks and keeps you profitable with a modest win rate.
Analysis: technical, fundamental and combining methods
There are three broad ways traders decide when to trade: technical analysis, fundamental analysis and market sentiment.
Technical analysis uses price charts and indicators (moving averages, RSI, MACD, trendlines, and chart patterns) to find entries and exits. Multiple-time-frame analysis is helpful: for example, use the daily chart to identify the main trend and a 1-hour chart for timing entry.
Fundamental analysis looks at economic data, central bank decisions and political events. News such as interest-rate changes, employment reports or inflation releases can create fast, large moves. Some traders trade the news directly; others avoid holding positions through major releases because of volatility and slippage.
Sentiment analysis considers what other market participants are doing (positioning data, order flow, or simple crowd indicators). Combining methods gives a fuller picture: for example, you might only take technical buy signals when fundamentals support a stronger currency.
Common beginner-friendly strategies include trend-following (trade with the larger trend), range trading (buy support, sell resistance in sideways markets), breakout trading (enter when price leaves a range) and swing trading (hold trades for days to capture medium-term moves). Scalping — capturing very small moves many times per day — is possible but demands fast execution, tiny spreads and disciplined risk control.
A practical trade example (step by step)
Imagine you see EUR/USD in a clear daily uptrend and on the 1-hour chart price pulls back into a moving-average area that has acted as support before. You define a stop-loss just below the recent swing low at 30 pips and set a take-profit at 90 pips, giving a 1:3 risk-reward. If your account risk per trade is $50, you calculate the lot size that makes 30 pips correspond to $50 of risk (so about $1.67 per pip; you would trade roughly 0.17 mini lots). You place a limit buy or wait for a bullish candlestick as confirmation, set the stop-loss and take-profit, and let the trade run. If the trade moves in your favour, consider moving the stop to break-even once some profit is secured.
Routine, journaling and practice
Create a routine you can repeat every day: check major economic events on the calendar, scan a watchlist of currency pairs you trade, perform your technical checks, place orders with predefined stops and profit targets, then monitor and journal the results. A trading journal is a compact record of each trade (entry, stop, target, reason for the trade, outcome, emotional state). Reviewing the journal weekly helps identify recurring mistakes and refine your edge.
Backtesting and forward-testing are valuable. Backtest a strategy with historical data to see how it would have performed, then try it on a demo account for a few dozen trades to confirm viability under live conditions.
Trading psychology: common pitfalls and how to manage them
Trading well depends as much on psychology as on strategy. Common pitfalls include revenge trading (trying to immediately recover losses), overtrading (taking too many low-quality trades), and greed (increasing risk impulsively after wins). To manage emotions, stick to your trading plan, fix risk sizes in advance, and enforce rules such as a maximum daily loss limit that stops you trading for the day if hit. Take breaks, keep realistic expectations and remember that consistent small gains compound; large, volatile bets are more likely to destroy an account than build it.
Risks and practical caveats
Forex trading carries significant risk. Leverage can magnify both gains and losses; a small market move can result in large losses that exceed initial margin in extreme cases. Market volatility — especially around news events — can produce slippage where orders are filled at worse prices than expected. Broker practices differ, and execution speed, spreads and order handling matter; use regulated and reputable firms and understand their terms. Demo accounts help you learn platform mechanics, but they don’t expose you to the emotional pressure of losing real money. Taxes, local rules and investor protections vary by jurisdiction; be aware of legal and tax obligations in your country. Finally, no method guarantees profits — expect losses, plan for them and avoid risking money you cannot afford to lose.
How to get started today (simple checklist)
Start by opening a demo account with a regulated broker and learning the platform. Spend time on a small number of major pairs (EUR/USD, GBP/USD, USD/JPY) until you understand their behaviour and typical spreads. Develop a simple trading plan: define your time frame, the strategies you will use, how much risk you will take per trade, and rules for entries and exits. Test that plan on demo and in a written trading journal. Only after you’ve shown consistent positive results on demo and feel comfortable with the mechanics and emotional side should you consider trading live with a small funded account and strictly defined risk limits. Always remember that trading carries risk, and this article is educational, not personalised financial advice.
Key Takeaways
- Practice first on a demo account, treat it like real trading, and learn your platform and order types.
- Use strict risk management: size positions so that a stop-loss equals a small, fixed percentage of your account.
- Combine a clear strategy with disciplined execution and a trading journal to improve over time.
- Trading carries risk; never trade money you cannot afford to lose and avoid taking advice as personalised guidance.
References
- https://www.atfx.com/en/analysis/trading-strategies/10-best-forex-trading-strategies-and-techniques
- https://www.home.saxo/learn/guides/forex/how-to-start-forex-trading
- https://www.ifcmarkets.com/pdf_files/forexbook/en/Forex_Trading_Strategies.pdf
- https://www.ig.com/en/forex/fx-need-to-knows/forex-day-trading-strategies
- https://www.forex.com/en-us/trading-guides/forex-trading-strategies/
- https://www.tastyfx.com/learn/how-to-trade-forex/
- https://www.youtube.com/watch?v=Jm71EoALK8g
- https://www.ig.com/en/forex/how-to-trade-forex
- https://www.youtube.com/watch?v=2MVNe67zCyY