Online Forex Trading: A Beginner’s Guide

What is Forex Trading and how does it work?

At BTF Prime, we are committed to ensuring our clients are kept up-to-date on the latest products, state-of-the-art trading tools, platforms and accounts.

For those just getting started, we have created a comprehensive Beginner’s Guide to introduce you to forex terminology, answer common FAQs and, most importantly, keep things simple.

Looking for a breakdown of forex terminology? Head over to our glossary page.

WHAT IS THE FOREX MARKET?
WHAT IS FOREX TRADING?
WHAT IS A FOREX BROKER?

What is a forex broker?

Brokers act as intermediaries, facilitating trades by providing clients access to the 24-hour interbank in order to conduct trades.

BTF Prime offers a number of different accounts, each providing services and features tailored to our clients’ individual trading objectives. Discover the account that’s right for you on our account page. New to forex trading? Learn about the markets by opening a demo account page.

Understanding Currency Pairs

All transactions made on the forex market involve the simultaneous purchasing and selling of two currencies.These are called ‘currency pairs’, and include a base currency and a quote currency. The diagram below represents the forex pair EUR/USD (Euro/US Dollar), one of the most common currency pairs traded on the forex market.

Base Currency

Euro

EUR
Quote Currencyy

US Dollars

USD
Bid Price

Sell 1 Euro for 1.0916 US Dollars

1.0916
Ask Price

Buy 1 Euro for 1.0918 US Dollars

1.0918
Spread
Ask Price - Bid Price
1.0918 - 1.0916 = 0.0002 (2 pips)
Pips
Ask Price - Bid Price
1.0918 - 1.0916 = 0.0002 (2 pips)
SPREAD
A spread is the difference between the ask price and the bid price. In other words, it is the cost of trading.For example, if the Euro to US dollar is trading with an ask price of 1.0918 and a bid price of 1.0916, then the spread will be the ask price minus the bid price. In this case, 0.0002.

Note: Forex prices are often quoted to four decimal places because their spread differences are typically very small. However, there is no definitive rule when it comes to the number of decimal places used for forex quotes.

On the forex market, trades in currencies are often worth millions, so small bid-ask price differences (i.e. several pips) can soon add up to a significant profit. Of course, such large trading volumes mean a small spread can also equate to significant losses. Always trade carefully and consider the risks involved.

VISUALISING
CURRENCY TRADES

Trades & Key Terminology

A ‘position’ is the term used to describe a trade in progress. A long position means a trader has bought a currency expecting its value to increase. Once the trader sells that currency back to the market (ideally for a higher price than he paid for it), his long position is said to be ‘closed’ and the trade is complete. A short position refers to a trader who sells a currency expecting its value to decrease, and plans to buy it back at a lower price. A short position is ‘closed’ once the trader buys back the asset (ideally for less than he sold it for)..

For example, if the currency pair EUR/USD was trading at 1.0916/1.0918, then an investor looking to open a long position on the euro would purchase 1 EUR for 1.0918 USD. The trader will then hold on to the euro in the hopes that it will appreciate, selling it back to the market at a profit once its price has increased.

An investor going short on the EUR would sell 1 EUR for 1.0916 USD. This trader expects the euro to depreciate, and plans to buy it back at a lower rate if it does.

What are the most traded currency pairs on the forex market?

There are seven Major currency pairs on the forex market. Other brackets include Crosses and Exotic currency pairs, which are less commonly traded and all relatively illiquid (i.e., not easily exchanged for cash).

For example, if the currency pair EUR/USD was trading at 1.0916/1.0918, then an investor looking to open a long position on the euro would purchase 1 EUR for 1.0918 USD. The trader will then hold on to the euro in the hopes that it will appreciate, selling it back to the market at a profit once its price has increased.

An investor going short on the EUR would sell 1 EUR for 1.0916 USD. This trader expects the euro to depreciate, and plans to buy it back at a lower rate if it does.

MAJOR CURRENCY PAIRS

Major currency pairs are the most commonly traded, and account for nearly 80% of trade volume on the forex market.These currency pairs could typically have low volatility and high liquidity.

They are associated with stable, well managed economies, are less susceptible to manipulation and have smaller spreads than other pairs.

CROSSES

Cross currency pairs – Crosses – are pairs that do not include the USD.Historically, Crosses were converted first into USD and then into the desired currency, but are now offered for direct exchange.

The most commonly traded are derived from Minor currency pairs (e.g. EUR/GBP, EUR/JPY, GBP/JPY); they are typically less liquid and more volatile than Major currency pairs.

EXOTIC CURRENCY PAIRS

Exotics are currencies from emerging or smaller economies, paired with a Major.

Compared to Crosses and Majors, Exotics are much riskier to trade because they are less liquid, more volatile, and more susceptible to manipulation.

They also contain wider spreads, and are more sensitive to sudden shifts in political and financial developments.

We’ve created a table below which showcases several different currency pairs from each bracket, as well as some nicknames which were coined by traders themselves.

UNDERSTANDING FOREX CHARTS
CANDLESTICK CHART

A candlestick is a chart, also known as a Japanese Candlestick Chart, that is often favoured by traders due to the wide range of information it portrays. The chart displays the high, low, opening and closing prices.

A candlestick has three points: open, close and the wicks.

The wicks show the high to low range and the 'real body' (wide section) shows investors if the closing price was higher or lower than the opening price.

If the candlestick is filled, then the currency pair closed lower than it opened. If the candlestick is hollow, then the closing price is higher than the opening price.

BAR CHART

A bar chart shows the opening, close, high and low of the currency pair’s prices.

The top of the bar represents the highest paid price and the bottom indicates the lowest traded price for that specific time period.

The actual bar represents the currency pair's overall trading range and the horizontal lines on the sides represent the opening (left) and the closing prices (right).

A bar chart is most commonly used to identify the contraction and expansion of price ranges.

LINE CHART

A line chart is easy to understand for forex trading beginners. In a line chart, a line is drawn from one closing price to the next.

When connected, it is easy to identify a general price movement of a currency pair throughout a time period and determine currency patterns.

NEED TO KNOW MORE ABOUT TRADING FOREX?

In this guide, we’ve briefly covered some of the most important aspects of forex trading, including key terminology, what currency pairs are, how currency pair transactions work and how investors can profit from positions taken on the forex market.

How to start trading with a forex broker

A broker such as BTF Prime acts an intermediary between the traders and the liquidity providers. It facilitates in the execution of clients’ orders.

It is recommended to choose a licensed, regulated broker that has at least 5 years of proven experience. If your broker abides by regulatory rules, then you can be sure that they are legitimate.

Once you have an active account, you can trade — but you will be required to make a deposit to cover the costs of your trades. This is called a margin account.

However, it’s really important to remember that becoming a profitable trader isn’t an overnight process. It takes time to become familiar with the markets, and there’s a whole new vocabulary to learn. For this reason, reputable brokers like BTF Prime offer a Demo account. This is a great way to experiment with different trading strategies – but with virtual money and none of the risk!

Once you’re ready to move on to live trading, we’ve got a great range of trading accounts to suit you.

Learn forex trading

As a global broker, we’re firm believers that developing a sound understanding of the markets is imperative to a trader’s potential to succeed. That’s why BTF Prime offer a vast range of industry-leading educational resources in a variety of languages which are tailored to the needs of both new and experienced traders.

These include free webinars, Ebooks, articles and more. Prefer to learn from an expert in person? We also hold insightful seminars and workshops in various regions around the world that a cover a multitude of topics.

There are also many forex tools available to traders such as margin calculators, pip calculators, profit calculators, economic trading calendars, trading signals and foreign exchange currency converters.

Forex widgets can help to enhance your trading experience. Some of the more popular widgets include Live rates feed, Live Commodities Quotes, Live Indices Quotes, and market update widgets.

Start trading
global markets today!
Free demo account Open account