Forex Trading for Beginners - NerdWallet (2024)

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If you’ve ever traveled internationally, you’ve touched on the world of forex trading, though you may not know it: When you stepped off the airplane, one of your first stops probably was to exchange your money for the local currency.

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What is forex trading?

Forex — or FX — refers to the foreign exchange market, and forex trading is the process of buying and selling currencies from around the globe. The forex market is the largest financial market in the world, but one in which many individual investors have never dabbled, in part because it’s highly speculative and complex.

A little healthy trepidation serves investors well. Active trading strategies and complex investment products don’t have a place in most portfolios. Financial advisors often strongly recommend low-cost index funds for long-term goals like saving for retirement.

But maybe you have a balanced portfolio in place, and now you’re looking for an adventure with some extra cash. Provided you know what you’re doing — please take those words to heart — forex trading can be lucrative, and it requires a limited initial investment.

» Already know the basics? Here are the best brokers for forex trading

Understanding forex trading

The concept of trading forex can be hard to wrap your head around. Here's how it works: Currencies are always traded in pairs, such as the Euro and the U.S. dollar. When you trade forex, you always buy one currency and sell another (which is why currencies are also always quoted in pairs).

Currencies rise and fall at different rates (for example, the Euro may rise while the U.S. dollar falls) based on geopolitical or economic factors such as natural disasters or elections. Based on those kinds of factors, you might think that a related currency — for example, the Euro — will rise in value. You could then buy Euros and sell U.S. dollars. If your prediction panned out, and the Euro did rise in value, you would make a profit. Of course, there are many more nuances that make forex trading complex, which we'll get into below.

Current forex trading rates

The chart below shows two paired currencies and reflects what one unit of the first listed currency is worth in the second listed currency. For example, the first row shows how much one Euro is worth in U.S. dollars.

Forex trading quotes are pulled from Google Finance and may be delayed up to 20 minutes. Data is solely for informational purposes, not for trading purposes.

How to read a forex quote

Being able to read and really understand a forex quote is, unsurprisingly, key to trading forex. Let’s start with an example of an exchange rate: EUR/USD 1.12044.

  • The currency on the left (EUR) is the base currency and is always equal to one unit — 1€, in this example.

  • The currency on the right (USD) is called the counter or quote currency.

  • The number is what the counter currency is worth relative to one unit of the base currency. When that number goes up, it means the base currency has risen in value, because one unit can buy more of the counter currency. When that number goes down, the base currency has fallen. In this example quote, 1€ is equal to $1.12044.

You're always buying or selling the base currency. Within a pair, one currency will always be the base and one will always be the counter — so, when traded with the USD, the EUR is always the base currency. When you want to buy EUR and sell USD, you would buy the EUR/USD pair. When you want to buy USD and sell EUR, you would sell the EUR/USD pair.

Forex Trading for Beginners - NerdWallet (4)

Bid and ask prices

As with stock trading, the bid and ask prices are key to a currency quote. They, too, are tied to the base currency, and they get a bit confusing because they represent the dealer's position, not yours. The bid price is the price at which you can sell the base currency — in other words, the price the dealer will “bid,” or pay, for it. The ask price is the price at which you can buy the base currency — the price at which the dealer will sell it, or “ask” for it.

  • The ask price tells you how much of the counter currency (USD, in our example) it will take to buy one unit of the base currency (EUR).

  • The bid price tells you how much of the counter currency you can buy when you sell one unit of the base currency.

  • The difference between these two prices — the ask price minus the bid price — is called the spread.

The bid and ask are typically shown as EUR/USD bid/ask, and the ask is represented with only the last two digits. For example, EUR/USD 1.12044/57 means that the bid is 1.12044 and the ask is 1.12057. You could sell 1€ for $1.12044 (the bid) and buy 1€ for $1.12057 (the ask).

The bid price is always lower than the ask price, and the tighter the spread, the better for the investor. Many brokers mark up, or widen, the spread by raising the ask price. They then pocket the extra rather than charging a set trade commission.

The last salient point about pricing is that the spread, earnings and losses are measured in a unit called a pip.

What is a pip?

Remember when we said forex trading was complex? We weren’t lying. In stock trading, you might hear or read that a stock's share price went up a point, or $1. A pip is the forex version of a point: the smallest price movement within a currency pair.

A pip’s value depends on the trade lot and the currency pair. If you’re trading a pair that has the USD as the counter currency and you’re using a dollar-based account to buy and sell, the pip values are:

  • Micro lot (1,000 units): pip = 10 cents.

  • Mini lot (10,000 units): pip = $1.

  • Standard lot (100,000 units): pip = $10.

If the USD is the base currency, the pip value will be based on the counter currency, and you’ll need to divide these values for micro, mini and standard lots by the pair’s exchange rate.

To figure out how many pips are in the spread, subtract the bid price from the ask price: That gives you 0.00013 in our EUR/USD example. For most pairs, the smallest price movement happens in the fourth digit after the decimal, so the spread here is 1.3 pips, or $1.30 on a mini lot. That’s the cost of the trade.

» Explore other alternative investments

Understanding forex lot sizes

Forex is traded by the “lot.” A micro lot is 1,000 units of currency, a mini lot is 10,000 units, and a standard lot is 100,000 units. The larger the lot size, the more risk you’re taking on; individual investors should rarely trade standard lots. If you’re a beginner, we recommend sticking to micro lots while you get your footing.

This seems like a good place to note that reputable forex brokers often give investors access to a demo trading account. It’s much more fun to lose play money than real money, especially while you’re learning the ropes.

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Forex Trading for Beginners - NerdWallet (5)

How to make money trading forex

As noted at the start of this post, forex trading is risky. You’re making a bet that what you buy will go up in value. With forex, you want the currency you're buying to go up relative to the currency you're selling. If you bought a mini lot of a currency and it goes up 1 pip in value, your investment would be worth $1 more. If it goes down 1 pip, your investment would be worth $1 less.

That’s easy enough to understand — after all, whether you’re buying a house or the euro, you want what you buy to be worth more than you paid for it. Where things get hairy is that leverage mentioned earlier.

Using your leverage

Leverage allows you to borrow money from the broker to trade more than your account value. Many brokers offer leverage of up to 50:1 on major pairs, which means you can initiate trades up to 50 times larger than the balance in your account.

Let’s go back to our earlier example. Let's say you want to buy EUR/USD at 1.12044/57. To trade a mini lot, or 10,000 units, you'd need to pay $11,205.70 for 10,000 euros. You might not want to put up that much on one trade, so you'd use leverage to enter the position with a smaller amount:

  • 10:1 leverage would require $1,120.57 from your account (one-tenth of the trade value).

  • 20:1 leverage would require $560.29 (one-twentieth of the trade value).

  • 50:1 leverage would require $224.11 (one-fiftieth of the trade value).

The upside? Because currency movements typically are small but frequent — often under 100 pips a day — leverage allows you to buy more with less cash upfront, increasing your return if the currency you’re buying goes up.

The downside, you may have guessed, is that leverage also increases your losses if the currency you’re buying goes down. The more leveraged your account and the larger the lot size you’re trading, the more exposed you are to a wipeout.

Forex trading vs. stock trading

Trading forex is different from stock trading in several ways:

  • Forex trades are made over the counter — trader to trader or through forex brokers or dealers — rather than through a central exchange.

  • Because traders work across time zones, the forex market is open 24 hours a day, five days a week.

  • Currency prices fluctuate rapidly but in small increments, which makes it hard for investors to make money on small trades. That’s why currencies almost always are traded with leverage, or money borrowed from the broker.

Forex Trading for Beginners - NerdWallet (2024)

FAQs

Is $100 enough to start forex? ›

Many brokers offer micro and nano lot sizes, which allow traders to risk a minimal amount per trade. By starting with smaller positions and reinvesting profits, a $100 account can slowly but steadily increase in size. Selecting a reputable forex broker is crucial, regardless of the initial investment.

Is $1000 enough to start forex? ›

Believe it or not, you can start forex day trading with $1,000 or even less. It requires mastering position sizing and managing risks, but if you navigate your way to success, the rewards can be significant. In this article, we will discuss in detail how you can day trade with $1000.

Can I start forex with $500? ›

The very lowest you can open an account with is $500 if you wish to initiate a trade with a risk of 50 pips since you can risk $5 per trade, which is 1% of $500.

Is forex trading good for beginners? ›

However, the forex market can be very volatile in nature and requires you to make careful trading decisions. Therefore, as a beginner, trading in such an environment might seem hard initially. That said, with the right tips and steps, you can slowly and easily ease into it.

What is the number 1 rule of forex? ›

Rule 1: Always Use a Trading Plan

The key here is to stick to the plan. Taking trades outside the trading plan deviates from your predicted performance and nullifies the value of your plan even if they turn out to be winners.

Can forex make one a millionaire? ›

Forex trading may make you rich if you are a hedge fund with deep pockets or an unusually skilled currency trader. But for the average retail trader, rather than being an easy road to riches, forex trading can be a rocky highway to enormous losses and potential penury.

Is it possible to grow a $10 dollar forex account? ›

To be able to grow a small or a $10 forex account easily, you need to trade in a trending market. That is because it makes it easy for you to get nice entry and exit points and also identify your potential profit targets. And that goes by the saying, the trend is your friend.

Can a beginner make money in forex? ›

How much money can a beginner in Forex make per day? 1st of all you need to have a trading strategy. Your profit will depend on the deposit you manage, and risk control. It is possible to make 1% daily profit, or 7%, even 100%, but more you want to make, bigger risks you will have.

What is the average profit per month in forex? ›

A good forex trader anticipates a return of 5%–10% per month, on average. Considering this to be a minor target is realistic and sustainable. While some traders may have higher targets, that, of course, is not without additional risk.

What is the best currency to trade in forex as a beginner? ›

Beginners might find the AUD/USD pair to be an excellent choice, since it is more predictable and less likely to spike or drop suddenly. In many studies, this pair has also been cited as one of the least volatile. In conclusion, the best currency pairs to trade for beginners are EUR/USD, GBP/USD, USD/JPY.

What is the smallest amount you can trade with forex? ›

You'll be able to open orders, the volume starting from 0.01 lots, and you'll have amazing leverage. The minimum trade size with FBS is 0.01 lots. A lot is a standard contract size in the currency market. It equals 100 000 units of a base currency, so 0.01 lots account for 1000 units of the base currency.

How much money do day traders with $10,000 accounts make per day on average? ›

How much money do day traders with $10000 accounts make per day on average? On average, day traders with $10,000 accounts can make $200-$600 per day, with skilled traders aiming for 2%-5% returns daily. So, it is possible to achieve a daily profit of $200 to $600 with a $10,000 account.

Has anyone gotten rich from forex? ›

One of the most famous examples of a forex trader who has gotten rich is George Soros. In 1992, he famously made a short position on the pound sterling, which earned him over $1 billion. Another example is Michael Marcus, also known as the Wizard of Odd.

How do I teach myself to trade forex? ›

Preparing for Your First Forex Trade
  1. Step 1: Learn About the Forex Market. ...
  2. Step 2: Choose How You Want to Trade Forex. ...
  3. Step 3: Choose a Broker. ...
  4. Step 4: Open a Trading Account. ...
  5. Step 5: Prepare a Trading Plan. ...
  6. Step 6: Choose a Forex Pair to Trade. ...
  7. Step 7: Analyse the Market. ...
  8. Step 8: Buy or Sell.

Can you really make a living trading forex? ›

Now, it's not to say that trading Forex for a living is impossible; it is certainly attainable, but it usually requires getting knowledge and experience, as well as opening huge accounts with hundreds of thousands of dollars in size.

How much money do I need to start forex? ›

Answer - You can start trading with as little as $10 or invest more, like $100, $1,000, or even $15,000. Higher investments can potentially lead to higher profits in forex. However, it often requires substantial investments to achieve significant gains.

Can you start forex with $50 dollars? ›

Forex Trading with just $50 is achievable and has the potential to help you supplement your income.

What leverage should I use for a $100 forex account? ›

Many professional traders say that the best leverage for $100 is 1:100. This means that your broker will offer $100 for every $100, meaning you can trade up to $100,000. However, this does not mean that with a 1:100 leverage ratio, you will not be exposed to risk.

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