Forex Market Fundamentals

Now that you likely have a better grasp of what the forex market is, we can dive deeper into the specifics of how to trade within it. Let's begin by exploring the basics of forex trading, including the different currency pairs you can trade and the various types of forex orders.

Tradable Forex Pairs

If you're looking to trade currencies, it's essential to understand which pairs are available to you. While the specific pairs will depend on the broker you choose, it’s important to enter the forex market with a clear understanding of your options.
This knowledge will not only help you see the range of opportunities available but also guide you in identifying your specific interests within forex trading.
Every currency pair has an associated exchange rate, and as is typical in the forex market, this rate will fluctuate throughout the trading day based on supply and demand. The key is to predict whether the price of a particular currency pair will rise or fall in the short term.

For example

Let’s say you decide to trade the Euro against the US dollar. In forex, this pair is represented as EUR/USD. At the moment, the price is 1.17. Your goal is to predict whether the exchange rate for this pair will move above or below that level.
Before we dive into the specifics of forex market orders (which we'll cover in more detail shortly), let’s first take a look at the three main categories of currency pairs. These are typically divided into major pairs, minor pairs, and exotic pairs.
We'll begin by focusing on the most traded currency pairs in the world—known as the "majors."

Majors

Major currency pairs consist of the US dollar and other widely traded currencies, such as the Euro, British pound, Australian dollar, or Japanese yen. The reason all major currency pairs include the US dollar is because it serves as the "anchor" or reserve currency.

Here are some exotic currency pairs you will be able to trade if your broker offers them:

Understanding Forex Market Orders

Now that we've discussed the different types of forex pairs, let's take a closer look at the various types of orders. Orders are an essential part of trading, as they inform your broker about the actions you want to take with a specific forex pair. Without placing orders, your trades won't be executed, and you won’t be able to manage your positions properly.

Buy and Sell Forex Orders

Once you've chosen the forex pair you want to trade, your next step is to predict the direction in which you expect the pair's price to move. After making decision, you'll need to place either a buy order or a sell order. Here's an example of how to determine which order to place:

Limit Orders and Market Orders

Next, let's dive into limit orders and market orders, which are both used to determine the price at which you want to enter a trade.

Limit Order Example

Let’s say you're trading EUR/USD, and the current price is 1.10. However, you don’t want to enter the trade until the price rises to 1.12. In this case, you would a limit order at 1.12. This means your broker will only execute the order when EUR/ hits that price. If the price never reaches 1.12, your order won’t be filled.

Market Order Example

Now, let’s look at a market order. Suppose the buy price for EUR/USD is 1.15, and you want to enter the trade immediately to take advantage of a short-term trading opportunity. You place a market order, and your broker will execute it at the next available price. Since currency prices are constantly changing, the actual price at which your order is executed will be slightly above or below 1.15, depending on the market fluctuations.

Why Traders Use Limit Orders:

Limit orders are commonly used by experienced traders because they allow you to enter a position at your desired price. This gives you more control over your entry point, as opposed to market orders, which execute at the best available price at the time.

Spreads

In simple terms, the spread is the difference between the buy price and the sell price of a currency pair.
Understanding the spread is crucial because it directly impacts how much profit you can make from your trades.
When you trade, you'll notice that trading platforms display two prices for each currency pair: the buy price (or ask price) and the sell price (or bid price). The difference between these two prices is called the spread, and it’s typically measured in pips—which we’ll explain in more detail shortly.
The spread is how your broker earns money for providing the trading service. This is particularly true for commission-free platforms like Skilling, Capital.com, and eToro, which make money from the spread rather than charging a direct commission on trades.
Now, let's move on to pips, as they play a big role in understanding the spread and how your trades are price

Please see below an example of how spreads work in practice, using a hypothetical trade:

Let’s break this down with an example using EUR/USD.

Suppose your broker quotes the following prices:

• Buy price: 1.1718
• Sell price: 1.1716

The difference between the buy and sell prices is 2 pips, which is the spread.

How the Spread Affects Your Trade:

• To break even on your trade, you need the price to move in your favor by at least 2 pips—the amount of the spread.
• Any movement beyond the 2-pip spread will be your profit. So, if EUR/USD rises to 1.1720, you would have made a 2-pip profit

Pips

What Are Pips?

A pip (short for "percentage in point") is the smallest unit of price movement in the forex market. It’s typically thefourth decimal place in a currency pair quote. For example, if the price of EUR/USD moves from 1.1718 to 1.1719, it has moved 1 pip.

Most major currency pairs (like EUR/USD, GBP/USD, etc.) are quoted to 4 decimal places, meaning each pip represents a 0.0001 change in the exchange rate

How Pips Impact Your Trade:

To help explain how pips affect your trade, let's use GBP/USD as an example:

• Suppose the current price of GBP/USD is 1.3000.
• If the price moves to 1.3005, this would be a 5-pip move (since the last digit after the decimal point represents the pip movement).

This means that for every 1 pip change in the exchange rate, your position is either gaining or losing value depending on whether you're buying or selling.

Example of How Pips Work in a Trade:

Let’s say you are buying GBP/USD at 1.3000:

• If the price moves to 1.3020, you’ve made a 20-pip profit.
• If the price drops to 1.2980, you’ve made a 20-pip loss.

Since the spread is also measured in pips, you need the market to move in your favor by enough pips to cover that spread and start making a profit. In essence, the smaller the pip movement, the smaller the profit or loss, but this also means your strategy needs to account for these small changes in price over time.

Now that you understand how pips affect your trades, you'll have a clearer picture of how exchange rates fluctuate and how to measure these changes to manage your trades effectively

Let’s break down the GBP/USD price movement and how pips affect your trade.

Example with GBP/USD:

• Initial Price: 1.3013
• Price after 2 hours: 1.3003
• The price has fallen by 10 pips (since 1.3013 - 1.3003 = 0.0010, or 10 pips).

Now, let’s say your stake was $100 per pip. In this case, since the price moved 10 pips in the opposite direction (a loss), your total loss would be:

• $100 x 10 pips = $1,000 loss.
• The GBP/USD exchange rate is initially 1.3013.
• Two hours later, the rate drops to 1.3003.
• This represents a decline of 10 pips in the GBP/USD value.
• Assuming you have a position size of $100,
• Your profit or loss would amount to $1,000 (calculated as $100 x 10 pips).

However, there is an exception to most rules, especially when it comes to forex quotes with four decimal places. The Japanese yen (JPY) is quoted differently – only to two decimal places. For instance, a price might look like 104.72.

Forex Trading Fund Management and Goals

Focusing on effective bankroll management will not only sharpen your trading skills but also support your growth as an investor. When it comes to minimizing risk and improving capital management, there are various tools and orders that canbe crucial for forex traders.
To begin, let's explore how leverage can influence your trades, and also how you can implement risk-control measures, such as stop-loss and take-profit orders, to protect your positions

Leverage

Leverage is a key component of forex trading for many experienced traders. Essentially, leverage is offered by most forex brokers and allows you to control a larger position than the actual funds available in your account.
To explain further, leverage is similar to borrowing money. The greater the leverage you use, the more potential profit you can make – but on the flip side, your losses could also be much larger.
In the forex market, licensed brokers are restricted in how much leverage they can offer to retail clients in regions like the UK, Europe, and soon Australia. For these retail traders (as opposed to professional ones), the maximum leverage available is 1:30 for major currency pairs, and 1:20 for exotic and minor pairs.

Let’s give you a practical example of how leverage works:

• You’re trading the GBP/USD currency pair.
• The current price is 1.3520.
• Your trading account has $500 left.
• You place a buy order with 1:30 leverage.
• Four hours later, the GBP/USD price rises to 1.3790.
• This represents a 2% increase in value.
• You lock in your profit by placing a sell order with your broker.

Without leverage, this trade would have earned you $10 (2% of your $500 account balance). However, by using 1:30 leverage, your profit is amplified. As a result, your actual profit comes to $300 (calculated as $10 x 30, the leverage ratio).
As mentioned earlier, leverage can significantly increase both your potential gains and your risks. This is where risk management tools like stop-loss and take-profit orders become essential to help safeguard your trades

Mitigating Risk: Stop-Loss Orders

By following along so far, you should now have a solid understanding of basic orders like buy and sell, as well as market and limit orders.

When it comes to managing your trading capital, stop-loss orders are an essential tool. They allow you to automatically close a trade at a pre-set level, helping to limit potential losses.

Below is an example of how a stop-loss order could be used in a forex trade:

• Imagine you’re trading the CAD/AUD pair.
• You place a buy order at 1.0710, and you decide you’re not willing to risk more than 2% of your position.
• To protect yourself, you set a stop-loss order at 1.0495.
• Two hours later, the CAD/AUD value drops to 1.0281, marking a 4% decrease in price.
• However, your broker executes the stop-loss order at 1.0495, as you had set it.
• Thanks to the stop-loss, instead of suffering a 4% loss, you only incur a 2% loss, as planned.

Automatically Lock in Gains: Take-Profit Orders

Similar to stop-loss orders, take-profit orders enable you to set a target for your trade. While stop-loss orders help minimize potential losses, take-profit orders allow you to secure your profits.

Here's an example of how a take-profit order would work in a different hypothetical trading situation:

Maximum Forex Stakes

When managing your trading bankroll, it's important to consider the maximum amount you're willing to risk on each trade. It's often easier to think of this in terms of a percentage rather than a specific dollar amount. To clarify this concept, a solid money management strategy involves only risking what you can comfortably afford tolose. Many traders adopt a rule where they risk no more than 1% (or even less) of their account balance on any single trade.

For instance, if your account balance is $2,000, it would be wise to risk no more than $20 on a single trade. Your account balance will naturally fluctuate as you experience both gains and losses. However, by limiting your risk per trade, you reduce the likelihood of losing your entire account due to one poor decision.

Tried and Tested Forex Market Strategies

No discussion about forex trading would be complete without addressing strategies. Once you have a solid understanding of how forex trades work—such as knowing what to trade and how to place an order—you’ll need to focus on defining your trading objectives and selecting a strategy to guide your approach, at least initially. Having a clear strategy in place will help you stay disciplined and make decisions based on logic rather than emotions. To help you get started, we’ve compiled a list of some of the most commonly used trading strategies inthe global forex market.

Forex Day Trading

Day traders in the forex market typically keep their positions open for less than a day—hence the term "day trading." This can mean closing a trade within minutes or hours.
Day trading usually involves executing multiple trades throughout the day, often using leverage. While the gains per trade tend to be smaller, the frequency of trades means profits can accumulate steadily over time. One key advantage of day trading is that these traders avoid overnight financing fees, which we will discuss in more detail late

Forex Scalping

Forex scalping is one of the more challenging strategies to master and is typically favored by experienced traders. The goal of scalping is to capitalize on small price fluctuations that occur throughout the trading day.
This strategy often involves placing a large number of orders within a short period, sometimes just hours. As the name suggests, scalpers "scalp" small profits each time a forex pair moves within a defined range.
Despite the small gains per trade, scalping is still considered a relatively low-risk strategy—especially when combined with tools like take-profit and stop-loss orders. Although each individual profit may seem minimal, when executed consistently and effectively, these small gains can accumulate into a successful trading week

Forex Swing Trading

If you're a beginner, forex swing trading could be a good option to consider. Essentially, swing trading is well-suited for short-term traders who want more flexibility in their approach to the forex market.
Swing traders typically hold positions for anywhere from one day to two weeks, and sometimes even months.
The flexibility of swing trading comes from its focus on capturing trends in the market—trends that can last anywhere from hours to several months. By riding these price movements, swing traders aim to profit from short- to medium-term market shifts.

Forex Demo Accounts

Demo accounts are an invaluable resource, not just for beginners, but also for experienced forex traders. The key advantage is that online brokers offering demo accounts provide a trading environment that closely simulates real-market conditions. On top of that, you'll be given virtual funds—essentially demo money—to trade with.
This setup allows you to test out new forex strategies as much as you like, or simply get familiar with the market without any financial risk. It's an excellent way to build confidence and refine your trading skills before committing real capital.
Using Signals and Automated Forex Market Systems
Earlier, we touched on the fact that there are alternatives for traders who may not yet fully understand technical analysis and price charts in forex trading—or for those who simply don't have the time or resources to master them.
If you're not familiar with these tools, don't worry. In this section, we'll explore signals, mirror trading, and trading robots, which can serve as helpful shortcuts for those looking to navigate the market more easily

Mirror Trading the Forex Market

Mirror trading is a powerful feature that allows you to copy the trades of an experienced trader. In simple terms, any currency pairs they trade will automatically be reflected in your own trading portfolio.
For example, if you decide to copy a forex trader who allocates 0.4% of their portfolio to AUD/USD and 0.3% to GBP/USD, then 0.7% of your portfolio will also be dedicated to those same currency pairs.
One of the best platforms for mirror trading is eToro. It offers a wide range of skilled traders to choose from, each witha proven track record. You can view their performance stats—such as their returns, preferred forex pairs, and average trade size—before deciding to copy them. On eToro, you can start mirroring a trader with as little as $200.

Automated Trading Robots in the Forex Market

Forex automated robots, also known as Expert Advisors (EAs), are designed to take the hands-on work out of trading by automating the entire process. In essence, these robots allow you to trade passively, as the algorithmic software handles everything for you.
Here's how it works: Unlike the "copy trading" feature where a human places the trades, an EA uses automated algorithms to scan the market 24/7 and execute buy and sell orders on your behalf. One of the keyadvantages of using an EA is that it removes emotional biases from trading—something humans often struggle with—while also allowing the software to operate around the clock without needing rest or sleep.
To start using a forex robot, you’ll typically need to choose a provider, sign up, and download the software. After that, you upload it to a third-party platform like MetaTrader 4 (MT4). Be sure to check that your broker is compatible with MT4 before you sign up.
While EAs can be a useful tool, it's important to remember that there are no guarantees when using automated systems. To get a feel for how a forex robot works, it's a good idea to start with a demo account before committing real money.

How to Find the Right Online Broker for the Forex Market

To begin your forex trading journey, one of the first and most important steps is selecting a reliable broker. As we mentioned earlier, there are countless brokers out there, some offering excellent services, while others fall short, making it difficult to choose the right one.
With that in mind, we've compiled a list of key factors to consider when choosing the ideal forex broker. It's also crucial to reflect on your own trading goals and preferences, as this will help guide you in identifying what matters most to you when evaluating brokers.

Licence Holder

We strongly recommend choosing a fully licensed broker to protect yourself from the risks associated with online trading. It’s important to remember that handing your money over to an unregulated company can expose you to serious dangers.
Regulatory bodies like the FCA (Financial Conduct Authority) in the UK and CySEC (Cyprus Securities and Exchange Commission) exist to ensure that the financial services industry operates in a fair and transparent manner.
By sticking to licensed brokers, you gain several important protections.
These include safeguards against financial crime and a level of security for your capital in case the broker goes bankrupt. Licensed brokers are required to segregate client funds from their own, meaning your money is kept separate and safe, even if the broker encounters financial difficulties.

Available FX Pairs

Another crucial factor to consider when choosing a forex broker is the range of currency pairs they offer. While there are over 100 forex pairs available in the market, not all brokers provide access to the same selection of pairs.
Before fully signing up with a broker, make sure to check which pairs are available to trade. For instance, if you're interested in trading pairs that involve emerging market currencies, such as USD/MXN (US dollar/Mexican peso), not every platform will necessarily offer that option. It's important to confirm that the broker provides the specific forex pairs you want to trade before committing.

Commissions and Fees

While it might seem obvious to check for fees, it’s easy to get swept up in the excitement of potential profits and the range of financial instruments a broker offers. However, it’s crucial to understand the fees associated with your trades. For instance, if your broker charges $10 for each position you open and close, you need to factor that cost into your expected profits.
Remember, a trading platform is a business, and it needs to generate revenue to operate and continue providing services. The good news is that many online brokers offer commission-free trading, meaning you won’t pay a fee on every trade. Instead of commission fees or a percentage of your order value, commission-free brokers typically charge spreads (the difference between the buy and sell price) and overnight financing fees. These costs can vary, so it’s important to understand them fully before you start trading.

Supported Payment Options

Before deciding on a broker, it’s important to understand how you'll fund your trading account. To access the global forex market, you'll need to deposit at least the minimum required amount set by the broker. Most brokerage firms accept a variety of payment methods, including credit/debit cards, wire transfers, and some e-wallets.
That said, it's essential to verify these payment options during your research process to ensure the broker offers the methods that work best for you. Additionally, while bank wire transfers are a common payment method, keep in mind that they tend to take longer to process—usually 2 to 3 business days—compared to other options like credit cards or e-wallets.

The Best Forex Market Brokers Right Now

If you've made it this far through our guide on trading in the forex market, you’re probably feeling well-equipped to kickstart your currency trading journey.
However, as we’ve mentioned, the first step is to find a broker that will give you access to the global forex market.
With so many brokers out there, it can be challenging to separate the good from the bad.
To make your search easier, we've put together a list of our top 5 forex brokers, carefully selected from the thousands operating in the industry. This should save you time and help you choose a reputable and reliable platform to get started.
Elect to Open an Account with a Forex Market Broker

Opening an account with a trading platform, especially the ones we've recommended, is typically a straightforward process. However, to ensure you're fully prepared, we’ve put together a simple 3-step walkthrough to guide you through the sign-up process.

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Register: Go to the broker’s website and click on the “Sign Up” or “Open Account” button. You'll be asked to provide basic personal details, such as your name, email address, and phone number. Some platforms may ask for additional information to verify your identity.
Verify Your Identity: To comply with regulatory requirements, most brokers will ask you to upload identification documents (such as a passport or driver’s license) and proof of address (like a utility bill or bank statement). This step is necessary to secure your account and protect you from fraud.
Deposit Funds: Once your account is verified, you’ll need to fund it to start trading. Select your preferred payment method (credit/debit card, bank transfer, or e-wallet), and deposit the required minimum amount to activate your trading account.

Place Your First Forex Trade

Now you are all set up with a funded account – you can start trading in the forex market. You simply need to find your chosen FX pair and create an order.

Here’s a quick recap of how to place your first order:

• Decide between buy or sell – depending on whether you think the price will rise or fall.
• Place a Limit Order/Market order – enter at a set price/execute immediately.
• Opt for or against leverage – if you wish to apply leverage, choose a multiple from what’s available.
• Set up Stop-loss/Take Profit orders – we highly recommend using these orders to balance your risk/reward from the trade.

Last but not least, confirm your order with the trading platform. We hope that your first trade in the forex market is a successful one!