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Forex Trading For Dummies – Step by Step Guide 2022

 

Forex trading for beginners can be an especially difficult task due to the impractical expectations when it comes to novices traders in the financial market. When it comes to Forex trading significant risk is involved and forex education is essential.

 

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What Is the Forex Market?

The foreign exchange market is a global financial market where investors trade currency. Uniquely, the foreign exchange market is not a centralized marketplace and currency trading is conducted electronically over-the-counter or OTC. OTC means that all transactions happen via computer networks between traders across the globe. The foreign exchange market is active 24 hours a day, five and a half days a week, in the major financial centres of London, New York, Tokyo, Zurich, Frankfurt, Hong Kong, Singapore, Paris and Sydney—across a large time zone.

When it comes to Forex, certain terminology will be used:

If a beginner trader misunderstands what they are reading they will be lost in a very large market before making a decent start and this may end up as a very costly mistake. Traders should think of it as being in a new country where an unknown language is spoken.

  • Active Balance: This term refers to the cash count.
  • Ask:  This refers to the rate at which the dealer sells a financial instrument or the price at which a trader is going to purchase a currency.
  • Base Currency: The currency which is used to quote all the trades in Foreign Exchange Market.
  • Bear: This is used in reference to someone who believes that the position or the market will go down.
  • Better Price: Describes the better price in case it is higher than is currently available in the market.
  • Broker: This is whereby the market participants perform transactions using specific set of instruments at the expense and on behalf of the clients. Remember to check out the best brokers for beginners at the end of this article!
  • Brokerage: Brokerage refers to the commission or the fee that a broker is paid for the rendered services.
  • Bull: Is someone who has belief that the position or the market will rise.
  • Cable: Slang for the dealers for the USD/GBP exchange rate.
  • Change: The difference between the closing price of the previous day of trading and the current price.
  • Change %: The is determined as the ratio of Change and the instrument’s current price .
  • Close Position: A transaction that once made leads to the closure of the position that was open.
  • Currency Risk: The risk of incurring the losses that ensue from any unfavourable change of the exchange rates.
  • Day Trading: The opening and closing at the same positions or position within a single trading day.
  • ECB: Stands for the European Central Bank.
  • Execution Warrant: This is whereby a transaction broker is committed in line with the warrant and cancellation of orders.
  • Limit: Limit refers to an order to sell or buy currency at a price that is specified or even better.
  • Lock: The opening of two positions for one specification, one instrument and the same size in various directions.

 

Bid/Ask Price

The Bid/Ask Price is the price at which a market-maker or dealer buys securities or other assets. When buying and selling currency pairs, the prices for each occasion has a specific name and the price of selling a currency pair is called the Bid price, for buying a currency pair – Ask price. Both Bid and Ask prices are updated in real time.

 

Lot

Forex is most commonly traded in specific amounts referred to as lots. Lots refer to the number of currency units a trader will buy or sell. The standard size for a lot is 100,000 units of currency, and there are also minimicro, and nano lot sizes which are 10,000, 1,000, and 100 units. Some brokers will show quantity in “lots”, while others may show them in actual currency units.

 

Spread

The spread in forex refers to the difference between the Ask and Bid price or the cost of trading.

 

Pip

Point in percentage or Pip, represents a tiny measure of the change in a currency pair in the forex market and is usually the fourth decimal point in a currency pair and all major currency pairs are priced to four decimal points. It is important for traders to know the monetary value of a pip in order to be able to calculate potential losses or profits. This value is always in quote currency.

The formula for calculating the monetary value of a pip is as follows:

Amount of base currency (in lots) x Decimal number of pips.

 

Margin & Leverage

Margin is basically the amount of money which a trader needs in order to produce, place a trade and maintain the position. Margin is less of a transaction cost and more a security deposit which the broker holds while a forex trade is open. Trading currencies on margin enables traders to increase their exposure. Leverage on the other hand is the relation of a trader’s funds to the size of the broker’s credit. Leverage is basically borrowed capital used to increase the potential returns. The Forex leverage size usually exceeds the invested capital for multiple times.

To fully understand how to manage an account, traders must have a good understanding of the leverage and margin level requirements offered by each individual forex broker. Failing to properly manage both will result in a margin call and the broker will liquidate a traders position in order to ensure that their losses do not reach a level where their margin is insufficient to cover them. Leverage can work both ways: a traders’ profits can increase but so can their losses.

 

Swap

Swap refers to the interest which a trader pays or earns when a position is left open overnight. Swaps are usually presented in pips per lots traded and vary among brokers and currency pairs. Some forex brokers will offer swap free or Islamic accounts for traders usually from Islamic countries, as this is against their religion.

 

Trading Account / Platform

  • A Trading Account: A Trading account is the account which a trader opens with their chosen forex broker. This account will determine all the trading conditions which a trader must follow whilst trading using a trading platform. Trading Accounts allow traders to manage their funds, documents, and any offers given by the broker.
  • A Trading Platform: A Trading Platform is the software used by a user to trade the markets. The most popular trading includes the Metatrader 4 and Metatrader 5 platforms which are generally available across desktop and mobile devices.

10 Best Forex Brokers best suited for Beginner Traders

 

XTB

XTB is a leader in the Forex trading space mainly due to its proprietary award-winning trading platform. They also offer excellent educational material in its training academy and a host of analysis resources as well. Great customer service backs up their already solid offering. XTB is regulated in markets across Europe by the IFSC, FCA, KNF, and CySec.

Pros Cons
Award winning platform which is very user friendly Limited product portfolio
Free and fast deposit and withdrawal No website trading platform
Training Academy Poor support
Low trading fees .
No withdrawal fees

 

Trading 212

Trading 212 has created state of the art web and mobile trading platforms that are both easy to use and navigate. They also have made opening an account easy and fast, with no minimum deposit as well. Trading 212 is authorised and regulated by the Financial Conduct Authority (FCA).

Pros Cons
No minimum deposit Limited product portfolio
Great user-friendly platform Basic research tools
Quick and easy account opening No live chat for support
Large product portfolio Sometimes problems with verification
No Inactivity fee

 

eToro

eToro is one of the biggest and most well-known names in the online trading market. They have a AAA grade support rating through multiple channels, with a wide range of languages on offer as well. They make account opening fast and easy with no deposit fee or minimum deposit requirements. eToro is supervised by the Financial Conduct Authority (FCA), Cyprus Securities and Exchange Commission (CySEC).

Pros Cons
Easy and fast account opening Withdrawing money is slow and expensive
No deposit fees  Account only based in one currency
Low minimum deposit High Forex fees

 

AvaTrade

AvaTrade, one of the largest and most regulated online brokerages in the world. AvaTrade is licensed as a regulated broker in the EU, Japan, Australia, South Africa and the British Virgin Islands. They are regulated in 6 different jurisdictions and offices worldwide which boast over 200,000 clients with monthly trades of over 2 million.

AvaTrade offers customer support in multiple channels in multiple languages as well, all of which make it a good option to traders of all levels.

Pros Cons
Easy and Fast account opening Only CFDs, Forex and Crypto offered
Free deposit and withdrawal options Poor phone support
No withdrawals fees Inactivity fee

 

Oanda

Oanda was one of the early online forex brokers and was the first to have a fully automated forex trading platform, which is easy to use and excellent. They operate across eight global financial centres, with clients in over 196 countries.

OANDA is the Most Regulated Forex Broker and operate across six of the most credible authorities including:

  • Australia AISC (Australian Securities and Investments Commission)
  • United States CFTD (Commodity Futures Trading Commission)
  • Europe and UK FCA – (Financial Conduct Authority)
  • Japan IFFA (Institute Financial Futures Association)
  • Singapore MAS (Monetary Authority Of Singapore)
  • Canada IIROC (Investment Industry Regulatory Organization of Canada)
Pros Cons
Low fees High bank withdrawal fee
Easy and digital account opening Poor customer service
Easy to use web trading platform Limited offering of only Forex and CFDs
Low minimum deposit ID verification issues can delay account opening

 

Pepperstone

Pepperstone trades in accordance with the regulatory principles set down by the European Securities and Markets Authority and the Financial Conduct Authority and was founded and launched in London. Pepperstone has built its highly regarded reputation on providing institutional grade trading to the online forex trader.  They offer a huge number of tools and a ton of different platforms to choose from.   This comes from an ethos of being a bespoke solution for each individual trader by giving a host of technological options.

Pros Cons
Free withdrawals and deposits Limited product portfolio of CFD, Forex and Crypto
Great customer service No Research or technical analysis data
Low minimum deposit
Low Forex fees
No Minimum deposit

 

FXCM

FXCM Group is an international online forex and CFD brokerage brand which maintains offices in several jurisdictions, including Australia and South Africa. Tradable products on offer include spot forex markets, cryptocurrencies, Treasury bond (the bund) and Contract for Difference (CFDs) for market indices and commodities. FXCM is regulated by top-tier financial authorities like the UK’s Financial Conduct Authority (FCA) and the Australian Securities and Investments Commission (ASIC).

Pros Cons
Regulated Broker Limited product portfolio
Multiple choices of trading platforms No longer accepts US clients after losing US regulatory license
Numerous free trading tools provided
Low minimum deposit requirement
Comprehensive educational section

 

IC Markets

IC Markets offer their proprietary copytrading platform Zulutrade which is one of the best in the market. With 500,000 trades per day they understandably cater most to high volume traders. IC Markets isn’t limited to copytrading and high volume, however.  They offer many services and features designed for both beginner and experienced traders. They have an excellent trading platform and wide range of products and have a quality 24/7 support team over multiple channels round their offering out. IC Markets is authorised and regulated by the Financial Services Authority (FSA) of Seychelles.

Pros Cons
Low Forex fees No negative balance protection
Easy and fast account opening Only Forex, crypto and CFD trading
Free deposit and withdrawal
Low minimum deposit

 

Alpari

Alpari Financial Services Ltd (Alpari) is one of the world’s leading independent forex brokers globally and offers a wide range of products. Alpari is regulated and licensed by the Financial Services Commission of Mauritius. Alpari offers a variety of account types and have an excellent customer support team with support in over 30 languages. Demo accounts and copy trading is also on offer for beginner traders to learn with.

Pros Cons
Low minimum deposit Limited educational resources
Best Broker for copy trading accounts Lack of resource tools
Diverse selection of tradeable assets High fees
Demo accounts and social trading available for the beginner trader Withdrawal fees
Good support in over 30 languages

 

FP Markets

FP Markets have been building their reputation since 2005 and have proven that traders’ expectations of reliability and safety will not be disappointed. Giving traders a careful balance between product choices and attractive pricing models, FP Markets is an attractive broker choice for expert and novice traders alike. Customer registration is a short and sweet process and users will have access to a mobile and web platform. Tech support will assist clients during office hours and are available through email, live chat and telephone. FP Markets is regulated by the Australian Securities and Investment Commission (ASIC).

Pros Cons
Good customer support Few products offered
Effortless registration Certain withdrawal options carry costs
Inactivity won’t attract penalties Underdeveloped web platform

 

Fees and commissions

Features Prices
Minimum Initial deposit to start trading $100
Average spread EUR/USD – active N/A
Average spread EUR/USD – standard 1.19
VIP or active trader discounts N/A

 

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In Conclusion

Finding the perfect broker is not an easy task, especially for beginner traders who don’t really know what to look for in order to make a start. Traders should invest their time in making sure that their intended broker caters to investors new to trade, and then only, invest their money. Forex Brokers should especially offer educational materials to Beginner Traders in order to make sure they have all the information they need before jumping in to the Financial Market head first.

 

Author Details

Louis Schoeman

Louis Schoeman

Featured Forex and Stocks writer

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